When Does Forward Buying in Supply Chain Make Sense?
Wholesalers and retailers live on thin margins. First tariffs and now the pandemic certainly aren't helping things. However, many companies are using forward buying in supply chain to effectively drive margin improvement through cost reduction.
A smart forward buy on inventory typically brings 5% to 20% in additional savings to wholesale, distribution and retail companies.
When does forward buying make sense? How can you ensure successful execution?
When to Make Investment Buys
A great use case for making a forward buy (aka, investment buy) is the tariff situation. When you know prices are likely to go up, or when there's opportunity to take advantage of a discount that won't be available later, then forward buying is a very smart way for you to do that.
Good candidates for forward buying are:
- Non-perishable goods
- Perishable goods with a long shelf life (nothing that will be out of date within 30 or 60 days)
- Products in hard lines, such as heating/AC parts, automotive parts, etc.
But Here's the Kicker
Sometimes an investment buy does not pay off.
You might be tempted to buy speculatively in cases where a supplier pre-announces a price increase or promotion on a high-turnover item. If you jump on that opportunity without good supply chain analytics to understand the economics behind it, your savings could be negated by the cost of carrying inventory you can’t sell.
You have to know your numbers because supply chain is too volatile. If you are using a spreadsheet, rule of thumb or "gut feeling" to hedge this investment, you are in trouble.
Forward Buy Simulations
There's a secret to ensuring profitable buys, every time. Technology.
Supply chain planning solutions like Blue Ridge offer a Forward Buy Simulation tool that automates the constantly changing math inputs and heavy lifting behind forward buying. The tool quickly and accurately finds your perfect profitability sweet spot with each opportunity. At what exact point does the buy deliver optimal results for YOUR business, and at what point is it just something the supplier wants you to do?
If you want to see how supply chain planning solutions work to refine forward buying in supply chain, check out this article: "Tariffs and Inflation: A Good Time to Forward Buy Inventory?"
An Example from Henry Schein
I'd like to wrap up by sharing a podcast we did with Henry Schein about their forward buying initiative.
Henry Schein has been quite busy lately, as you'd expect from a provider of 300,000+ healthcare products -- including a rapid test that detects COVID-19 in 15 minutes. When tariffs were announced last year, creating immediate pressure on Henry Schein and the rest of the distribution world to cut costs, they quickly responded with a culture of innovative forward buying.
Questions? Comments? How can we help you take advantage of forward buys during the pandemic and beyond? Reach out to someone on our team here.