HELP - Buy large quantites, sell low quantities - How to Make Profit?

[JRGRTX]

All,

As sad as this may sound, forums are my last resort here. I have a small business where we buy products from the manufacturer and resell directly to the end user. Generally, manufacturers do not like to sell small quantities, especially considering these are machined parts. A machining manufacturer will not start up a machine for a batch order of say, 10 pieces. Instead, they run lots of 500 or 1000. Some will, but not many. The Good: We get approximately 20-30 RFQ's for our products every day without doing any marketing or advertising whatsoever. We carry very little inventory so 90% of the time we are having to go to the manufacturer to get pricing. It is not realistic to carry inventory that would fit our customer base considering there are literally hundreds of thousands of different sizes, shapes, types, etc of this particular series of product type we sell. We'd need a warehouse the size of a SAM's club,,,,,,,,,,,or larger. Here's my dilemma and question for the forum. I have customers come in daily for quotes in quantities of, for example, 15 pieces, 30 pieces, 16 pieces, 55 pieces, 100 pieces, etc. However manufacturers often give price breaks at higher quantities of these products at, for example, 200, 500 and 1000 pieces. So here's what is happening: Customer comes in for 15 pieces. I don't have them in stock. I go to the manufacturer and get a price of $20 each. I mark up, say, 25%, and thus quote a price of $25 each. Meanwhile, company B comes along and quotes a price of $5 to that same customer thus I get beat out on price and lose the sale. As I stated, there are literally hundreds of thousands, if not millions, of these type of products out there and no one particular line that you could feasibly focus on and still draw the right business amount in. You have to offer them all in order to compete and draw in the business. I've toyed with the numbers of buying the 1000 pieces at .50 cents each instead of the 15 pieces at $20 each, selling the 15 and putting the other 985 in inventory. Problem is that in 2 years of running this business my data shows I've only had and order for the same type of piece duplicated 4 times. Those 985 pieces could sit in inventory for years and years. How do I get the lower pricing to be competitive, not hold inventory, and still offer a competitive price to my customers?

[Freelancier]

You need a different business model. I don't see a way to square the circle. Either you sell to wholesalers/retailers instead of end-customers, or you buy from wholesalers so that you don't have to hold inventory, or you work with manufacturers who will price and ship the way you need it. Either way, your current model isn't working and likely will never work.

[Paul]

Not as unusual a scenario as you may think. As Freelancier said, and based on your explanation ,it can't work as is.

Consider 1000 at .50 = $ 500 compared to 15 at $ 20= $300. So for $ 200 you get an extra 985 peices.

So whay not embrace the reality and become a wholesaler yourself. Buy the bigger lots and then wholesale out...if you can. I realize storage may be an issue but maybe manufacturer can hold your inventory or just make sure you move it out quickly. Not sure if any of this works for you but just a thought.

[JRGRTX]

Not as unusual a scenario as you may think. As Freelancier said, and based on your explanation ,it can't work as is.

Consider 1000 at .50 = $ 500 compared to 15 at $ 20= $300. So for $ 200 you get an extra 985 peices.

So whay not embrace the reality and become a wholesaler yourself. Buy the bigger lots and then wholesale out...if you can. I realize storage may be an issue but maybe manufacturer can hold your inventory or just make sure you move it out quickly. Not sure if any of this works for you but just a thought.

Thanks Paul. The issue I have is not the 985 pieces I have extra now. Here's the problem. Lets say I have a 50% markup (to keep math even). So I sell those 15 the customer requested at $1.00 each, thus I make a $15 sale. But I have $485 of cost still left in that 1000 piece buy I made. As I stated above, I've seen 4 times in 2 years where the same type of "piece" was come in for. Therefore those 985 pieces and $485 of cost may sit there for years and years............. Old inventory and cost in that inventory is a bad thing.

[Freelancier]

The problem you're having is common to a lot of retailers as well: having the right product mix to be profitable. You only have X amount of floor space and product has to move, so you focus on the items that you know you can move instead of focusing on trying to make every single sale.
So... find a set of things you can sell the hell out of and do that instead of trying to satisfy small orders for everyone by hoping you can sell the extras. Again: need a new business model.

[turboguy]

One option might be to work on your sources. In your example you say the manufacturer quotes you 20 bucks and company B comes along and gives your customer a price of 5 bucks. Would you not be better off buying from Company B yourself and quoting 7 bucks. Perhaps with repeat business and overall volume company B might give you a discount to where you could match their price.

Another option might be to concentrate of fewer items where you can focus your sales efforts and sell enough to buy in larger quantities.

Since you said Forums are your last resort I am assuming the business model you have now is generating quite a bit of interest but not enough sales to be a workable model. If you want to share more information we might be able to help more.

[Fulcrum]

I'd like to know what the product being sold is.

I worked at a shop where we had a catalog of 10,000 parts and we made over 95% of the items in house. If possible, I'm wondering if these are parts that can be made easily on a bridgport and small lathe.

[JRGRTX]

Let me give you the closest possible example I can. Let's say automotive nuts and bolts and washers. There are literally hundreds of thousands of types, shapes, sizes, thread types, metal types, lengths, etc., etc. Today, a customer may come in for 25 phillips head stainless steel machine screws with a countersunk head, 1/2" long. We may not see a customer come back in for that screw again for 2 or 3 years. To get a good price, we cant buy just the 25, we have to buy 1000. But then we have the cost of those other 975 on the books for 2 or 3 years and are in the hole for that cost till then also. That's about as close an example as I can give. Thoughts?

[Harold Mansfield]

Let me give you the closest possible example I can. Let's say automotive nuts and bolts and washers. There are literally hundreds of thousands of types, shapes, sizes, thread types, metal types, lengths, etc., etc. Today, a customer may come in for 25 phillips head stainless steel machine screws with a countersunk head, 1/2" long. We may not see a customer come back in for that screw again for 2 or 3 years. To get a good price, we cant buy just the 25, we have to buy 1000. But then we have the cost of those other 975 on the books for 2 or 3 years and are in the hole for that cost till then also. That's about as close an example as I can give. Thoughts?
I agree with everyone else. If you can only make a profit by purchasing in bulk at the bulk price, yet are stuck with left over inventory...your business model needs to change.
Either sell more products, or change the quantities that people are allowed to order in to match how you have to order them.

You really only have 3 choices.

1. Order fewer products and raise your prices.
2. Keep ordering products in bulk and sell more to someone. Either get more customers, or find somewhere to sell the surplus.
3. Or quit because you are eventually going to go under with a crap load of inventory.

[JRGRTX]

Thanks Harold. Option 1 is what I've been doing. We've been hitting a few sales here and there with this option but only when no-one else has what we either have or have access to. Option 2 is something I'm trying to determine how to do without holding onto the inventory for years to come. Option 3,,,,,,,,,,,,,,,,,,,I wasn't raised like that.

[Harold Mansfield]

Is there is opportunity here for you to become the only source for your products? To corner the market?
Or do you have competition doing the exact same thing?

[JRGRTX]

Lot of competition Harold and lots of manufacturers of these products around the globe. The niche you have to have is to be able to offer as wide array of these as you can and do so at a competitive price. That's where I'm struggling on the small quantities without taking on a lot of cost in inventory that will sit for years. Questions in my head are along the lines of:
- Do I buy larger quantities at the lower prices directly from the manufacturers and then sell them at the more competitive pricing and just take on that excess inventory and try and sell it? If I have a customer come in for a quantity below the manufacturers price break point (I.E., customer comes in for 25 but there's a big price break at 100) do I just quote the min buy, give them the option to buy at the higher price with a qty of 25 and an option to buy at the lower price of a 100 qty, no-quote them for a 25 qty, or quote them at the 100 qty buy price and sell them the 25 thus take on 75 in inventory?

[Freelancier]

The niche you have to have is to be able to offer as wide array of these as you can and do so at a competitive price.
I think anytime someone starts with "the niche you have to have". it means a failure of imagination about what else is possible. There are LOTS of niches out there to be pursued, the question is: which one can YOU make profitable? Right now, the one you're pursuing, you're telling us you can't make it profitable. So, that means you need to find another way.

[Harold Mansfield]

I'm thinking along the same lines as Freelancer. Is there another market to tackle? Can you increase sales? Is selling online to open yourself to more markets a possibility?
If you answer to all of the questions about increasing sales is "No", and there are no other markets to exploit, I just don't see how you can keep doing the same thing and expect them to get better.

[JRGRTX]

I agree with both you guys 100%. I came to the forums to get ideas flowing to do just that............................find another way. We currently do offer our products online. It is predominantly an online marketplace. The plus side here, if any, is that we do zero marketing or advertising and still get over 15-20 RFQ's a day for our products with an average RFQ value of over $900. The interest and opportunity is obviously there, we just have to make it work and turn some of these "RFQ's" into actual "PO's".

[Fulcrum]

You should start marketing offline and look at opening a small storefront similar to Fastenal. Possibly start a route going to manufacturers with a large assortment of screw, nut, bolt usage. Finally, buy a screw machine and make the parts yourself if it makes sense.

[Mont Ellis Consulting]

You say that the competitors beat you on price. It also sounds like you don't have the economies of scale (yet) to compete with them on price, so it's just not an option.

Is there a value added service you can offer your customers, that your competitors can't? You will continue to be more expensive, but customers will choose you because of X, Y and Z.

[JRGRTX]

Mont Ellis. Thank you for the post. The value added service we offer lies in the diversity of the manufacturers we deal with. We do not carry much inventory but we have access to items that keep the RFQs coming in. After reading these posts, im wondering if a missing link isn't to add a B2B type access to our website to allow customers to issue POs without an RFQ. The issue is that we don't always have everything requested. We have access to it most likely at our mfg sources, but not necessarily in stock. I'm wondering if I couldn't partner with some of these manufacturers, especially the small businesses, and list their inventory and work a standard pricing agreement with them on a target set of items. Thoughts?

[Mont Ellis Consulting]

Mont Ellis. Thank you for the post. The value added service we offer lies in the diversity of the manufacturers we deal with.

Sorry, I wasn't very clear - I meant "value added service" in terms of offering something additional post-sale that your competitors don't, loyalty-programs, an additional service, product or resource with the purchase etc Something that says "yes, we are more expensive, but you also get more"

Cheers,
Tanja

[JRGRTX]

Mint Ellis, I understand. So value added such as, basically, "something extra". IE, allow some customers the opportunity to simply buy direct without waiting for a quote from an RFQ. Or offer to continually fill their min max stock levels for those who keep stock, or offer to handle their RFQs direct if we could tie into their systems, etc

[veritasvisions]

All,

As sad as this may sound, forums are my last resort here. I have a small business where we buy products from the manufacturer and resell directly to the end user. Generally, manufacturers do not like to sell small quantities, especially considering these are machined parts. A machining manufacturer will not start up a machine for a batch order of say, 10 pieces. Instead, they run lots of 500 or 1000. Some will, but not many. The Good: We get approximately 20-30 RFQ's for our products every day without doing any marketing or advertising whatsoever. We carry very little inventory so 90% of the time we are having to go to the manufacturer to get pricing. It is not realistic to carry inventory that would fit our customer base considering there are literally hundreds of thousands of different sizes, shapes, types, etc of this particular series of product type we sell. We'd need a warehouse the size of a SAM's club,,,,,,,,,,,or larger. Here's my dilemma and question for the forum. I have customers come in daily for quotes in quantities of, for example, 15 pieces, 30 pieces, 16 pieces, 55 pieces, 100 pieces, etc. However manufacturers often give price breaks at higher quantities of these products at, for example, 200, 500 and 1000 pieces. So here's what is happening: Customer comes in for 15 pieces. I don't have them in stock. I go to the manufacturer and get a price of $20 each. I mark up, say, 25%, and thus quote a price of $25 each. Meanwhile, company B comes along and quotes a price of $5 to that same customer thus I get beat out on price and lose the sale. As I stated, there are literally hundreds of thousands, if not millions, of these type of products out there and no one particular line that you could feasibly focus on and still draw the right business amount in. You have to offer them all in order to compete and draw in the business. I've toyed with the numbers of buying the 1000 pieces at .50 cents each instead of the 15 pieces at $20 each, selling the 15 and putting the other 985 in inventory. Problem is that in 2 years of running this business my data shows I've only had and order for the same type of piece duplicated 4 times. Those 985 pieces could sit in inventory for years and years. How do I get the lower pricing to be competitive, not hold inventory, and still offer a competitive price to my customers?

I think you need a marketing plan that will provide you very targeted people asking for your product. I am unfamiliar with your business but i'd say that a larger amount of sales is the answer to reduce the cost from the manufacturer. In your situation, you need the success to be able to leverage yourself. So find out ONE specific method of marketing that works for you and scale it.

[laantigua]

What are your sales channels?

[HooktoWin]

Thanks Harold. Option 1 is what I've been doing. We've been hitting a few sales here and there with this option but only when no-one else has what we either have or have access to. Option 2 is something I'm trying to determine how to do without holding onto the inventory for years to come. Option 3,,,,,,,,,,,,,,,,,,,I wasn't raised like that.

Hi JRGRTX,

Without knowing much about the ins and outs of your business I thought I'd chime in with a few other options.


Arbitrage. Create a system that enables you to pre-sell your product to customers. It's going to take some work, but figure out how to pre-sell the product then figure out how to use "just-in-time manufacturing/delivery" to make things work.
Use bonuses & incentives. When you pre-sell your product to customers you can offer a "regular" and "premium" versions of the quote. The premium version is more expensive but offers a bonus or incentive that customers really want.
Create uniqueness at the product level. Offer some thing with your product that no one else is able or willing to offer. Your product uniqueness could be based on a unique service (24/9 support), unique pricing (dirt cheap or really expensive), a unique experience (we're the only ones who'll...), or a unique market (we only focus on...).

If you want to sell high, customers are going to need a compelling reason to spend that much. Without a reason (e.g. uniqueness) they're unlikely to do so.

Hope this helps,

Andrew