What Are Special Buys?
Special buys are single-instance purchases made by retailers to support various retail needs. Suppliers might see special buys for:
New Store Allowances: Retailers often ask suppliers to discount their products for new store openings. Suppliers might offer 5-10% off to help stock shelves at a lower initial cost.
Seasonal Inventory Pushes: Retailers may purchase additional stock as part of a seasonal push for holiday items or seasonal categories like lawn and garden.
Packaging Changes: When a product undergoes a packaging upgrade, suppliers often want to launch the new look at a specific time. Special buys help retailers clear out the older packaging.
While these opportunities can boost visibility and sales, suppliers must understand the potential pitfalls of special buys.
Key Pitfalls to Avoid in Special Buys
Price Protection Complications: When retailers transition to new prices, they often seek price protection, which enables suppliers to “buy down” the cost difference for existing stock. Price protection lets retailers reduce prices without losing money on unsold inventory, which is critical for staying competitive. However, it can get tricky for suppliers when special buys are involved.
Example of a Pitfall: If you sold products in a special buy at a lower cost (e.g., $1.85 instead of the usual $2), this reduces the average inventory cost. However, suppose the retailer calculates price protection based on the system cost (often the original $2). In that case, you might pay more than you should to cover the price difference. Therefore, special buys can complicate price protection calculations, leading to potential supplier overpayments.
Same-Day Pricing Confusion: Special buys can also create issues with same-day pricing, where auditors review purchase orders to ensure consistent pricing on the same day. Internal and third-party auditors often compare the prices on special buys against other orders to spot discrepancies. Suppose the auditor sees two different prices on an identical product ordered on the same day. In that case, they may assume the lower price is correct and recommend a refund to the retailer, even if the higher price was legitimate.
How It Affects Suppliers: Auditors may challenge the price differences, often pressuring retailers to seek reimbursement from suppliers. This can be especially problematic if you’re working to maintain goodwill with a retailer only to face potential chargebacks due to auditing processes.
Return Cost Discrepancies: Returns are a common challenge for seasonal categories, like fans or air conditioners. Suppliers might initially stock stores with lower-cost imports for the season, later transitioning to higher-cost domestic inventory for restocking. However, when returns come in at the end of the season, they’re often calculated at the domestic (higher) cost. This leads to inflated return costs for the supplier, who may be charged more than they should for returns of inventory sold at a lower price.
An Approach to Mitigate This Risk: HRG suggests that suppliers track fulfillment proportions by comparing imports versus domestic inventory. By establishing a “rebill” process, suppliers can accurately bill retailers based on the original cost proportion. This practice can save suppliers significant amounts by ensuring they don’t overpay on returns.
How Suppliers Can Protect Themselves
To mitigate these risks, HRG has two essential pieces of advice for suppliers:
Clear Communication: Suppliers should document and clearly communicate all details around special buys and pricing terms, including any items not included in special buy agreements. Clear records prevent auditors from misinterpreting pricing or item inclusion, potentially saving suppliers from costly deductions.
Save and Archive Communications: Suppliers should systematically archive all emails and agreements related to special buys and pricing. By keeping a clear, accessible record of every communication, suppliers can provide documentation when needed. HRG recommends that suppliers use systems similar to those used by retailers, where email communications are saved at the firewall and are easily retrievable during audits.
Final Thoughts
Special buys can be a great tool for retail suppliers but come with unique risks. Suppliers must be vigilant and prepared for price protection complexities to return cost discrepancies.
However, by maintaining clear communication, keeping detailed records, and most importantly, understanding the nuances of special buys, suppliers can minimize risks and make the most of these opportunities. This understanding will make suppliers feel informed and knowledgeable, ready to confidently navigate the world of special buys.
At HRG, our goal is to help suppliers make wiser decisions and face fewer deductions. If you’re facing challenges with special buys or deduction management, visit us at SavvySupplierPodcast.com and HRG-Audit.com to learn more and connect with our team.
Our wish for you: wiser decisions, fewer deductions.