To buy-back or not to buy-back, that is the question
We’ve said it before, but forecasts are almost always wrong. What this means for many businesses is excess stock taking up valuable shelf or floor space. Whatever methods a business chooses to move this stock, the priority should always be to move it.
Buy-back is one way that retail organisations ensure excess stock isn’t weighing them down and preventing them from selling more profitable items. There are many ways businesses can build buy-back into their SCM processes, to help them clear poor performing stock to make way for more in-demand products. But unfortunately, there’s no way around the fact that each of these strategies has its draw-backs and will impact ROI.
Let’s take a look at some of the options for retailers of non-perishable items and the impact on CTC (Cost to Clear) of buy-back strategies.
Buy-back from up or down the supply chain
This is a buy-back model that’s built in at a contractual level with suppliers of either raw materials or manufactured finished products. On the surface, it sounds like a sensible strategy. But the drawback here is that no supplier will agree to the hassle and expense of buying back product without making it worth their own while. They will inevitably build the cost of shifting unsold stock into their contractual agreements. So while retailers might save themselves some hassle, they will pay for the privilege. The trick here is to measure the likely financial impact of holding and clearing excess stock against the cost of contractual buy-back agreements.
This model is sometimes used as a marketing or brand initiative, with businesses buying back used items and onselling them to customers (à la Patagonia). It’s a worthy ethical initiative that undoubtedly reduces waste, but it’s unlikely to be profitable. For some brands, this clear disregard for profit is a way of telling the market that they value circular consumption above ROI and demonstrates that they’re prepared to walk their environmental talk. While the value of this may not be measurable in terms of immediate sales, it certainly builds integrity into the brand and in turn increases consumer loyalty and respect.
The smart alternative to buy-back
For organisations looking to streamline their supply chain and reduce waste, there is now another alternative that’s worth considering. Advancements in AI (Artificial Intelligence) and ML (Machine Learning), along with ever-growing collections of Big Data mean that businesses can remediate issues in their forecasts, before they impact profits. This eliminates the seasonal cycle of having to continually increase CTC and use excess stock as a loss leader for in-demand products. Instead, businesses are able to identify possible anomalies in advance, finetuning their supply chain management strategy and more accurately meet the true demand of the market. In this way, entire supply chains can become leaner, optimising their inventory levels while reducing freight-associated carbon emissions and manufacturing waste at every step.