Risky Business
Entrepreneurs are by their very nature, always looking around the corner for opportunities. That requires taking risks. Risk is the key reason businesses grow.
The good news is that there are some specific strategies that you can employ to mitigate those risks. A good place to employ those strategies is in your buying process.
There are 4 common strategies to mitigate risk and here are some ideas on how they can be utilized on your buy.
Avoidance
This is doing everything you can to avoid or prevent something from happening. This is usually implemented through policies and processes. In buying products for the next season, this could mean a policy as simple as not placing an order at market until you have reached a point where you can analyze and assess your assortments as they relate to your budget. Another policy is not to accept products after the completion date has passed. Think about the losses you could have avoided if the right policies and protocols were in place and followed.
Reduction or Control
A good example here is determining how much you front-load inventory. Too much too soon, and you do not leave dollars to bring in fresh goods. A fresh flow of inventory is critical to keep your customers active and engaged. Staying fresh is a key component in both sales and marketing. Front-loading can also disrupt cash flow and put pressure on having a very strong sell-through early in the season. Even with terms where dating is generous, this can be a risky strategy. There are some classes that are seasonal, such as some toys and games and certain holiday products, where there are few options. However, you can mitigate even this by balancing highly seasonal goods with other parts of your business where you can control the flow of merchandise.
Another measure of control is to be cautious of vendor programs that on the surface seem appealing but when you dig into the math, they can be costly. Always do the math, and talk to other retailers to see if those programs have the expected ROI. If it is too good to be true…
3. Transference
For a retail buy, I take this to mean having a great classification structure and a thoughtful vendor strategy.
A great classification structure allows you to spread the risk proportionately. Some classifications are trending well and others are not. Measuring this allows you to make better investments into each of these different businesses.
Narrowing your vendor structure allows you to be more important to fewer vendors in specific classifications, and thus build better and more meaningful relationships with a few rather than many. That can result in better terms, more lenient return policies, early access to new products, and marketing money. Some might argue that it is better to cover yourself with more vendors, but in my view that seeming benefit is more risky. Plus relationships, if built well, provide future leverage.
4. Acceptance
Acceptance is just that, accepting the risk. An example is deciding to carry a new vendor, and the minimum is high. You accept the fact that it is a test, it may or may not work but in the end, the benefits outweigh the risk. A good strategy to employ here is “fail fast”. If the risk does not pan out, act quickly and move on.
One last thought on risk identification: remember that not making a decision is in fact a form of decision and carries its own risks: whatever you do, don’t fall prey to paralysis. Analyze, then act.
You are in the business of assessing risk every day. Your merchandise buy represents the biggest risk because it represents your largest expense and also reflects your brand. Management One planning is a great tool because it not only forecasts demand, it is a great progress monitoring and cash flow planning tool that can help you identify and address both risk and opportunity.
Employing the strategies above offers a means to understand and manage the risks that are an inherent and necessary part of your business.
Onwards, and Upwards,
Marc Weiss - Co-founder, Management One