The Buying Pyramid

The buying pyramid is about managing your risk with stock, while properly sticking to “open to buy” plans. The way you manage stock levels, and the associated risks, differs with the every category, season, etc. It needs to take into account your wholesale / retail mix, ecommerce and available outlets to dispose of obsolete stock or overstocks.

Typically, stock can be broken up into three risk categories:

  • Low Risk- basic stock that has been in the business for a while, doesn’t get discounted very often, doesn’t change each season or year – it’s the bread and butter of the business
  • Medium Risk – seasonal product, adaptations of basic products (different colours or add ons), new but relatively safe product
  • High Risk – window dressing, new innovative product, cutting edge technology

Using fashion as an example – a black Ralph Lauren polo shirt is low risk – a dress shirt in the “season trending” colour palette is medium risk and a high fashion dress that was shown at the Melbourne Fashion week on a supermodel is high risk.

You want to sell all three categories, but you want to limit your risk and investment in stock.

Low risk product should make up a large portion of your stock. Even in cutting edge or high fashion businesses, you will find that consumers look at the high risk product, but buy more conservatively. These consumers make up the large percentage of followers. Low risk product should be the easiest to forecast and to take advantage of quantity breaks. You should never, ever, run out of this product. It is what keeps your business alive.

Medium risk product needs to be well stocked at the launch or beginning of a season. It needs to be well represented in your stores. Perfection on this stock is that you run out of it just as the season or life cycle ends (which hardly ever happens). You should buy what you really think will sell (no buffer over the budget / forecast). If you start having some holes in this stock near the end of the season; that is a good outcome. You don’t want a warehouse full of this stock at the end. This is product that you will most likely have to start discounting near the end and will make up the majority of your “end of season” sales.

High risk product is the window dressing. It is what the consumers come to see, but only a small percentage buy. You need this product for marketing. When buying this product, buy about 60% of what the sales and marketing guys forecast (they get excited about these products). Make sure you run out of this product before the season is done because you will have to cut the prices dramatically on these items if they don’t sell during the regular season. Whatever you do, don’t get caught in the trap of buying more than you need to hit a price point. You will regret it.

This system (or an adapted version) has worked in every business that I have assisted, many of them in a state of turmoil. But even the businesses that were just “looking to improve” (not in a dire state) improved their stock turns and overall margins using this logic.

To do this successfully, you have to be able to get and understand the data from your merchandise planning systems, your POS (if you have retail) and your retail customers.

See also Merchandise Planning vs. Buying