Distributor, wholesaler or direct: where should you buy your stock?

Most small shops in Jamaica and across the Caribbean stock their shelves from a mix of sources. Each one trades price against convenience and cash in a different way.

• A distributor's route sales rep. The rep visits on a set day, takes your order and the goods are delivered to your door. See ordering from route sales reps.
• A wholesaler or cash-and-carry. You go to them, choose what you need, pay and take it home. Some wholesalers also deliver larger orders.
• Buying direct. You deal with the producer, importer or manufacturer yourself, often a local bakery, bottler, farmer or maker. Prices are lowest, but the minimum order is usually the largest.

Which is best depends on what you are buying, how fast it sells and how much cash you have. The way to compare them fairly is to work out the cost of getting the goods onto your shelf, not just the price on the list. That figure is the landed cost.

The distributor's strength is convenience. A van arrives and shelves fill without you leaving the shop, and many reps will extend payment terms to a shop that pays on time. The weakness is that you pick from one company's price list, and the weekly visit can push you to over-buy.

The wholesaler's strength is control and range. You see the goods, compare brands and buy only what you need. The weakness is that the trip itself costs money and time, and you pay up front.

Buying direct wins on price and freshness, especially for local products, and you deal with the maker. The weakness is the minimum: if the producer wants a pallet or a $2,000 order, a small shop ties up a month of cash in one product.

Here is a made-up but realistic example. A mini-mart buys about $600 worth of drinks and groceries a week at the distributor's list price. It can get roughly the same basket three ways. These figures are illustrative: use your own.

Read this carefully, because the answer is not what the unit prices suggest. The wholesaler is 6 percent cheaper per item but costs $23 more per week once you pay for the trip and your own time. If you could use those three hours to serve customers, the real cost is even higher. The wholesaler only wins when you buy more per trip, so the fixed cost of the journey is spread over a bigger load.

Buying direct is $45 a week cheaper than the distributor, but you must find $2,200 in one go and hold about four weeks of stock. If $2,200 is more than a week of your takings, you will feel it. Also the storage must exist, and anything perishable has to sell before it spoils.

The distributor's price looks high, but the credit is worth something. Paying 14 days later means you sell part of the stock before you pay for it, which lowers the cash you need to run the shop. See cash flow for shop owners. Credit is only a benefit if you pay on time, as working with your distributor rep explains.

Use the distributor for steady, high-volume lines

Staples and fast drinks that you sell every week are ideal. You avoid trips, you can negotiate on volume and credit helps cash. Plan these orders around the visit day: planning stock around delivery days.

Use the wholesaler for top-ups and gaps

When a truck is late or a product spikes, a quick trip beats an empty shelf. It is also good for trying a new brand in a small quantity, and for items your distributor does not carry. Keep trips for when the load justifies the journey. Combine the trip with other errands, and make a list first so you do not wander the aisles.

Use direct buying for local products with a steady rhythm

Bread, patties, produce, eggs or locally made drinks often come straight from the maker, on a regular schedule and a small minimum. The prices are good, and fresh stock sells faster. Agree what happens to unsold or damaged goods before the first order.

Split an order when it helps

Nothing says all of one product has to come from one place. Fast lines might come from the rep and bulk, slow-selling extras from the wholesaler in small quantities. A second source also gives you leverage in negotiating with suppliers.

Once you know the landed cost, price accordingly. If the real cost is higher than the list price, your margin is smaller than you think. For a bottle with a $2.00 list price and a landed cost of $2.20, selling at $3.00 gives a gross profit of $0.80, not $1.00. Over a year, the difference adds up. See how to price products and gross profit for shop owners.

Record the cost you actually paid, including delivery or transport, so the profit figures are honest.

• Comparing list prices and ignoring the cost of the trip and your own time.
• Chasing a cheaper unit price into a minimum order that ties up all your cash.
• Buying perishables in bulk because the price is good.
• Relying on one source for everything, so a late truck leaves the shelves empty.
• Not checking quality or damage when buying in volume. See how to receive stock deliveries.
• Forgetting to update selling prices when a source's price changes.

Shopkeepa lets you record the cost on every delivery through Stock In, so you can see your gross profit per product where cost is known. If you change source and your costs change, the reports show how your margin moved. Sales reports with best sellers and slow movers tell you which products deserve a bigger, cheaper order and which should be bought in small amounts.

Your restock list shows what needs ordering and a suggested quantity, whichever source you buy from. Learn more about sales and profit reports. Shopkeepa does not connect to any supplier or place orders. Shopkeepa is in development, and early access shops will help shape it.