As dealers are working on winter buys, it’s important to keep in mind that the lowest price from a manufacturer doesn’t always equal the highest profit potential for your lumberyard.
We all know that we don’t realize our profits until we sell the last boards in a pile. As a dealer, we have to justify whether or not we’re going to put our money into something expensive like composite decking. For example, say you’re going to buy a unit of lumber for $5,000, and the manufacturer offers a 10% discount. You have to sell all of that lumber in order to realize a profit on it. If you’re unable to sell 20% of that inventory, then you’ve actually lost money on the deal.
A typical winter buy offer from a manufacturer may say that if you purchase three to five units of decking, they’ll give you a discount over the out-of-warehouse job lot price. You have to do the math on a deal like this. If you buy outof- warehouse at a higher price (say it’s 10% more), there’s less risk there than you’d otherwise have if you hold the inventory.
You won’t have the risk of damaging materials while they’re in storage in your yard. You won’t have to insure the materials because they’re not considered inventory, and you don’t need to hold as much of the product, which is good since you don’t know for sure which colors customers are going to pick, and so on. You also won’t have to worry about the risk of obsolescence, in which a manufacturer discontinues a line or a color because it’s not popular, and then you have that inventory left.
There are other risks, of course, to holding the inventory. It could get stolen or damaged. Any time you have inventory on site, all it takes is a forklift to bump something to scuff up the unit. When the material is at a warehouse and you’re buying out-of-warehouse and a forklift hits that item, then that’s not your expense. Buying decking isn’t the same as buying dimensional lumber where if you scratch a few pieces, it’s still sellable. Decking is expensive, high-dollar, high-value product that has to be handled very carefully.
Here are a few other things to look for in a good winter buy deal:
Exclusivity: If a manufacturer asks me to carry their product and in turn they offer some exclusivity and there’s a big enough price difference compared to out-of-warehouse pricing—enough to assure me that if I stock the product and I cause some accidental damage to the inventory, it wouldn’t take away my net profit—then I’d be more likely to consider that product. One of the best offers I’ve seen includes an exclusivity radius. For every unit I buy, for example, I get a quarter mile radius around my store for exclusivity. If I buy 20 units, that gives me a four-mile radius that I don’t have to worry about competitors for that product.
Buybacks: A good winter buy deal includes a buyback agreement, so that at the end of the season, if I’m not able to sell their product because they set up too many dealers in the area, or they made an agreement with a box store to sell it for less, then I’m going to be able to sell it back to them and get my money back out of it. A deal like this helps me realize my profits. It does no good to make 15% to 20% on an item if you can’t sell the product. As dealers, we can’t control a lot of what the manufacturer does. There have been a number of times when a manufacturer will offer me a great price if I buy a truckload. In one case, I bought five truckloads. About two months later, the same manufacturer offered a dealer program that meant smaller buys got the same discount that I did for truckloads. Additionally, the other dealers got a $500 credit back for only buying one unit. When I did the math, I actually paid substantially more, even though I bought five truckloads. Lesson learned.
Today, I’m very cautious about winter buy offers, and I think other lumber dealers should be as well. Do the math, calculate the cost to purchase from manufacturer or out-of-warehouse. Be sure to factor in your cost to insure any product against theft, damage, and loss. And keep in mind that until inventory is sold, your money is sitting in a pile getting weathered. Look at your inventory as money. It’s not converted to cash until you physically sell it. If you don’t sell it and can’t return it, then you can’t use that cash to pay the bills.