The 7 main activities of a good Buying Area

The main responsibility of the buying area is to make a reality the positioning of the business by defining and properly selecting the product offering. This primarily responsibility demands a series of activities to be developed by the area, such as: analysis of market opportunities; assortment definition (offering to the customer); suppliers’ selection; product and supplier performance evaluation (sales, margin, working capital, shrinkage); presentation and availability of products at the point of sale/store (guarantee that the product is available at the point of sale).

In view of such responsibility, the day-to-day of the buying area is tough and demands much organization and discipline, as well as creativity and a certain degree of intuition.

In a large company, where many hierarchical levels exist, responsibilities are divided between strategic (C-level), of supervision (manager) and of execution (buyers and assistants). Strategic responsibility involves the constant evaluation of how the role of the area will be affected in view of the changes in the consumer market (behavioral, demographic) that, in turn, influences the sales channel (brick and mortar, virtual), identifying the possible answers. Responsibilities linked to supervision are related to the short and medium terms, involving the fulfilling of the targets established for the area. And, finally, the responsibilities related to execution are those of more daily and immediate, involving, buying, negotiation, relation with suppliers and answering to the sales channels.

There are three false beliefs about the buying area: (1) bulk of its time is spent on negotiating; (2) intuition and experimentation guide its decisions; and (3) it has discretionary power to include suppliers indiscriminately.

The buying area is an area managed based on statistic, financial data, and surveys and researches. Of course there is room reserved for intuition and experimentation. Nevertheless, this is increasingly less frequent and curbed. After all, in a large distribution company is fundamental obtaining economies of scale (more volume and concentration) and of scope (less products in more sales channels).

The 7 (seven) main activities of the buying area are:

1.    Assortment definition (customer offering)
Some aspects must be taken into account such as: customers that will be served (professionals vs. individuals, social class, geographic region, habits and local products); size of the physical store (space is limited!); available exhibition equipment; and, not less important, who is the competition and what they offer.

2.    Suppliers selection
The objective should be that of having the lesser possible number of suppliers to obtain bargaining power and, consequently, lower costs and more support from the supplier. Additionally, a lower number of suppliers lead to reduced expenses, demanding lesser employees (buyers and assistants) and control simplification. In this process of supplier selection various aspects will be considered: market share; supplier relationship with the network; price and margin; commercial policy (minimum orders, order “tradeload”, returns treatment, support and promotions); and expansion capability (supplying different stores and different geographies).

3.    Product and Supplier Performance Evaluation
This evaluation considers the following elements: sales, purchases, gross margin, received income (free merchandise and money), shrinkage, stock in amount and days, accounts payable to supplier in amount and days.

4.    Product presentation at the Point of Sale (Store)
It is not recommendable to create a store solely based on statistical models and privileging efficiency. The company needs to make choices and bets aiming to differentiate from the competition and /or improving profitability. The buying area may contribute to that.

5.    Replenishment
Both out of stock (lack of products) and overstock (excess of products) are reflexes of replenishment problems. It is the buying area responsibility to provide information about replenishment parameters, analyze stocks without sales for many days, on imminent problems involving suppliers and revise the position (portfolio) of pending (outstanding) orders.

6.    Control Activities

a.    Assortment Committee
The committee is comprised of professionals from the buying, operations and logistics areas. The Committee analyzes new suppliers and products to be introduced establishing sales and profits targets as well as an evaluation schedule.

b.    Visit to Competition and Own Stores
This is an activity of “visual” control. Visiting both the competition as own stores, allows comparison in terms of assortment, promotions, price level, and, eventually, a new supplier (that maybe could not reach the large retailers) can be identified.

c.    Buying Agreement
Every supplier must sign a standard buying agreement. Such contract establishes responsibilities from side to side – those involving the product are assumed by the supplier, except when the product is affected by bad storage or bad manipulation –, fees or funds or incomes to be paid (and how they are calculated), the price list to be used, payment terms, the treatment of product returns etc.

d.    Annual Negotiation
At least once a year there are negotiations in which both the retailer and the supplier discuss their objectives and seek mutual alignment. Depending on the relation with the supplier and its performance, the defined strategy may be reducing its participation, developing another supplier.
Generally, suppliers are classified accordingly to levels of sales and profits. Based on this classification, participants of the annual meeting are defined. This may involve up to the CEO of both companies (top to top meeting).

7.    “Opportunistic” Activities

a)    Tactical Negotiations
These negotiations represent an “arm wrestling” and a “give and take”. Examples of these types of negotiation are those involving a compensation (or even return) of stock purchased in excess or a margin recovery for having accompanied an activity promotion conducted by a competitor.

b)    “In-Out”
These opportunities arise from big lots of products offered by manufacturers or distributors. They may be originated by discontinuation of production, excess inventory, excess imports, products apprehended by the IRS, among other motives. The strategy to be used – and of difficult application by large retailers – is that of purchasing the product and put it on display without any commitment with the maintenance of that item after it is sold out. This is a double opportunity for a higher profitability and of creating excitement/animation at the point of sale (store). Large retailers face difficulties in taking advantage of such opportunities as they do have neither the flexibility nor the autonomy. The structure and the processes created to make the business efficient and controlled do give slim or no room for such activities. When they do take place it is an exception to the rule.

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