Purchasing Materials – Buy in Bulk or Buy When You Need?
Updated: Nov 6, 2018
Materials in general, are often your biggest variable costs, which is why whether to buy in bulk or not is one of the most important choices you’ll make as an owner.
The best way to make money is to save money. How do you save the most money? Cut your variable costs. A #variablecost is one that directly correlates to the amount of products/services you complete. For example, a salon would need to spend more money on styling spray as they complete more haircuts. Styling spray is a variable cost.
Here are a few key factors to consider before you decide.
Lower Per Unit Costs The biggest selling point to buying in bulk is the lower per unit cost. Wholesalers are aiming to move as much product as possible in the shortest amount of time and as such, they offer big incentives for buying more. Let’s say that a pair of 2x4 wooden plank costs you $10 when purchased standalone. If you were to purchase a year’s worth of those same planks from a lumber yard though, you may see that cost come down to $3 per plank. While that seems like a small discount now, you’ll find yourself saving hundreds if not thousands by the end of the year.
Requires Storage Space It’s all well and good to buy 25 boxes of copy paper at cost, but where are you going to store it all? Don’t forget that along with a limited amount of money, you also have a limited amount of space. It may be more worthwhile for you to use that extra closet to keep extra finished products on hand or expand your service area for more customers.
Smart business owners allocate their work spaces as carefully as they allocate their budgets.
Higher Upfront Costs Wholesalers such as Sam’s Club or BJ’s offer membership-only shopping, meaning you can’t even buy a pack of lightbulbs without joining up. Some of these memberships require upfront or annual fees. Additionally, depending on what you’re purchasing and whether you’re simply reselling it or not, you could also be subject to licensing fees from the wholesale house. While most of these costs are usually minimal, you’ll still need to allow for in your #budget.
Increased Sales Potential The truth is that no matter how well-calculated your sales projections are, you could always end up being hit with a big, unexpected order. Luckily, having materials handy means your company is equipped to serve more people and sell more products. Not only does this mean more cash in your pocket, it also means increased customer satisfaction. Nobody wants to turn away business, but the unprepared often do.
Risk of Spoilage Many businesses are built on materials like foods or chemicals that have a limited shelf life. Unfortunately, these companies could actually lose a lot of money through poorly-planned bulk purchases. For instance, a burger shack that produces 1,000 burgers a day at max capacity would not benefit from keeping a higher number of patties than that on hand. Having more than that would cause a surplus that would either go bad or need to be sold at a discount in order to be moved quickly. Either way, the shack’s owner faces a financial loss that could have been avoided.