The Rewards and Risks of Accepting an Order for a "Buy Out" Item

Categories: Customer Service, Inventory Management

By Mark Tomalonis
Principal, WarehouseTWO, LLC

You just got an inquiry for an item made by a manufacturer for which your company does not have a formal relationship.  That is, you will have to "buy out" this item from another supplier, or possibly from another distributor.  Should you accept the order?  If so, what are the rewards and risks of processing an order for a "buy out" item?

In my experience there are four reasons why your customer wants to give you an order for a "buy out" item:

1. Value/Reputation:  your company is seen as the go-to source for "stuff".  The customer values your service over cost so much that it is willing to pay a premium for the "buy out" item.
   
   
2. Ignorance:  the customer thinks that your company is the authorized distributor of the "buy out" item.
   
   
3. Convenience:  the "buy out" item is just one item on a large list of items to be ordered.  Your company is the authorized distributor of most of the items on the list.
   
   
4. Financial restrictions:  The customer is on credit hold with the authorized distributor of the item.  (Danger, Will Robinson!)

The Rewards and Risks of Accepting an Order for a "Buy out" Item

A sales order for a "buy out" item is different from a sale for a stocked item in terms of its rewards and risks:

The rewards

• It is a sale.  Hopefully an exceptionally profitable one.  (See below for how to price a "buy out" item.)
  
  
• You have satisfied a customer's need.
  
  
• You may have initiated or strengthened a relationship with a new supplier.  (This could help you in the future.)

The risks

• There is a higher probability of a return.  For example, you may not be able to recognize if the "buy out" item is what the customer really needs.  An error on the customer's part can result in the acceptance of an un-resellable return on your part.
  
  
• You have less experience with the "buy out" supplier.  For example, do you really know how accurate the supplier's lead time quote is?
  
  
• You have less leverage with the "buy out" supplier.  If you need to expedite the item's delivery, will your order get priority?
  
  
• It may be a challenge to get paid.  Or you may not get paid at all.  (See item #4 above, "Financial restrictions".)

The Extra Costs Associated with Selling a "Buy out" Item

Even if the risks of processing the sale of a "buy out" item are low, your costs of handling the transaction are higher than those associated with selling a stocked item.  Those increased costs can include:

• researching and identifying an acceptable source for the "buy out" item
  
  
• establishing payment terms with the supplier
  
  
• placement of a separate PO
  
  
• receiving and inspecting the item
  
  
• processing of a separate invoice

Should You Accept an Order for a "Buy Out" Item?

Considering the risks and extra costs of accepting an order a "buy out" item, you may want to turn the order down, and instead redirect the customer to a an alternative supplier who has a formal relationship with the item's manufacturer.

How to Price a "Buy Out" Item

If you decide to accept an order for a "buy out" item, you should make a significantly-above-average profit on the sale.  A simple rule-of-thumb:  double the acquisition cost.  Justifications for such a mark-up:

• You have incurred greater risk in processing an order for a "buy out" item
  
  
• Your transaction costs associated with a "buy out" item are higher than they are for a normal, stocked item; see my comments on this above ("The Extra Costs Associated with Selling a 'Buy out' Item"))
  
  
• You have saved the customer time and effort, by taking on the burden of sourcing the item from a supplier that may not be an approved supplier for the customer

Exceptional Order Acceptance Form

To protect your company from having to take back a pricy "buy out" item because the customer wants to return it, consider implementing an "exceptional order acceptance" policy.  To learn more about such a policy, and to download our "Exceptional Order Acceptance Form", read our article, Your Customer Wants to Return WHAT???.

Tracking the Risk of Selling "Buy out" Items

Inevitably, you may be asked to take back a "buy out" item from the customer.  Does your company's QA process capture the reasons behind every item return ("buy out" or otherwise)?  And does your process flag every return that is for a "buy out" item?  If so, what percent of all line items sold are returned, and what percent of all "buy out" items sold are returned?  These are good metrics to compare to help you determine whether or not you should impose an "Exceptional Order Acceptance" policy.

Got a question or comment about this article?  Email me.

About the Author
After a successful career in sales and operations management in the wholesale-distribution industry, Mark Tomalonis is now principal of WarehouseTWO, LLC.  He amuses himself by writing articles, such as this one, to help manufacturers and wholesaler-distributors execute their operations better.  Mark’s articles and tips are published in WarehouseTWO’s monthly e-newsletters.  Click here to subscribe.

About WarehouseTWO
WarehouseTWO, LLC is an independent “inventory-pooling” service created exclusively for durable goods manufacturers and their authorized distributors, and for any group of durable goods “peer” wholesaler-distributors, such as members of a buying/marketing group or cooperative.  To learn how inventory-pooling with WarehouseTWO can help your business, visit the WarehouseTWO website, or email info@warehousetwo.com.