Build Your Business: Management

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April 7, 2014

I recently was challenged via Twitter by Patti Keegan of Keegan Tees, located in the awesomely named city of Effort, Pa., to discuss the pros and cons of using purchased goods versus customer-supplied goods.

Many apparel decorating firms struggle with such inventory issues on a daily basis, and there have been some good discussions in previous Impressions articles already. What could I offer to this debate?  Only a career’s worth of struggle probably … let’s see how I do.

For starters, the central struggle surrounding this issue is akin to a heavyweight boxing match. In one corner is the champion, “Shops Purchasing Their Own Goods.” This is main business model for many T-shirt shops and is very successful. You wouldn’t think about bringing your own raw meat to a restaurant, so why would handing over blank inventory to a T-shirt shop be acceptable or even warranted? What are these customers trying to get away with? Are they that cheap? Are they going to supply the ink next?

In the other corner is the challenger, “Customer-Supplied Goods.” This is where customers order the goods from a distributor and have them shipped to the decorator or, more simply, deliver the shirts personally before the order production date. This is becoming more common in the modern shop business model, but how to do it successfully is less well known, and many shops struggle with this knowledge. After all, buying shirts and marking them up is a huge profit center, so why would you give that up? To most, it just doesn’t make sense.  For those that exist in the contract decorating world, it’s just another day at the office.

Round 1: Marking Up for Profit
Most shops have purchasing inventory as a key part of how they make money. Customers hand over their orders, the goods are purchased and there is a formula that’s used for pricing. The shirts cost “$X”, and this cost is increased with a percentage, and then decoration charges and other fees are added and a quote is given to the client. The percentage of markup on the inventory is different from shop to shop, but it’s usually 10%-35%. Volume, market, competition and geography all are factors. If you purchase enough inventory every year, your shop can get rebates and incentives from distributors — and even from the garment manufacturers. At huge levels, you can even dictate or lock in pricing for yearly purchases. This is why buying your own inventory is the most popular way to run your shop. It’s all about the Benjamins.

Round 2: Cash is King
Protecting your cash flow is one of the most important things you can do to operate a business successfully. One of the main reasons many shops allow their customers to purchase their own inventory for jobs is that this protects their cash flow better than if they bought the goods. On the face of it, it seems strange that businesses would want to give up their economic position. However, if you’ve ever felt pinched financially because you had to pay an invoice to your shirt supplier before you received payment for your printed work, you can understand why someone would adopt this model. Sure, smaller shops or smaller orders can demand upfront payment before anything is started. But the larger your shop grows or the more sophisticated your client base becomes, you start having to extend terms. Thirty, 45 or even 90 days out are common, depending on markets that you serve. Shops that handle large retail accounts can see 120 or 180 days for receivables. Protecting your cash position is crucial to your success. How do you handle this currently?

Round 3: Customer Savvy
Because this is the information age and apparel inventory is more or less a commodity, customers know the cost of blanks. It’s natural for people to shop online and compare pricing. It’s almost expected. The larger the order, the more often this will happen. For an order that’s a dozen shirts? Probably not. A hundred dozen or more? Most certainly. The big question you have to ask yourself is: How are you responding to this fact? Established shops with veteran owners that remember the “old days” usually are the ones that are disgruntled and angry that someone would think about supplying their own inventory for an order. Younger, more open-minded, or even more technology-savvy owners, see this as the model of the future and work to embrace the change. Some shops have been operating this way for years.

Round 4: Counter Punching
Successful boxers adapt their fighting strategies during fights by changing their tactics to win based on what works during the match. Maybe they have a great overhand right punch that always works, but they can only land jabs and body blows, as the other fighter has adjusted their style to compensate. This is what’s happening with apparel inventory. More companies are adjusting their policies regarding customer-supplied inventory, as this is becoming increasingly prevalent. Are you the fighter than can only land one type of punch? Even apparel distributors are getting into the mix by offering services such as Pack Separately Ship Together (PSST) programs. Such programs are set up so that your customers can order from distributors, and they combine everything and ship all of your customers’ orders to you together with free freight. You need sales volume to participate in these programs, but this is a hugely successful method to outdistance your competition.

So what is becoming more dominant now is apparel decorating shops developing hybrid policies regarding customer-supplied inventory. These days, you have to make it easy for customers to do business with you. Your competition isn’t just the shop across town; it’s also all the other ones online. Every tool in your toolbox that you add can help you win another new client, or keep an existing one who is important. If your customers are asking if they can buy their own goods, this is a sign that they are shopping around. Maybe the key to keeping them happy is explaining the pros and cons of them buying the inventory vs. the simplicity of you handling it for them.

Round 5: Listen to Your Corner Man
The devil in how to proceed these days, like always, is in the details.  You don’t have to change, and if your business model is consistently making money purchasing inventory and marking it up that’s fine.  Why give up margin if it isn’t necessary?  I’m certainly not advocating that.  Just make sure you aren’t stubbornly sticking to your guns, or even operating unaware on what’s going on around you.  Do some research and understand your market.  Only you can know what’s best.  Make sure you talk to your sales people, customer service staff, customers, and even your vendors.  Ask for advice.  Keeping with the boxing metaphor, a cornerman is the person that watches the boxer’s opponent carefully during the fight.  He knows his fighter, but is keeping an eye out for that one thing that can help the fighter win.  During the break between rounds, the cornerman will advise his fighter on small strategy or tactic changes that might work.  In your business, find your cornerman that you can go to for advice.  You might be so involved in the fight, that you are missing opportunities because you are busy punching every day.

Round 6: The Knockout Punch
So what does it take to win these days? Regarding inventory, it could mean a specific tactic for different types of customers or even orders. All shops operate differently and have their own unique challenges. To be successful, ready your shop for these challenges by thinking through the potential problems and setting up some standards to follow. You can start by asking “What if?” and then developing the answer to that question. What if customers wanted to supply their own shirts? Would you take the order? How would you process it? How do you deal with shortages, misprints or defects? What happens if the inventory arrives late, or is the wrong color or style? How can you turn a potential headache for you into a competitive advantage? For some (maybe even most) shops, dealing with these headaches isn’t worth it if the money they make from buying the shirts isn’t part of the order. Experience tells me that you may be squaring off on this issue sooner or later. Getting out in front, building a response to the question that works for your shop and being ready will help you in the long run. There isn’t a right or wrong answer to this question, only what works for your business.

Post-Fight Analysis
As our shop, Visual Impressions, is a contract apparel decorator, about 80% of our orders use customer-supplied inventory. Our orders range from a quantity of a single piece, to hundreds of thousands of shirts. That means we also purchase about 20% of the inventory for other orders. This works well for our business, but it’s the operating standards and procedures that we have set up that make it tick. If you aren’t accustomed to your customers purchasing goods, here are some tips that will help make sure you are on top of your game every day on this issue:

1. Receiving checks in inventory the same day it arrives against a packing slip. Any discrepancies are reported immediately to the client. The packing slip is your most valuable tool and you have to insist on one. This is especially true if your local client drops off their inventory themselves. Make sure everything is counted against the packing slip while the customer is present. If there isn’t a slip, create one and have the client sign it. Packing slips protect both you and the client for any misunderstanding and subsequent financial disputes. Also, it’s important to note that packing slips aren’t 100% perfect either. Everything that’s not correct has to be immediately reported.

2. We physically count and go through every order that is less than 144 pieces and compare what’s on the order. For larger orders, we crack open each box and audit that it’s the correct color and size. Miscellaneous piece boxes are completely counted. You have to open every box. We have found pink shirts in a forest green box, large-sized shirts in a box marked for medium sizes, etc. Start with the assumption that something is wrong; you just have to find it.

3. Immediately label all boxes with a work order number and label. Separate fully received and partially received orders based on the order number. We have our inventory arranged on our floor by the last digit of the order number, so everything is easily located. Looking for a partially received order that ends with a “2?” It’s right there in the “2” row. Make it simple so that everyone can understand it.

4. Have catalogs and color cards in the Receiving department so that staff can identify anything that looks weird. Is that color Graphite or Anthracite? How would they know? Make it easy for them to do their jobs correctly.

5. Post signs and have policies regarding how customers can drop off goods. Have a standard process where they can’t just leave boxes on your loading dock or front desk. Someone has to check them in and acknowledge every shirt, color, size and style. Even better, train your customers to prepare a packing slip that will match their inventory to make your job easier. Talk to them about why this is a good policy and how it solves potential problems later.

6. If you will allow customer-supplied goods, make sure you are divulge upfront how you treat misprints, shirt defects or other potential problems that can arise during production. When you buy your own, any production challenges can be rectified without the client ever knowing. Mistakes happen. There are holes or stains on shirts sometimes. Have the conversation with the client early and things will go more smoothly if there’s a challenge. Discuss the difference between buying a few more so the order can ship complete, or what happens if there are a few problems with the shirts during production. There won’t be an issue on most orders, but if you have this conversation consistently when something does arise, you have a game plan in place.

7. Some shops charge a fee for customer-supplied shirts. That’s awesome if it works for you. It’s completely dependent on the market and your competition. From what I’ve seen, it’s usually a percentage on the order, or a small per-shirt fee. This is similar to restaurants charging an uncorking fee when you bring in your own bottle of wine. You may also consider having a fee, with an option of waiving it if you get pushback from a key customer.  

8. If you are handling a long-running program for a client, they may want to send you inventory to store and pull from to decrease turnaround times and make orders easier to process. Make sure you discuss how you are handling the inventory, the fees you will use for storing the goods in your shop, how you will charge to pull from the inventory and when you do inventory counts. This is popular, especially for company store programs. The key to success is transparency and having clear expectations. Be candid about what happens when there are problems. If you give them weekly or monthly inventory updates, what happens if their purchase order uses more goods than what you have on the floor? Get the expectations out of the way with a series of “what-if” scenarios so both sides know how to handle challenges.

9. Having prewritten descriptions on your program, procedures and standards can go a long way to establishing a good relationship between you and your client regarding how customer-supplied inventory is to be treated. Written procedures also are great for your departments, too. This makes it easy when you have new employees or are holding your existing staff accountable during performance reviews. Setting standards creates performance expectations.

In closing, there’s no winner for this inventory debate. However, I believe that you should set your company up for success by preparing for the future by closely examining both sides of this issue. Tackling this challenge early on in discussions with clients and presenting them with options and guidelines can go a long way to building a better relationship with them. You are the expert in your business. Only you can decide if you can make both options work in your shop.

Patti, how did I do?

Marshall Atkinson is the chief operating officer of Visual Impressions Inc., and Ink to the People, Milwaukee, Wis. A frequent contributor to Impressions, Marshall also lectures on sustainability at Imprinted Sportswear Shows (ISS) events and has participated in numerous industry webinar panel discussions. He is on the board of directors for the Sustainable Green Printing Partnership (SGP), and serves on the SGIA Leadership Committee. You can follow him on Twitter @atkinsontshirt  or his blog, atkinsontshirt.com.