What Is the biggest cost in your business?

Nov 11, 2014 2 min

Staff? Stores? Marketing?

A few months after I first started in retail, too many years ago, as a young buyer at Boots I was sat next to our Managing Director at an introductory dinner. I am sure he had played this game with hundreds of fresh faced young people before me but he still seemed to thoroughly enjoy himself. “What is the biggest cost in our business” he suddenly asked. After choking on my starter and no doubt blushing wildly I tried to think of what would be the smart answer: Staff? -No, Stores? -No, Marketing? –NO, I was beginning to think my career was over before it had even started. After a while when fortunately no other smart graduate had come up with an answer either he very proudly announced – “The products that we sell”. Well that was obvious I thought, feeling just a little stupid I had just failed to realise it or say it.

There was a serious point to the game, he pointed out that most people in retail do not get this right either and take it for granted that we have stock of products to sell so they overlook the fact that they are the biggest cost to the business. He went on the explain that because of this fact we should make sure that as we developed in our career we must always appreciate that fact and make sure that we buy at the best price, even a very small discount or drop in buying price can deliver huge results to the bottom line, having too much inventory ties up vital cash within the business and stops our growth potential and could even break the business, too little stock and you lose sales and deliver poor customer service which could lose a good loyal customer.

An Obvious but Important Message

It may seem obvious but this message is as true today as it was all those years ago, possibly even more important because retail is significantly more competitive today than it was then.

I eventually became good friends of the MD and fortunately went on to have a pretty good career at Boots and subsequently became Supply Chain Director at Iceland Foods group. I never forgot Mike’s message and have relayed this to very many young people coming into retail under my guidance. Eventually I moved out of retail into the software business running companies specialising in Inventory Management, yes the message really did get to me. I am still involved in a supply chain optimisation company today, RELEX the leader in delivering huge benefits to large numbers of retailers all over Europe. Getting the right inventory at the right price in the right quantity to stores and central warehouses has improved supply chain performance and delivered huge profits to their customers. If you remember this game you too could benefit from their optimisation technology and make your Managing Director very proud of you.

Written by

Mikko Kärkkäinen

Co-founder & Group Chief Executive Officer