Lessons · Lesson 3 of 3
Cash, space and time: what a buyer is really optimising
Judge one buying decision on unit cost, on margin rate, on cash and on space, watch the lenses disagree, and decide which one was binding.
Lesson 3 of 3 · 35 min
The question left open
A shop can run out of three different things. It can run out of money for stock, room to hang it, and weeks to sell it. This lesson measures one buying decision against all three, and they disagree. The same order can be best in the range on cash and worst on space. What settles the argument is which of the three the shop was actually short of. It also explains why a buyer refuses a keen price, or asks for one delivery to be split into two.
On gross margin in cash, the 14,000 buy beat the 9,000 buy: GBP 360,362 against GBP 339,500. If that were the only number, Imogen's February decision was right and there is nothing more to say.
It is not the only number. A retailer does not have unlimited money, unlimited shop and unlimited weeks. It has a budget, a fixed quantity of rail, and a season that ends. Every buy competes with every other buy for all three. A decision that looks good on its own is judged against what those three things could otherwise have done.
This lesson puts a number on each.
Cash: the budget is a fixed number, and it was nearly full
Marchbank gave outerwear GBP 880,000 at cost for autumn. That is the money available to buy stock with, and it is set before a buyer sees a single sample.
| November plot | February buy | |
|---|---|---|
| Committed at cost | GBP 763,600 | GBP 842,860 |
| Share of the budget | 86.8% | 95.8% |
| MK-8120's share of the budget | 25.2% at 9,000 | 36.9% at 14,000 |
How that budget is set, phased across the season and traded week by week is Retail Planning, track 17. Here it is simply a wall. The extra 5,000 coats cost GBP 102,980, and there was no spare GBP 102,980. It came out of the longline puffer and the trench, which were cut by GBP 107,520 and GBP 46,240 of cost between them.
So the real question about the coat deal is not "did it make money". It is "did it make more money than the puffer and the trench would have". And there is a single measure for that.
Gross margin return on inventory investment
GMROII is the gross margin a line produces divided by the average value of the stock it tied up, at cost. It answers one question: for every pound of the company's money this line held, how many pounds of margin came back?
The average inventory is the stock the line held averaged across the whole season, not the opening buy. A line that sells out in week 14 held far less average stock than one that limped to week 27 with the same opening quantity.
| Gross margin | Average stock at cost | GMROII | |
|---|---|---|---|
| MK-8120, as planned in February | GBP 576,893 | GBP 136,840 | 4.22 |
| MK-8120, buy 9,000 | GBP 339,500 | GBP 99,379 | 3.42 |
| MK-8120, buy 14,000, what happened | GBP 360,362 | GBP 195,722 | 1.84 |
| MK-8148 shacket, same season | GBP 165,243 | GBP 26,249 | 6.30 |
Marchbank's outerwear department is run to a GMROII of 3.0. Read the column. The plan was comfortably over it, and the smaller buy would have cleared it. The buy that was actually made came in at 1.84, a little over half the target. And it did that on the line with the best intake margin in the range.
The marginal number is worse than either. The extra 5,000 coats added GBP 20,862 of gross margin and GBP 96,343 of average stock at cost. That is a GMROII of 0.22. Twenty-two pence of margin for every pound held, in a department that needs three pounds.
Space: margin per metre of rail per week
Stock also occupies a physical shop, and a shop does not get bigger because a buy did. A wool coat takes about 45 mm of hanging rail. A store's outerwear wall is what it is.
Marchbank measures this as margin per linear metre of rail per week: the gross margin a line produced, divided by the rail it occupied multiplied by the weeks it occupied it.
| Rail a store | Weeks on the floor | Metre-weeks | Margin per metre-week | |
|---|---|---|---|---|
| MK-8120, buy 9,000 | 1.1 m | 21 | 3,419 | GBP 99.30 |
| MK-8120, buy 14,000 | 1.6 m | 24 | 5,683 | GBP 63.41 |
| MK-8148 shacket | 1.0 m | 17 | 2,516 | GBP 65.68 |
How rail is allocated, laid out and presented is Visual and Digital Merchandising, track 19. What belongs here is only the arithmetic a buyer owes the space. The bigger buy needed half a metre more rail in every store, for three more weeks. It earned GBP 63.41 a metre-week where the smaller buy would have earned GBP 99.30.
Now notice something that a tidier course would hide. On cash, the shacket is the best thing in the range by a distance: 6.30 against the coat's 1.84. On space, the shacket is worth GBP 65.68 a metre-week. That is barely better than the over-bought coat, and much worse than the 9,000 coat. The two lenses disagree. No amount of arithmetic will make them agree, because they measure two different scarce things.
Time: the selling window, and the favour that was refused
In June, Denizkent came back with good news. The line had freed up and they could ship 18 days early at no extra cost. Any factory would offer this and expect thanks.
Marchbank refused it. Here is the bill it would have run up.
| Payment falls due eighteen days earlier on GBP 324,380, at a cost of money of 7.5% a year | GBP 1,200 |
| Distribution centre storage, at GBP 0.018 a coat a week | GBP 648 |
| Total cost of the favour | GBP 1,848 |
Against a benefit of zero, because the coats could not go on sale eighteen days earlier. The shop floor in that week still held summer. The coat's launch date was set by the floor plan and the marketing calendar. Stock that arrives before its window sits in a warehouse being paid for.
That is the general rule, and it is worth having in one sentence: early delivery is worth money only when the SELLING window moves, and the selling window is set by the shop, not by the container. If the coat could genuinely have launched eighteen days sooner, eighteen days of full-price selling in a thirteen-week window is worth many multiples of GBP 1,848. Marchbank would have paid for the favour rather than refused it.
A factory reading a refusal like that concludes the buyer is being difficult. The buyer is protecting a date they do not control.
The same buy, judged seven ways
| Lens | Buy 9,000 | Buy 14,000 | Better |
|---|---|---|---|
| FOB price | USD 26.50 | USD 24.90 | 14,000 |
| Landed cost | GBP 24.60 | GBP 23.17 | 14,000 |
| Intake margin | 66.8% | 68.8% | 14,000 |
| Gross margin in cash | GBP 339,500 | GBP 360,362 | 14,000 |
| Achieved margin rate | 60.5% | 52.6% | 9,000 |
| GMROII | 3.42 | 1.84 | 9,000 |
| Margin per rail metre-week | GBP 99.30 | GBP 63.41 | 9,000 |
Four to three, which settles nothing on its own. What settles it is asking which constraint was actually binding that autumn. The answer is on the budget table at the top of this lesson. The February buy used 95.8% of the outerwear budget. Money was the thing there was not enough of. So cash was the lens that mattered, and on cash the coat deal came last in the range.
Why a perfectly good FOB price can be the wrong order
Everything in this course started with an honest, competitive, well-built quotation. Course 8.1 builds one from the factory's side, and there was nothing wrong with this one. Yet the order that quotation attracted lost the department GBP 216,532.
So here is what a factory is actually being told when a buyer refuses something that looks obviously good.
- "We will take 9,000 at the higher price." Not a squeeze. The buyer has calculated that the extra units return less than the budget's next-best use, and that the price break does not cover the difference. The cost sheet cannot see this, because it is not on the cost sheet.
- "We cannot take it earlier." Not disorganisation. The selling window is fixed by a floor plan, and early stock costs money and earns nothing.
- "We need it in two deliveries." Not fussiness. Two deliveries halve the average stock the line holds, and therefore roughly double its GMROII, for the price of a second consignment.
And here is the useful half, because a refusal with no route through it is worth nothing to either side. What a supplier can offer that a retailer can accept is almost always about shape rather than price. A lower minimum. An initial order with a call-off inside the season. A split delivery. A shorter lead time that lets the buy be decided later, on better information. Suppose Denizkent could have held USD 24.90 on an initial 9,000, with 5,000 callable within eight weeks. Marchbank would have taken the price and never bought the last 5,000 coats. That is not free for the factory, because the mill minimum still has to be met by somebody. But it is a conversation, and it is a conversation about the right thing. How a buyer runs that conversation is course 16.4.
Check yourselfTwo lines both return a 60% margin. Line A turns twice a season, line B turns four times. Which does a buyer prefer, and by how much?Show the answer
Line B, by a factor of two. Margin percentage is identical, so the entire difference is in the money. Line B holds half as much average stock to produce the same margin on the same sales, so its GMROII is double. If the budget is full, and it usually is, buying line B releases cash that buys something else and buying line A does not. This is why "what margin do you run at" is a much weaker question than "what does the money do". It is also why two suppliers offering the same margin are not offering the same thing.
Check yourselfA buyer asks you to split one shipment into two, four weeks apart, at your cost. What are they buying, and what should you ask for?Show the answer
They are buying a lower average stock holding and a second chance to be right. Half the units arrive four weeks later, so the money is committed later and the line's GMROII rises sharply. And if the first delivery sells badly, the second one can still be re-sized or re-coloured. It is worth real money to them. What you should ask for is a share of it. A fixed total quantity, so your fabric and your line plan are safe. A cut-off date after which the second delivery cannot be changed. And the split's cost recognised in the price. What you should not do is treat it as an administrative request, because it is not one.
Prompt · Judge one buy on cash, on space and on time
Before a range sign-off, when every line looks fine on margin and you need to know which one is actually eating the budget.
Act as a retail buying director reviewing a range before sign-off. For each line I give you: [CODE], ticket price, landed cost, units, expected selling window in weeks, expected disposal split across full price and each markdown step, and the linear metres of rail or the shelf allocation it will occupy in an average store. My department budget at cost is [AMOUNT], my store count is [NUMBER], my target gross margin return on inventory investment is [NUMBER], and my target blended intake margin is [PERCENTAGE]. Do the following. First, give me a table of every line's intake margin, expected achieved margin, cash gross margin, average stock at cost across the season, GMROII, and margin per rail metre per week. Second, calculate the blended intake margin of the whole range, and tell me how much money separates it from my target, in money and not only in points. Tell me whether any miss is in the LINES or in the MIX between them. Third, rank the lines by GMROII, and separately by margin per rail metre per week, and name every line where the two rankings disagree, because those are the decisions I actually have to make. Fourth, tell me what percentage of my budget is committed, and which line is consuming the most of it relative to what it returns. Fifth, for the worst line by GMROII, tell me what quantity would bring it to my target and what that releases in cash. Sixth, ask me which constraint is binding this season — budget, rail space or the selling window — and re-rank the range on that one. Do not tell me a line is good because its margin percentage is high.
AI can make mistakes — check anything you act on.
What you can do now
You can take one garment from a factory's quotation to a retailer's gross margin, and you know why the two ends are further apart than they look. Specifically:
- Build a landed cost from an FOB, a currency rate, freight, duty and clearance, and know that duty moves with the FOB.
- Convert between markup and margin, and calculate a margin on net selling price rather than on cost.
- Read three margins: intake, planned achieved, realised. And know that only the last one is money.
- Price a markdown, including the part of it handed to customers who were going to buy anyway.
- Price terminal stock honestly, and know the loss lands when the decision is made.
- Judge a quantity decision on cash and space, not only on unit cost and margin rate, and say which constraint is binding.
And one thing that is not a calculation. When a retailer refuses an order that looks excellent from a factory, they are almost never refusing the price. They are refusing the units, the date or the shape. The page that decides it is not the cost sheet, and it is not a page the factory has ever been shown.