Auctions? Got More Than You Bargained For?

In this Segue company report, learn about the residual costs and collateral channel damage for an OEM utilizing online auctions including brokers and e-tailers.

An All Too Common Scenario

Imagine for a moment that you are the manager of a tier 1, major distributor or retail chain. It’s early Monday morning and you’re excited about the prospect of selling the diverse volume of recently purchased OEM products you’ve placed on your shelves. Your company has invested substantial resources into advertising and marketing, personnel, store fronts, and warehouses. You’ve established pricing that covers your costs and provides a reasonable profit, providing your company the means to stay in business and buy replacement inventory tomorrow. You’re ready to roll.

You check your e-mails to get a head start on the day. Amongst the first forty e-mails you open, several are from various auctioneers, brokers, and large, highly visible e-tailers that are not part of your front-line distribution channel, offering large volumes of identical products to those on your shelf. The products are offered at wholesale level pricing, well below the price you need to sell yours at. Some of the product is advertised new, some refurbished, but most of the time you can’t tell because the ads aren’t clear.

Your research reveals that none of these companies are authorized OEM resellers. Most of these companies operate out of small shops or offices with very little overhead. They spend the majority of their money saturating the internet with advertisements hawking inexpensively priced, margin crushing offerings. The links take you to Amazon, eBay, Overstock.com,

B-stock.com and a host of other large, non-authorized, online auction sites and e-sellers marketing at severely discounted prices. Increasing your burden is the fact that many end-user consumers of this inventory will attempt to bring this product back to your retailer for credit…at your management and resource expense. The extreme levels of channel conflict and margin breaking competition are daunting. You sit back in your chair wondering how you’re going to move the inventory off your shelves and explain the losses to upper management and eventually, to your shareholders. At that moment, your phone rings. It’s one of your major OEM suppliers asking you for your next order. You immediately pick up your calculator and begin formulating the deep discount you will be asking for.

Auction Friction

The Internet has created the single largest available channel for the sale of excess, B-Stock and obsolete goods. Utilization of online auction/bidding sites are expanding at an accelerating rate for the sale and disposition of at-risk inventories. On these ubiquitous sites, any variety or volume of inventories can be posted. Theoretically, the inventory is sold to the highest bidder at the highest attainable recovery available. Also, theoretically, the money is quickly received, and the OEM’s at-risk inventory headache is over in a fraction of the time it would take for traditional channels (distributor discounts, in-house employee sales, warehouse clearance sales, liquidator and broker sales) to accomplish. The reality, however, is typically quite different.

The auction solution creates far more serious issues than any benefit it provides or problems it resolves. The residual costs and collateral channel damage for the OEM utilizing this “faster to market strategy” can be staggering. What appears to be cost saving and efficient from a logistics point of view is accomplished at the expense of the overall Sales and Distribution channels and OEM ROI. With the exponential increases of returns due to the shift to online buying, at-risk inventory returns have currently increased to 13-22% (7%-9% just a few years ago) of the overall revenue generated by A-Stock inventory sales in the authorized disti and retail channels. However, the significant impact this fractional, at-risk inventory places on overall corporate profitability and margin, distributor and consumer satisfaction, inventory throughput, corporate branding and image doesn’t equitably measure out vs. the auction benefits. If you are a manufacture of recognized brand name products and have a highly regarded image in the consumer’s mind, you’ve worked too hard to achieve that. If you’ve established a well thought out and productive network of distributors, retailers and resellers who are committed to ensuring the ongoing sale of your products and future success, you want to protect that.

The Real Cost Of Online Auctions

The revenue generated by the sale of at-risk inventory is generally viewed as the majority of its recovery value. While there are some other residual administrative cost savings, the collateral costs associated with online auction activity may outweigh or eliminate any recovery revenue to the extent that the auction ends up COSTING the manufacturer more than if they had simply scrapped the product. Let’s look at several common scenarios:

• High visibility of cheap B-stock offerings impacts A-stock prices/margins.
  • Result: OEM projected revenues fall
• B-stock advertisements saturate the online channels (even if the actual volumes are low)…demand for A-stock stalls. Distributor’s shelves (and/or buy dollars) can’t accommodate new A-Stock purchases or the retailer/dist returns the product to the OEM for Credit.
  • Results: Slowed throughput impacts new product introduction, reduces shelf space for latest A-stock. The result is either increasing distributor stock rotations or discounting the inventory to the Retailers/Dist. further decimating margins on the at-risk inventory as well as the perception/value of the new models released.
• OEM distributors/retailers, resellers frustrated over market saturation of discounted products offered for identical or like part numbers still on their shelves. Buyers ask for discounts on next order
  • Result: OEM A-Stock sales and margins are unnecessarily reduced.

Critical Point

On average, a half percentage point (1/2%) decrease in A-Stock pricing as a result of B-Stock competition will neutralize any recovery gained from associated B-Stock sales.

• Consumers lose faith in a Brand after bad experience with with product/condition/customer support/warranty, etc. They reconsider purchasing that brand again.
  • Result: OEM loses market share, brand name/image impacted

Typically, the recovery achieved from at-risk inventory auction sales to the “highest” bidder, is a small fraction of the original cost or true market value of the product. The supposed “highest recovery” that is being achieved on the bid is, in actuality, only the highest price offered by a small group of bidders, after the inventory has been vastly marketed to the entire marketplace as bidders attempt to pre-sell the inventory. The resulting bid price, while the highest amongst the small bidding group, will be lower than what could have been achieved had there not been a pre-established view of existing high quantity, market visibility and saturation. Buyers with real money do not engage in auctions as the product quality is suspect.

A few important questions to ask yourself:

• How much profit/margin is lost on A-Stock sales when the price point on a product drops prematurely due to lower priced auctions based on product availability?
• How can a forecasted revenue stream be maintained once a lower price has been established in the marketplace?
• How many A-Stock sales are being converted into auction based lower priced, unauthorized reseller sales?
• Once the product is sold to the buyer via auction, how does the warranty work? Does the buyer received a warranty? If not, how does that affect the advertised retail value of that inventory?
• If the buyer/end-customer is dissatisfied with the product and can’t send it back to the auction house or the seller, how will the OEM deal with the unhappy customer whom will remember the brand if not taken care of, at the OEM expense?
• How do you calculate the cost of replacing a loyal and productive network of dissatisfied resellers and distributors?
• How much management time and energy will be required to repair the Brand’s image after consumers are disappointed with the condition of the product received or the bad customer service received?
• Does the average consumer know the difference when buying from an authorized distributor versus a well positioned, non-authorized broker?
• What is the cost of regaining or replacing a dissatisfied customer?
• What is the overall cost of the resources required to manage these issues?
• Does the auction contribute to the organization’s goals?

The most important question of all:

Why not apply the same principles and strategies created for tier-1 Distribution/Retail channels to at-risk inventories?

Solutions: How an OEM can extract maximum value for at-risk inventory while protecting those vital OEM and Distribution channels.

Dedicated reverse logistics partner: Utilize a single partner that can deliver comprehensive industry, product and reverse logistics knowledge and experience, under one roof. This provides maximum accountability, measurability, efficiency and control, while alleviating the majority of the costs associated with the management of any at-risk inventory.

• Fast ROI: There is excessive speed and perfect speed. Utilizing an auction for instant recovery has tremendous associated risks and costs with a completely unreliable and arbitrary recovery forecast. An immediate recovery value based on current market conditions or inventory being turned on a 30 day cycle guarantee removes a significant portion of the ongoing financial risk associated with the inventory for both the OEM as well as the buyer. An instant return (based on true achievable market value) combined with channel protection methods will achieve optimized results.
• Profitability: The control of margins through formulaic, pricing strategies and MAPPING strategies, current A-Stock pricing, current market conditions, and historical sales (as opposed to haphazard auction results) is essential. A strategically structured, well managed, low visibility channel of non-OEM competitive B2B customers, combined with a vast array of highly managed B2C outlets will optimize a-risk asset recoveries while protecting and stabilizing pricing for A-Stock channel inventories.
• Alternative Channel: Access to alternative retail/disti channels, consistently managed by Segue will establish optimized results: pricing control (MAPPING against A-Stock values), marketing strategies, channel conflict mitigation, product integrity and customer satisfaction.
• Channel Control: Tight management of a diversification of buyers (by sector and geographic locations) provides these channel buyers a greater level of security and reduces their risk exposure. The mitigation of unchecked, unmanaged inventory offerings and perceived market saturation increases their willingness to pay higher prices and increases throughput as well as increased profitability. The net result is the highest levels of control attainable. Additionally, these buyers will pay higher prices for the opportunity to receive a steady flow of products, much like a 1st tier distribution model.
• Accountability: The optimal partner should be able to account for all transactions efficiently and effectively. Metrics reporting is an absolute necessity to gauge progress and adjust future strategy to meet ongoing change and process development.
• Integrity: Industry experience and reputation should mirror the OEM’s goals, objectives and strategies. Anything short of that creates a weak link in the overall supply chain.

Conclusion:

Manufactures spend a tremendous amount of time, money, and management resources carefully and strategically building effective Distribution and OEM sales channels. Safeguarding these vital links in the supply chain will yield overall maximum corporate profitability, security and future growth.

The Segue Difference

As an industry vetted, multi-faceted, dedicated forward/reverse logistics supply chain company, Segue delivers a comprehensive menu of customizable forward/reverse and 3PL options and services that provide organizations the ability to tailor solutions that best fit their business needs and goals. Segue will provide everything you need to optimize your time, money and personnel, providing your organization more time. Money and energy to focus on the vital and necessary profit centered areas of your business.

About Segue

Headquartered in Lake Forest, CA. California, Segue Corporation is a global multi-faceted forward and reverse logistics supply-chain company. Our comprehensive, end-to-end Supply Chain solutions have been supporting the consumer and computer electronics industry and marketplace since 1988. For inquiries regarding Segue Corporation, and our comprehensive supply chain solutions, contact us by calling (949) 589-5040 or email us at: info@seguecorp.com