An up-and-coming merchandise manager asked me recently regarding the pros and cons of merchandise purchased on Sale or Return (SOR) versus purchased outright. I asked her the reason for the question and it went something like this.

She has a supplier who desperately wants their merchandise in her stores but they are invariably stonewalled by the buyer (who likes the merchandise) because there is no Open to Buy. They therefore said to the buyer that if she was happy, they would discuss SOR with her merchandise manager which they did. Anything not sold at the end of the month would be swapped for other merchandise or it could simply be returned for a full credit.

This sounded particularly attractive and clearly the supplier had great confidence in their range. But the merchandise manager had to refuse the offer. “Why?”, I asked.

Each month management looks at stock levels keenly and one of the merchandise manager’s KPI’s is the level of inventory. She is therefore naturally keen to control this carefully because a bad review means little or no salary increase. If she agreed to SOR her stock levels would go up and she would be overspent.

I argued that surely sales would increase as a result of the SOR merchandise which the buyer liked and in which the supplier had such confidence. And here is the rub.

The merchandise manager said she had tried SOR in the past from a different supplier and the stock had flown out. Because the merchandise was better than similar stock in the stores, sales of the other stock had suffered and while sales had increased, so had inventory to a larger degree. Therefore she had come to the decision that if there was no OTB, whether or not the stock was on SOR, it couldn’t be bought. In other words, if it sold, it was immaterial whether or not it had been bought outright or not.

I couldn’t fault the logic. SOR is simply an insurance policy and the supplier wouldn’t insure if they thought they would get bitten.

This is partly the reason for suppliers getting into retail. They know that they can do a better job than a lot of retailers can. So shops within shops spring up and retailers become landlords with clumps of disparate merchandise and decor in their store. In many stores in Asia, they have gone the whole hog. Just about everything is on consignment, and the supplier not only owns the merchandise, but the staff too.

Of course an alternative to this debacle is to become a trusted supplier with a replenishment agreement based on set criteria. The supplier then simply tops up the retailer every week/month having received sales by SKU on say a weekly basis.

This more or less guarantees an in-stock position on all good sellers and the poor sellers can be weeded out quite quickly and replaced. This is not suitable for all categories of merchandise, but it is for many.