The secret was in the purchasing. Two opposite ways to use time!
For over thirty years, my IT business ran under false (or at least hidden) colors. My first business was an electrical contracting firm where I instituted strict edicts to always pay our vendors (and of course payroll) on time which created a cash flow issue because our usual customer base (general contractors) regularly paid slowly (sometimes, if at all). I compensated for this by, rather than taking the easiest route and consolidating all my orders with a single distributor, holding daily competitions on a line item basis to squeeze the last bit of juice out of every procurement.
When I started my IT hardware business, in 1980, since I was conserving cash, I chose a mail-order model. My advertising was the big expense (I took out full page adds in Byte Magazine, a nationally distributed microcomputer oriented magazine of the time, and later in the NYT’s technology section). OTOH, my sales model was; the customer sends me a check (pre-credit card days), and once it cleared my bank, I would have their purchase drop-shipped from the nearest/cheapest distributor/manufacture to their location (along with my paperwork, rather than the vendors). I would then pay the vendor in 30 days. My “inventory” was an ever-growing bank account of other people’s money.
This methodology meant that my ultimate profit was based on finding the best net delivered price in the nation, based on final destination as well as gaining an understanding of the various “channels” that manufacturers sold their products through at vastly different prices. I didn’t care if they considered be a distributor, OEM, reseller, retailer, dealer, VAR, installer or whatever, as long as I got the cheapest price (occasionally leaving the authorized channel structure completely by buying from OEM’s at their cost to boost their numbers in their own pricing matrix).
The massive buildup of cash allowed a few additional strategies to play out. I ALWAYS continued to pay my bills on time - which created a situation where my firms had essentially unlimited credit with hundreds of firms. It also allowed me to offer to pay in advance or in ten/fifteen however many days to get an additional discount in price (a 2% discount on two week’s worth of giving up the use of the money was a pretty good return for me).
My creditworthiness was relatively unique among brick and mortar resellers in the early days and it allowed me to compete for government business (who wouldn’t pay the C.O.D. required by those who had their money tied up in inventory which quickly became obsolete). We became successful enough that when networking was “invented” I was able to withdraw the contracting business from the slow paying commercial sales and use it as the infrastructure arm of the faster paying government business.
The government business ballooned and we pulled the plug on the mail order sales (and the expensive advertising, which additionally, tended, because of its showing discounted prices tended to tick off manufacturers). Our experience in national procurement, augmented by a database program I wrote to choose the least expensive source for each line item we were purchasing. While our sales prices were cast in stone based on competitive bids, we could make a significant bump on our profits by imaginative and aggressive procurement - with the knowledge that everyone wanted to do business with us because they knew they would be paid on-time.
For years, we were able to run at double digit net profit in a field notorious for gross profits to be in the lower half of single digits. The secret sauce was in both using every available edge in procurement by holding what amounted to daily auctions between distributors/manufacturers as the stick and the promise of as quick a payment as they were willing to pay for as the carrot.
Jeff
