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BUYING is a neglected art.
Yet distribution is regulated at every step by buying.
Distribution begins when an elevator buys a farmer's wheat. It proceeds when the flour mill buys the wheat from the elevator. It continues when the wholesaler buys from the miller, when the retailer buys from the wholesaler, and it ends when the ultimate consumer buys from the retailer.
There is no adequate appreciation of the significance of this fact.
The discussion of buying in our rather extensive literature of business is singularly meager. It is as meager as the treatment of selling is bounteous. As a nation we seem to have dedicated all our energies to selling and all our "best minds" to the solution of problems of salesmanship. The important part which buying plays in distribution has been overlooked probably because economy in buying seems a "negative" rather than an "affirmative" virtue. We seem to have quite overlooked the fact that every act of selling is accompanied and indeed is conditioned upon an act of buying. What is most unfortunate, preoccupation with the art and science of selling seems to have actually resulted in the atrophy of the art and science of buying.
Yet buying is far and away the more important. A little consideration of the part played by buying in our economy will show, first, that buying regulates all distribution; second, that extravagances in marketing cannot be passed on to buyers unless buyers are ignorant of commodity standards or market values; third, that consumers generally are entirely without knowledge of merchandise values; that buying for resale is automatic rather than selective, and that only in the case of buying for industrial use are buyers even to a limited extent technically qualified to determine the value of the things which they buy.
This is a state of affairs that points clearly to the need of a real study of the subject of buying. It is true that some studies of buying have been made which deal with the practical problems of the buyer and purchasing agent, but so little has been written concerning the economic aspects of buying as to make this phase of the subject virtually unexplored territory. I have, therefore, ventured upon an outline of certain salient aspects of the economics of buying, and trust that others may be inspired to undertake a complete exposition of the principles involved. Buying may be classified as, first, the buying of raw materials, parts, and supplies for re-fabrication; second, the buying of finished and unfinished commodities for re-selling; and third, the buying of finished commodities for ultimate consumption.
Nearly all our raw materials and semi-finished products are bought for re-processing--for fabrication into finished products. All our industrial buying, including the buying of fuel and power, machinery, and supplies, is incidental to the refabrication of raw materials. The mill which spins and weaves cotton into cloth, not only buys raw cotton, but it buys spindles and looms, coal for its power plant, oil for lubrication, and a thousand other products all of which directly and indirectly are used in the fabrication of cotton goods.
What is the principle which governs the buying of commodities for re-fabrication? In what does it differ from the principle which governs other kinds of buying? We must answer these questions if we are to come to an understanding of the part which buying should play in the solution of the problem of distribution.
In the spinning of the yarn and the weaving of the fabric, for which practically the entire cotton crop is used, certain definite qualities or characteristics of cotton are selected by the mill-buyer because these qualities are essential in the manufacture of the kind of goods which this mill produces.
It is not enough for the buyer to know that the cotton he is considering buying is priced correctly--he must know the color, luster, and brightness of the lint; the nature and amount of foreign matter present in the lint, such as leaf or dust; the preparation or ginning, and the length of its fibers.
What is true of cotton is true of pretty nearly all the commodities which are purchased for reprocessing for industrial use. In buying for this purpose, the purchasing agent pays little attention to extraneous matters like pretty advertisements or high-powered salesmen and concentrates upon the qualities of the product which he is buying.
In buying for refabrication, the principal question is whether the product conforms to the standards or specifications established for the work in hand. This fact having been established, the question of price becomes very largely a matter of agreement between buyer and seller as to just what actually is the current market price.
Two great groups of middlemen, one group operating in raw materials and the other in finished products, are engaged in buying for reselling.
The first of these two groups are the merchants who buy, assemble, grade, and resell raw materials and semi-finished products.
When cotton is sold by the actual grower of the fiber, it is first bought by a local storekeeper, factor, or agent. From these local factors it is bought by the cotton merchants. Both the local factor and the cotton merchant, one of whom may be said to be a retail assembler of raw cotton and the other a wholesale assembler, buy purely to resell. The only change which the cotton undergoes while passing through their hands is that of grading and assemblage. The consideration which governs them in their buying therefore is solely one of making certain that the intrinsic quality of each lot of cotton is accurately reflected in the price they pay. In buying, therefore, the two considerations which are never for the moment lost sight of are those of grade and price.
The second group of buyers for resale are the wholesalers and retailers who buy finished commodities for distribution to the ultimate consumer. In this group the consideration which governs buying today is altogether different.
Fifty years ago the buying of finished commodities by retailers and wholesalers was governed by precisely the same principles relating to grade and price which prevail today in the buying of raw materials. The development of brand specification and the gradual destruction of all the established grades and standards with regard to finished products has almost universally destroyed wholesalers' and retailers' abilities to function selectively in buying.
As long as cotton sheets are purchased by the wholesaler and retailer on the basis of grade and price--as long as the count of warp and filling, the fineness of the yarn, and the quality of the finishing are considered in connection with price, the buyer for wholesaling and for retailing both perform a selective function with regard to all the merchandise which passes through their hands. As soon, however, as the sheeting ceases to sell on its intrinsic qualities, but purely upon the demand for a certain brand, the wholesaler and retailer cease to exercise any selective function in buying it. It is obvious that the greater the extent to which brand specification enters into the buying by the ultimate consumer, the less will the retailer and wholesaler perform a selective function in buying. Yet this selective buying is absolutely essential if manufacturers are to be prevented from charging more than competitive prices for their products.
To make this clear it is worth while considering the full significance of a true competitive price. A true competitive price can only be established in a competitive market. An excellent statement 1 of the attributes of a competitive market is made by Edmund Brown, Jr. in "Marketing, pp. 6 and 7:
(1) A common meeting place.--For a market to be open and competitive it must be possible for buyers and sellers to meet and trade. This does not require that they meet on a trading floor or in a particular market space: it means that by using the facilities at hand--telephone, telegraph, or a trading floor--any reputable buyer should be able to trade with any reputable seller, and vice versa, without artificial hindrance.
(2) Common knowledge of market information.--Buyers and sellers must have convenient access to all facts as to who the other buyers and sellers are, the potential supply and the potential demand, and the price established by previous transactions--i.e., a common knowledge of the general conditions under which they operate.
(3) Indifference to identity of product.--In such a market the commodity offered by any seller at a market price will be identical in physical character and quality with the commodity offered by any other seller at a market price, so that it is a matter of indifference to any purchaser whether he buys from one seller or another. The commodity, therefore, must be standardized. All sellers must be willing to sell to all buyers on equal terms. This indifference must function freely and every buyer and seller in the market must be able to take advantage of the market price, so that no buyer and no seller can be forced by individual necessities to depart from that price.
It is very obvious that the absence of any one of these three elements destroys a true competitive market and makes it impossible then to establish a true competitive price. In the buying of raw materials for resale true competitive markets are generally prevalent, but in the buying of finished products, the prevalence of brand specification has all but destroyed the normal basis upon which true competitive prices can be established. If we are to eliminate high pressure marketing, it is perfectly plain that we must re-establish the buying of finished products for sale to the ultimate consumer upon a basis of the intrinsic qualities of the goods and put branding in its proper place as subsidiary to the merchandise itself. Upon this point let me quote Mr. Saunders Norvell (Chairman of the Board of Directors of McKesson & Robbins, Inc., New York, manufacturing druggists. Reported in the Hardware Retailer, November, 1923.) :
Once upon a time, the retail drug merchant was an authority in his community on drugs and chemicals just as today the hardware man is an authority on axes, hatchets, and saws. When a man wished drugs and chemicals he went to his friend, the retail drug merchant, and asked his suggestions and advice in regard to the kind and the quality of goods to purchase. He was guided by this advice.
This condition, while it still exists in the hardware trade, has entirely passed away in the drug trade. Nowadays the national advertiser in the drug business thinks up some highsounding name, advertises his goods nationally, on one hand frightening the consumer about the condition of his health, describing his symptoms, and on the other hand, promising him a cure or relief if he will only buy his concoction. Then in his advertising he warns everybody against substitution. If any retail drug merchant would have the temerity to say to a customer, for instance--"This other preparation made by me is 'just as good'"--that drug merchant would immediately be classified by the intended purchaser as a fraud and a cheat.
What is the result?
The retail drug merchant today knows nothing whatever about salesmanship. He does not try to sell goods. His clerks, like automatons, stand behind the counter and pass out the goods that are called for--that are nationally advertised. They have nothing to say about these goods. They would not dare to make any suggestions. They take the money, punch the cash register and turn like a machine to repeat the same performance with the next customer that national advertising has driven into their shops.
Now what has brought about this condition? The answer is simple--national advertising. The manufacturers of a long line of drugs and toilet articles have bought space in newspapers, magazines, on street cars and on billboards, and have proceeded to sell their goods to the public. The greatest of these manufacturers openly boast that they do not ask any selling ability on the part of drug jobbers or retail merchants. All they ask is that their goods be carried in stock and that orders be filled when the goods are called for. This all seems very simple and delightful, but when we analyze the profits that the jobbers and the retailers are making on these nationally advertised goods, we soon find that the goods are being sold, by reason of competition, at less than the actual cost of handling the business.
Today the retail hardware man, thank God, is still an authority on hardware in his own town. If a man wishes to build a house he goes to him and asks his advice in regard to builders' hardware. If a man wishes to buy a set of tools, he goes to his retail hardware friend to help him make the selection. If the time ever comes when builders' hardware, tools, and other articles in the hardware line are advertised as they are in the drug line, this condition will entirely pass away. When a man goes to buy his builders' hardware or his tools he will know, or he will think he knows, exactly what he wants, and woe to the retail hardware merchant who would dare to suggest to him what he should buy! If he does, this retail merchant will be branded as a "substituter," and the consumer will go to some other store where he can get what he wants without trying to have any other brand put over on him.
Therefore, while no one believes more than I do in certain kinds of advertising, let me utter a warning against this chimera of national advertising. In the end it will be a bad thing for manufacturers, jobbers, and retail merchants, just as today it has almost completely demoralized and ruined the wholesale and retail drug business of the country.
When we come to the practices which today prevail in buying for ultimate consumption, we find that less than one hundred years of divorce between production and consumption has almost entirely destroyed the consumer's capacity for measuring quality.
Up to the beginning of the industrial revolution over one hundred years ago, the ultimate consumer was a self-sufficient animal. He produced for himself most of the things which he consumed. Those he could not produce himself, he secured directly from craftsmen who could make them for him. Products which are now factory made were home made or custom made.
In determining the value of the things bought, the consumer of that time had the tremendous advantage of observing all the processes involved in their production. Thus he was able to familiarize himself with the factors which determined the value of what he bought. He met the maker of the products he bought on common ground with a common understanding of what constituted value. These conditions made him an infinitely shrewder buyer than is the consumer of today. Even the least observing man of that day knew more about the production of the things he bought than the most observing consumer of today. The consumer of the days previous to factory-production knew about foodstuffs because practically everything that he ate was grown, often on his own farm, and milled right within his own neighborhood. He knew about the textiles he used because he raised his own wool and flax, saw the yarns spun and woven, if not in his own home, certainly on looms the operation of which he had witnessed until he was sufficiently familiar with weaving to judge intelligently the qualities of the fabrics. When he ordered hardware and furniture from his local blacksmith and cabinet maker, he was sufficiently familiar with the making of the things he wanted to specify the materials to be used and the methods of workmanship to be employed.
It was just as easy then as it is today to fool the consumer about merchandise with which he was unfamiliar, but it was impossible to fool him then, as it is possible to fool him today, about the value of the commodities which he bought day after day and year after year.
Today the consumer, when in the market, is confronted with a factory made product, the qualities of which are influenced by his needs and desires only in the most indirect fashion. Factory production of necessity results in a divorce between production and consumption. Through this change the consumer is confronted with a problem in buying the significance of which we scarcely appreciate.
The consumer of today has little opportunity to learn about the raw materials which enter into the products he buys, or the methods used in fabricating them. The very abundance of the times has confused him, disarmed him, and tended to make him the helpless and credulous victim of the manufacturer's propaganda. Let him be deprived of the guidance of the independent retailers, who select merchandise carefully because the retailers' survival is dependent upon intelligent selection, and he will be entirely helpless.
In buying today the consumer is therefore credulous and gullible. He is influenced by arguments pitched in a key to appeal to intelligences whose average is no higher than those of eleven and twelve year old children.
"The American buying public," said a very successful business man who is a shrewd student of marketing methods, "consists of one hundred million morons."
An advertiser of one of New York City's largest department stores quotes an English poet who said, "Nowadays, people know the price of everything and the value of nothing." (James A. Hearn & Son, New York.)
Today the consumer is reduced to a state in which he has no other method of judging the relative value of two products than by the prices which are asked for them. If the price of one is higher than the other, he assumes that the higher priced one must be superior. He knows too little about the factors involved in producing the product itself to determine whether or not the higher priced product really represents a commensurate increase in value. And yet he flatters himself that he is so much wiser than his forefathers!
Under such conditions it is no exaggeration to say that the consumer has surrendered the satisfaction of his needs and desires to the direction of high pressure salesmanship and to high pressure advertising. It is because these modern agencies for his guidance are failing to furnish him with goods at the lowest cost which modern methods and inventions make possible, that we are confronted with the necessity of establishing distribution practices which will once again make production subordinate to consumption.
So accustomed are manufacturers who are engaged in high pressure marketing to the discussion of the problem of distribution from the point of view of the producers only, that any effort to make them realize that after all production exists for the benefit of the consumers and not consumers for the benefit of production will come to them as an intellectual shock.
There are three principles which these manufacturers must accept if they are to reconcile themselves to the principles of buying here enunciated.
(1) That consumers are entitled to secure the goods needed and desired by them at the lowest possible cost; (2) That it is in the general interest of the community as a whole--the interest of the consumers and producers taken together--that distribution and production be economically conducted; (3) That whenever any factor in the process of distribution, i.e., any retailer, wholesaler, or manufacturer, aggrandizes himself by methods which tend to increase the cost of distribution, such methods are not justified by sole virtue of the fact that the man who employs them finds them profitable.
No business exists entirely to itself.
No business man has the economic right to profit by sacrificing the general welfare to his individual profit.
Most of the ills and ailments of distribution may be traced to the failure to bear these principles in mind in buying--the basic regulating device in our process of distribution. The extravagant marketing methods which exist today are those which individual manufacturers have found most profitable to them. The general welfare has suffered from what might be called a state of anarchy in distribution--of unrestrained license upon the part of manufacturers.
The check upon the manufacturer represented by informed buyers no longer exists. The ultimate consumer knows little or nothing about the intrinsic qualities of the merchandise he buys from the retailer. And the retailer follows the path of least resistance, and hands out to the consumer only those products which the enterprise of manufacturers makes it easy for him to sell.
If the disappearance of the informed buyer has produced these extravagances of distribution, then it is obvious that the re-appearance of the informed buyer would result in their elimination.
If any appreciable number of consumers were to begin buying to the tune of an old Latin saw, "Caveat Emptor," high pressure marketing could not survive.
The theory upon which consumers have been persuaded to abandon caveat emptor is in substance this--the manufacturer assumes the risk of satisfying the consumer, and the consumer need not therefore examine carefully the article he is buying, because he can rely upon the manufacturer's guarantee rather than upon his own judgment or that of the retail dealer.
In effect, the consumer is made to feel that it is unnecessary for him to have any technical knowledge of the product which he buys because, if he confines his buying to well known brands, the self-interest of the manufacturer will prevent him from selling merchandise which might endanger the consumer's goodwill. The manufacturer will, presumably, be too intelligent to make shoddy goods in order to earn a slightly larger profit, if that is apt to endanger the consumer's continued preference for the manufacturer's brand.
There is no question about the fact that this shifting of responsibility has introduced a pleasanter atmosphere into the relations of consumers and manufacturers, at least superficially. It is extremely doubtful, however, whether even this superficial improvement offsets the great disadvantages which have followed upon the sacrifice of the buyer's independent judgment in this fashion. With the manufacturer no longer forced to meet the critical judgment of the consumer, it is perfectly natural for the manufacturer to develop methods of marketing which will yield him the highest net profit, regardless of the intrinsic value of his product.
What is needed, therefore, is a skeptical and critical attitude toward merchandise--an attitude which in these days is somewhat out of fashion.
Whenever an article is offered the consumer in such a form as to make it difficult to intelligently determine its value--when it is packaged, or branded, or he finds himself importuned to buy it by any of the devices of high pressure marketing--what he needs to do is to act on the principle of caveat emptor--let the buyer beware.
The extravagances of high pressure marketing cannot survive general practice by the public of the principle of not buying high priced goods whenever it is possible to buy equally as good products for less money.