Memo Programs

The practice of providing merchandise on a memorandum basis has been part of the jewelry industry for a long time. Memo began in the diamond business when a client requested a specific stone or several stones for purchase consideration. Over time, memo programs became an integral part of the business where large-scale programs are used with large chains and independent jewelers alike.

Retailers like them for a variety of reasons. Why not supplement your inventory with additional merchandise you might not normally purchase? A program that reduces dollar inventory investment serves only to increase inventory turn—a very good thing. Or, better yet, what’s wrong with a supplier providing you with basic merchandise that you pay for when you sell it?

Suppliers, too, like memo programs. Why not get more of your product into a client’s inventory with an opportunity to sell greater quantities of goods and further enhance your relationship with that client?

Like any good idea, memo can be an effective way of selling more product for both sides of the table … if it is a well-managed program. But both parties to the memo agreement have to uphold their ends of the bargain.

Memo programs usually require the retailer to report on the memo on a regular basis, usually monthly. On receipt of the report, the manufacturer issues an invoice, and the retailer pays according to agreed terms. The manufacturer then replaces the memo product with the same or a similar number.

This is ideal, if everything works well. Because our industry has few public companies, transparency is not what it is in the public arena. Problems with memo programs are worked out quietly, and, as a consequence, others fall prey to the same or similar problems.

What problems? One major manufacturer had to write off $500,000 of a million-dollar receivable because the system used to track its memo program was flawed. Getting proof of delivery was impossible; shipping companies can provide such proof for only a year. The retailer paid $500,000 in a 50–50 split of the receivable. The retailer benefited in this case.

Another problem for manufacturers is that a memo program, in effect, allows a retailer more flexibility to purchase from other suppliers. These are usually foreign suppliers whose concept of payment differs from that of domestic suppliers. Typically, foreign suppliers want a letter of credit or payment on the receipt of goods.

In effect, the memo-offering manufacturer is helping to finance a competitor’s access to a retailer. The reality is, the memo manufacturer may not have much of a choice.

Still another problem is the legal title to the merchandise. Some years ago a major diamond supplier found that memo merchandise with a major retailer had been mixed into the retailer’s inventory, and, in a Chapter 11 filing, the supplier could not have the merchandise exempted from the retailer’s inventory value.

From a retail perspective, memo merchandise may not be the best way to provide for inventory requirements. Because the manufacturer offers to put its merchandise into your assortment, to some degree they control the assortment. In effect, your merchandise judgment is somewhat compromised.

At the end of the day, memo programs may provide a competitive advantage for both the supplier and the retailer. Each, however, should enter into the arrangement with eyes wide open to the potential for problems.