chapter 9 merchandise buying and...

Chapter 9

Merchandise Buying and

Handling

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Learning Objectives

Describe the major steps in the merchandise

buying and handling process.

Explain the differences between the four methods

of dollar merchandise planning used to determine

the proper inventory stock levels needed to begin

a merchandise selling period.

Explain how retailers use dollar-merchandise

control and describe how open-to-buy is used in

the retail buying process.


Learning Objectives

Describe how a retailer determines the makeup of

its inventory, including what cross-referencing in

the merchandise item file means and how a

category-item line review works.

Describe how a retailer selects proper

merchandise sources.


Learning Objectives

Describe what is involved in the vendor–buyer

negotiation process and what vendor contract

terms can be negotiated.

Discuss the various methods of handling the

merchandise once it is received in the store so as

to control shrinkage, including vendor collusion,

and theft.


Major Steps in Merchandise Buying and

Handling

Merchandise management - Analysis, planning,

acquisition, handling, and control of the

merchandise investments of a retail operation.

LO 1


Exhibit 9.1 - Major Steps in the Merchandise

Management Process

LO 1


Dollar Merchandise Planning

Gross margin return on inventory - Gross

margin divided by average inventory at cost;

alternatively, it is the gross margin percent

multiplied by net sales divided by average

inventory investment.

LO 2



Basic stock method

(BSM)

Allows for a base stock level plus a variable amount of

inventory that will increase or decrease at the beginning of

each sales period in the same dollar amount as the period’s

expected sales.

Percentage

variation method

(PVM)

Assumes that the percentage fluctuations in monthly stock

from average stock should be half as great as the percentage

fluctuations in monthly sales from average sales.

Weeks’ supply

method

(WSM)

The inventory level should be set equal to a predetermined

number of weeks’ supply, which is directly related to the

desired rate of stock turnover.

Stock-to-sales

method

(SSM)

The amount of inventory planned for the beginning of the

month is a ratio (obtained from trade associations or the

retailer’s historical records) of stock-to-sales.

LO 2



The BSM is calculated as follows:

Average monthly sales for the season = Total planned sales for the season/Number of months in the season

Average stock for the season = Total planned sales for the season/Estimated inventory turnover rate for the season

Basic stock = Average stock for the season – Average monthly sales for the season

Beginning-of-Month (BOM) stock at retail = Basic stock + Planned monthly sales

LO 2



The PVM is calculated as follows:

BOM stock = Average stock for season X ½[1 +

(Planned sales for the month/Average monthly sales)]

LO 2



The WSM is calculated as follows:

Number of weeks to be stocked = Number of weeks in

the period/Stock turnover rate for the period

Average weekly sales = Estimated total sales for the

period/Number of weeks in the period

BOM stock = Average weekly sales X Number of weeks

to be stocked

LO 2



The SSM can be computed as follows:

Average BOM stock-to-sales ratio for the season =

Number of months in the season/Desired inventory

turnover rate

LO 2


Dollar Merchandise Control

Open-to-buy (OTB) - The dollar amount that a

buyer can currently spend on merchandise without

exceeding the planned dollar stocks.

LO 3



Most common buying errors include:

Buying merchandise that is priced either too high or

too low for the store’s target market.

Buying the wrong type of merchandise or buying

merchandise that is too trendy.

Having too much or too little basic stock on hand.

Buying from too many vendors.

LO 3



Failing to identify the season’s hot items early enough

in the season.

Failing to let the vendor assist the buyer by adding

new items or new colors to the existing mix.

LO 3



Planning stock levels might be affected by any or

all of the following:

Sales for the previous month were lower or higher

than planned.

Reductions are higher or lower than planned.

Shipments of merchandise are delayed in transit.

LO 3


Inventory Planning

Once the retailer has decided how many dollars

can be invested in inventory, the dollar plan needs

to be converted into an inventory plan.

LO 4


Optimal Merchandise Mix

Merchandise line - Group of products that are

closely related because they are intended for the

same end use; are sold to the same customer

group; or fall within a given price range.

LO 4


Exhibit 9.2 - Dimensions of and Constraints

on Optimal Merchandising Mix

LO 4


Optimal Merchandise Mix

Variety

Number of different merchandise lines that the retailer stocks in

the store.

Breadth

(assortment)

Number of merchandise brands that are found in a merchandise

line; is particularly a problem for retailers selling private-label

brands.

Battle of the brands - Retailers have their own products

competing with the manufacturer’s products for shelf space and

control over display location.

Depth

Average number of stock-keeping units within each brand of the

merchandise line.

LO 4


Constraining Factors

Dollar-merchandise constraints

Some retailers try to overcome the dollar constraint by

shifting the expense of carrying inventory back on the

vendor.

Consignment (pay from scan) - Vendor retains the

ownership of the goods and usually establishes the

selling price; it is paid only when the goods are sold

by the retailer; helps reduce risk for seasonal products.

LO 4



Extra dating - Allows the retailer extra or interest-

free days before the period of payment begins.

Space constraints

If variety is to be stressed, then it is important to have

enough empty space to separate the distinct

merchandise lines.

Most retailers have operation guides that tell how

much space should be between each fixture, rack,

display, and so forth.

LO 4



Merchandise-turnover constraints

The retailer must know how various merchandise

mixes will affect inventory turnover.

Market constraints

Affect decisions on variety, breadth, and depth, and

have a profound effect on how the consumer perceives

the store and consequently on the customers that the

store will attract.

LO 4


Exhibit 9.3 - Inventory Management

for a Retailer Selling a Basic Stock Item

LO 4


Exhibit 9.4 - Inventory Management

for a Retailer Selling a Seasonal Item

LO 4


Using the Item File to Manage Inventory

When inventory of the item is purchased from the supplier or sales are made to customers, the item’s performance will be linked to that category on both the OTB and merchandise planner workbooks that the company keeps.

The buyer has to decide: how many items to create in the system.

if there are any existing items that the new item should be linked to.

if the item will be displayed everyday on permanent store fixtures or will the item be a ‘‘special buy.’’

LO 4


Using the Item File to Manage Inventory

Replenishment affects the merchandise budget

and, in turn, the retailer’s financial statements.

LO 4


Conflicts in Stock Planning

Maintain a strong in-stock position on genuinely

new items while trying to avoid the 90 percent of

new products that fail in the introductory stage.

Maintain an adequate stock of the basic popular

items while having sufficient inventory dollars to

capitalize on unforeseen opportunities.

LO 4


Conflicts in Stock Planning

Maintain high inventory-turnover goals while

maintaining high gross-margin goals.

Maintain adequate selection for customers while

not confusing them.

Maintain space productivity and utilization while

not congesting the store.

LO 4


Reviewing Inventory Performance

At the end of the selling season, the buyer reviews

all of the merchandise performance in a line

review.

Line reviews involve taking a lot of data and

trying to summarize it in a digestible manner.

They involve understanding trends and fashion.

To be successful, buyers need to have both

creative and quantitative analysis capabilities.

LO 4


Generally, the retailer must consider the following criteria: Selling history; consumers’ perception of the

manufacturer’s or wholesaler’s reputation

Reliability of delivery, trade terms, and projected markup

Quality of merchandise and after-sales service

Transportation time and distribution-center processing time

Inventory carrying cost and net cost; country of origin and fashionability

Selection of Merchandising Sources

LO 4


Selection of Merchandising Sources

Vendor profitability

analysis statement

Tool used to evaluate vendors and shows all purchases made

the prior year, the discount granted, the transportation

charges paid, the original markup, markdowns, and finally

the-season-ending gross margin on that vendor’s

merchandise.

Confidential vendor

analysis

Identical to the vendor profitability analysis but also

provides a three-year financial summary as well as the

names, titles, and negotiating points of all the vendor’s sales

staff.

LO 5


Vendor Negotiations

Negotiation - Process of finding mutually

satisfying solutions when the retail buyer and

vendor have conflicting objectives.

The essence of negotiation is to trade what is

cheap to you but valuable to the other party for

what is valuable to you but cheap to the other

party.

Five types of discounts can be negotiated: trade,

quantity, promotional, seasonal, and cash. LO 6


Vendor Negotiations

Trade discount (functional discount) - Is a form of compensation that the buyer may receive for performing certain wholesaling or retailing services for the manufacturer.

Promotional discount - Provided for the retailer performing an advertising or promotional service for the manufacturer.

Seasonal discount - Provided to retailers if they purchase and take delivery of merchandise in the off season.

LO 6


Vendor Negotiations

Quantity discount - Price reduction offered as an

inducement to purchase large quantities of

merchandise.

Noncumulative quantity discount - Based on a

single purchase.

Cumulative quantity discount - Based on the total

amount purchased over a period of time.

Free merchandise - Merchandise is offered in lieu of

price concessions.

LO 6


Vendor Negotiations

Cash discount - Offered to the retailer for the

prompt payment of bills.

Most common forms of future-dating negotiation:

End-of-month (EOM) dating

Middle-of-month (MOM) dating

Receipt of goods (ROG) dating

Extra (EX) dating

Anticipation

LO 6


Vendor Negotiations

End-of-month

(EOM) dating

Allows the retailer to take a cash discount and the full

payment period to begin on the first day of the following

month instead of on the invoice date.

Middle-of-month

(MOM) dating


payment period to begin on the middle of the month.

Receipt of goods

(ROG) dating


payment period to begin when the goods are received by the

retailer.

Extra (EX) dating

Allows the retailer extra or interest-free days before the

period of payment begins.

Anticipation

Allows the retailer to pay the invoice in advance of the end

of the cash discount period and earn an extra discount.

LO 6


Delivery Terms

Free on board (FOB)

factory

Charging for transportation where the buyer assumes title

to the goods at the factory and pays all transportation costs

from the vendor’s factory.

Free on board (FOB)

shipping point

Charging for transportation in which the vendor pays for

transportation to a local shipping point where the buyer

assumes title and then pays all further transportation costs.

Free on board (FOB)

destination

Charging for transportation in which the vendor pays for

all transportation costs and the buyer takes title on

delivery.

LO 6


Packaging

Each packaging display method changes the cost

and is usually negotiated as part of the price.

LO 6


In-Store Merchandise Handling

Shrinkage Merchandise that cannot be accounted for due to theft, loss,

or damage.

Vendor collusion An employee of one of the retailer’s vendors steals

merchandise as it is delivered to the retailer.

Employee theft Employees of the retailer steal merchandise where they work.

Customer theft Customers or individuals disguised as customers steal

merchandise from the retailer’s store; also known as

shoplifting.

LO 7


The retailer must consider the employees’ and

customers’ rights to privacy versus the retailer’s

right to security.

Retailers must not only plan to have the

appropriate amount of merchandise on hand for

customers but also ensure that the merchandise

purchased for the store shelves actually arrives.


LO 7



To minimize the threat of hijacking:

Eliminate the retailer’s name from the side of

containers carrying the cargo.

Install electronic monitoring devices on all shipment

vehicles.

Screen all internal transportation personnel as well as

third-party logistics personnel in each market.

Hire security personnel for each shipment.

LO 7

chapter 9 merchandise buying and...

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