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Chapter 9
Merchandise Buying and
Handling
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.
© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
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.
© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
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.
© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Major Steps in Merchandise Buying and
Handling
Merchandise management - Analysis, planning,
acquisition, handling, and control of the
merchandise investments of a retail operation.
© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
LO 1
Exhibit 9.1 - Major Steps in the Merchandise
Management Process
© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
LO 1
Merchandising photos
© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
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.
© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
LO 2
Dollar Merchandise Planning
Basic stock method Allows for a base stock level plus a variable amount of
inventory that will increase or decrease at the beginning of
(BSM)
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.
© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
LO 2
Dollar Merchandise Planning (Basic Stock
Method) start
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
This is a buffer, or safety stock
Beginning-of-Month (BOM) stock at retail = Basic
stock + Planned monthly sales
© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
LO 2
Dollar Merchandise Planning (percentage
variation)
The PVM is calculated as follows:
BOM stock = Average stock for season X ½[1 +
(Planned sales for the month/Average monthly sales)]
© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
LO 2
Dollar Merchandise Planning (weekly sales)
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
© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
LO 2
Dollar Merchandise Planning (stock to sales)
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
Or
BOM = SS ratio X Planned Sales
© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
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.
© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
LO 3
Dollar Merchandise Control
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.
© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
LO 3
Dollar Merchandise Control
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.
© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
LO 3
Dollar Merchandise Control
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.
© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
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.
© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
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.
© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
LO 4
Exhibit 9.2 - Dimensions of and Constraints
on Optimal Merchandising Mix
© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
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.
© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
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
Just in time – but not really. Vendor carrying the inventory
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.
© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
LO 4
Constraining Factors
Extra dating - Allows the retailer extra or interestfree 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 and display the
distinct merchandise lines. Something to evaluate in
your stores
Most retailers have operation guides that tell how
much space should be between each fixture, rack,
display, and so forth.
© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
LO 4
Constraining Factors
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.
© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
LO 4
Exhibit 9.3 - Inventory Management
for a Retailer Selling a Basic Stock (staple) Item
© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
LO 4
Exhibit 9.4 - Inventory Management
for a Retailer Selling a Seasonal Item
© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
LO 4
Exhibit 9.4 - Inventory Management
for a Retailer Selling a Seasonal Item
© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
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 - maybe used together. Exs?
if the item will be displayed everyday on permanent
store fixtures or will the item be a ‘‘special buy.’’
© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
LO 4
Using the Item File to Manage Inventory
Replenishment affects the merchandise budget
and, in turn, the retailer’s financial statements.
© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
LO 4
Conflicts in Stock Planning
Maintain a strong in-stock position on genuinely
new items (that will be successful) 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.
© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
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.
© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
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.
© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
LO 4
Selection of Merchandising Sources
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
© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
LO 4
Selection of Merchandising Sources
Vendor profitability Tool used to evaluate vendors and shows all purchases made
analysis statement 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 Identical to the vendor profitability analysis but also
analysis
provides a three-year financial summary as well as the
names, titles, and negotiating points of all the vendor’s sales
staff.
© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
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.
© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
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.
© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
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.
Can take the form of cash, or:
Free merchandise - Merchandise is offered in lieu of
price concessions.
© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
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
© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
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
Allows the retailer to take a cash discount and the full
payment period to begin on the middle of the month.
Receipt of goods
(ROG) dating
Allows the retailer to take a cash discount and the full
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.
© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
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.
© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
LO 6
Packaging
Each packaging display method changes the cost
and is usually negotiated as part of the price.
© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
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.
© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
LO 7
In-Store Merchandise Handling
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.
© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
LO 7
In-Store Merchandise Handling
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.
© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
LO 7
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