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.

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

Dollar Merchandise Planning 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

Dollar Merchandise Planning 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

Dollar Merchandise Planning 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

Dollar Merchandise Planning 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

Dollar Merchandise Planning 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

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. 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. 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. 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

Constraining Factors Space constraints 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

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. 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

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

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 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 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. 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

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. 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. LO 7