Chapter 9 Merchandise Buying & Handling

Merchandise Management The analysis, planning, acquisition, handling, and control of the merchandise investments of a retail operation. Can be performed by a retail worker, salesperson, etc. Most entry-level marketing positions involve some form of contact with merchandise management.

Gross Margin Return on Inventory (GMROI) Incorporates into a single measure the idea of both inventory turnover and profit, and is used because inventory is the largest investment a retailer makes. Formula: (Gross Margin/Net Sales) x (Net Sales/Avg. Inventory at Cost) (Gross Margin/Average Inventory at Cost) Note that (Sales/Dollars Invested) is not the same as inventory turnover, because inventory turnover is (Sales/Dollars Invested at retail) We use cost because it measures investment activities in carrying inventory.

Four Methods of Planning Dollars Invested in Stock Basic Stock Method (BSM) Percentage Variation Method (PVM) Weeks’ Supply Method (WSM) Stock-to-Sales Method (SSM)

Basic Stock Method Allows for a base stock level plus a variable amount of inventory that will increase or decrease at the beginning of each sales period (e.g., month) in the same dollar amount as the period’s expected sales. Works best when a retailer has a low turnover rate or sales are erratic.

Basic Stock Method It fails to perform when the turnover is greater than once every two months (or 6 times per yr), because in this situation the basic stock level for each month would be negative. Average Stock for the Season = Total Planned Sales for the Season/Estimated Inventory Turnover Rate for the Season Average Monthly Sales = Total Planned Sales for the Season/Number of Months in the Season Basic Stock = Average Stock for the Season – Average Monthly Sales for the Season BOM Stock = Planned Monthly Sales + Basic Stock

Percentage Variation Method 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. Works best with an annual turnover of six or more BOM Stock = Avg. Stock for the Season x ½[1+(Planned Sales for the Month/Average Monthly Sales)]

Weeks’ Supply Method 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. Works for retailers where inventories are planned on a weekly, not monthly, basis, and where sales do not fluctuate substantially.

Stock-to-Sales Method 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. This is the method used in our merchandise budget and is quite easy; however, it requires the retailer to have a BOM stock-to-sales ratio, which can be gained from: POS data Trade Associations Turnover goals

Dollar Merchandise Control Open-to-Buy (OTB) – represents the dollar amount a buyer can currently spend on merchandise without exceeding the planned dollar stock. Calculated as follows: EOM planned retail stock Plus planned sales for the month Plus planned reductions for the month Minus stock on hand at retail Equals planned purchases at retail Minus commitments at retail for current delivery

Dollar Merchandise Control The OTB should be flexible because consumer demand is “King”; however, changing it should not be a common occurrence. Some 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.

Four Constraining Factors of the Merchandise Mix

Conflicts in Unit Stock Planning Successful retailers will: Maintain a strong in-stock position on genuinely new items, while trying to avoid the 90% of new products that fail. Maintain an adequate stock of the basic popular items, while having enough inventory money available for unforeseen opportunities. Maintain high merchandise turnover goals, while maintaining high margin goals. Maintain adequate selection for customers, while not confusing them. Maintain space productivity, while not congesting the store.

Considerations When Selecting a Merchandise Source Generally, one must consider such things as… Selling history Product quality Consumers’ perceptions of the manufacturer Reliability of delivery Trade terms Projected markup After-sale service Transportation time Distribution center processing time Inventory carrying costs Country of origin

Selecting a Vendor Retailers should always enter the market with two pieces of information concerning vendors: Vendor Profitability Analysis Statement Provides a record of all the purchases you have made over the last year, the discounts received, transportation costs, the original markup, markdowns, and season ending GMs Confidential Vendor Analysis Same as the vendor profit analysis statement, but also includes a 3 year financial statement, as well as annotations on the vendor’s sales staff’s negotiating points

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 (i.e., collaboration – ref. handout and quiz).

Vendor Negotiations Given price is often one of the first factors to be negotiated, the buyer should be aware of the different types of discounts available. Trade (or functional) discount Promotional discount Seasonal discount Quantity discount Cash discount

Delivery Terms Specify where title to the merchandise passes to the retailer, who pays shipping costs, and who is responsible for insurance/damage claims. Free on Board (FOB) Factory The buyer assumes title at the factory and pays all transportation costs from the factory. Free on Board (FOB) Shipping Point The vendor pays the transportation to a local shipping point, but the buyer assumes title there and pays all further transportation costs. Free on Board (FOB) Destination The seller pays the transportation and the buyer takes title upon delivery.

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.

In-store Merchandise Control Retailers must concern themselves with the management and minimization of: Vendor collusion Employee theft Customer theft

What You Should Have Learned… Chapter’s Learning Objectives The major steps in the merchandise buying and handling process. Differences between the four methods of dollar merchandise planning. How retailers use dollar-merchandise control and describe how open-to-buy is used in the retail buying process. How a retailer selects proper merchandise sources. What is involved in the vendor–buyer negotiation process and what vendor contract terms can be negotiated. Methods of handling the merchandise once it is received in the store so as to control shrinkage, including vendor collusion, and theft.