Merchandise Buying and Handling 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 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 Calculating BSM 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 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 Calculating WSM 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) Dollar amount that a buyer can spend on merchandise without exceeding the planned dollar stocks LO 3

Dollar Merchandise Control Common buying errors 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 Failing to identify the season’s hot items early 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 is affected when: 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 Converting dollar plan into inventory plan Optimal merchandise mix Contrasting factors Managing the inventory Using the item file to manage inventory Conflicts in stock planning Reviewing inventory performance 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 Fall within a given price range LO 4

Optimal Merchandise Mix Category management Simultaneous management of: Price, shelf-space merchandising strategy, promotional efforts, and other elements of the retail mix Based on the firm’s goals, the changing environment, and consumer behavior LO 4

Exhibit 9.4 - 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 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 Vendor establishes the selling price which is paid when the goods are sold 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 It is important to have enough empty space to separate the distinct merchandise lines Operation guides- Tell how much space should be between each fixture, rack, display, and so forth LO 4

Constraining Factors Merchandise-turnover constraints Retailer must know how various merchandise mixes will affect inventory turnover Market constraints Affect decisions on variety, breadth, and depth Have a profound effect on how the consumer perceives the store LO 4

Managing Inventory Decisions pertaining to: When to order and reorder inventory Direct and indirect costs involved in maintaining the inventory Requires conducting physical audits (wrong 40% of time) Forecasting the factors that will drive production and distribution costs

Using the Item File to Manage Inventory Requires the buyer make decisions pertaining to: How many items to create in the system Linking new items to existing items, where required Determining whether the item will be displayed: Everyday on permanent store fixtures or will be a special buy Replenishment Buying or selling inventory Affects the merchandise budget LO 4

Conflicts in Stock Planning Maintaining a strong in-stock position on genuinely new items while: Avoiding new products that fail in the introductory stage Maintaining an adequate stock of the basic popular items while: Having sufficient inventory dollars to capitalize on unforeseen opportunities LO 4

Conflicts in Stock Planning Maintaining high inventory-turnover goals while maintaining high gross-margin goals Maintaining adequate selection for customers while not confusing them Maintaining space productivity and utilization while not congesting the store LO 4

Reviewing Inventory Performance Line review - Taking data and summarizing it to understand trends and fashion (80-20 report) To be successful, buyers need to have both creative and quantitative analysis capabilities LO 4

Selection of Merchandising Sources Following criteria should be considered by the retailer Selling history and 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. A, B, C, D, F LO 5

Vendor Negotiations Negotiation Finding mutually satisfying solutions when the retailer and vendor have conflicting objectives Types of discounts that can be negotiated Trade Quantity Promotional Seasonal Cash LO 6

Vendor Negotiations Trade discount (functional discount) Compensation for performing certain wholesaling or retailing services for the manufacturer Quantity discount Price reduction on purchase large quantities of merchandise Promotional discount Provided for performing an advertising or promotional service for the manufacturer LO 6

Vendor Negotiations Seasonal discount Cash discount Provided for purchasing and taking delivery of merchandise in the off-season Cash discount Offered to the retailer for the prompt payment of bills LO 6

Vendor Negotiations Quantity discount 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 Types 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 Packaging display method Changes the cost Is 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. Organized crime theft Professional thieves steal merchandise either when it is in transit to the store, or in the store. 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