1. Merchandise Buying and Handling
Chapter 9
Merchandise Buying and Handling

2. 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

3. 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

4. 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

5. 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

6. Exhibit 9.1 - Major Steps in the Merchandise Management Process
LO 1

7. 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

8. 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

9. 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

10. 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

11. 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

12. 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

13. Dollar Merchandise Control
Open-to-buy (OTB)
Dollar amount that a buyer can spend on merchandise without exceeding the planned dollar stocks
LO 3

14. 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

15. 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

16. 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

17. 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

18. 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

19. Exhibit 9.4 - of and Constraints on Optimal Merchandising Mix
LO 4

20. 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

21. 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

22. 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

23. 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

24. 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

26. 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

27. 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

28. 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

29. 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

31. 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

34. 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

35. 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

36. 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

37. 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

38. 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

39. 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

40. 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

41. 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

42. Packaging Packaging display method Changes the cost
Is negotiated as part of the price
LO 6

43. 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

44. 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