Chapter 9

Merchandise Buying and Handling

Retailing, 6th Edition. Copyright ©2005 by South-Western, a division of Thomson Learning. All rights reserved.

Learning Objectives

1. 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.

2. Explain how retailers use dollar merchandise control and describe how open-to-buy is used in the retail buying process.

3. Determine how a retailer determines the makeup of its inventory.

Learning Objectives

4. Describe how a retailer selects proper merchandise sources.

5. Describe what is involved in the vendor-buyer negotiation process and what terms of the contract can be negotiated.

6. 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.

Retailing Truism

If a retailer doesn’t have the merchandise, there is nothing to promote and sell.

Dollar Merchandise Planning

Merchandise management:

Is the analysis, planning, acquisition, handling, and control of the merchandise investments of a retail operation.

LO 1

Dollar Merchandise Planning

Gross margin return on inventory:

Is 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 1

Dollar Merchandise Planning

Basic stock method (BSM):

Is a technique for planning dollar inventory investments and 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.

LO 1

Dollar Merchandise Planning

The BSM can be 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) = Basic stock + Planned monthly sales

LO 1

Dollar Merchandise Planning

Percentage variation method (PVM):

Is a technique for planning dollar inventory investments that 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.

LO 1

Dollar Merchandise Planning

The (PVM) can be calculated as follows:

BOM stock = Average stock for season X ½[1 + (Planned sales for the month/Average monthly sales)]

LO 1

Dollar Merchandise Planning

Weeks’ supply method (WSM):

Is a technique for planning dollar inventory investments that states that 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.

LO 1

Dollar Merchandise Planning

The WSM can be 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 1

Dollar Merchandise Planning

Stock-to-sales method (SSM):

Is a technique for planning dollar inventory investments where 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 1

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 1

Dollar Merchandise Control

Open-to-buy (OTB):

Refers to the dollar amount that a buyer can currently spend on merchandise without exceeding the planned dollar stocks.

LO 2

Dollar Merchandise Control: Common Buying Errors

Buying merchandise that is either priced too high or too low for the store’s target market.

Buying the wrong type of merchandise (i.e., too many tops and no skirts) or buying merchandise that is too trendy.

Having too much or too little basic stock on hand.

LO 2

Dollar Merchandise Control: Common Buying Errors

Buying from too many vendors.

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 and/or new colors to the mix. (All too often, the original order is merely repeated, resulting in a limited selection.)

LO 2

Inventory Planning

Merchandise line:

Is a group of products that are closely related because they are intended for the same end use (all televisions); are sold to the same customer group (junior miss clothing); or fall within a given price range (budget women’s wear).

LO 3

Dimensions of and Constrains on Optimal Merchandising Mix

LO 3Exhibit 9.1

Inventory Planning

Category management:

Refers to the management of merchandise categories, or lines, rather than individual products, as a strategic business unit.

LO 3

Inventory Planning

Variety:

Refers to the number of different merchandise lines that the retailer stocks in the store.

LO 3

Inventory Planning

Breadth (or assortment):

The number of merchandise brands that are found in a merchandise line.

LO 3

Inventory Planning

Battle of the brands:

Occurs when retailers have their own products competing with the manufacturer’s products for shelf space and control over display location.

LO 3

Battle of the Brands

Private branding in retailing is creating a situation in which many “third-tier” brands are beginning to be squeezed out of the market, thus leaving only the leading national brand and the retailer’s private label brand. Here Albertson’s has strategically located its private brand to the right of the national brand.

LO 3

Inventory Planning

Depth:

Is the average number of stock-keeping units within each brand of the merchandise line.

LO 3

Inventory Planning

Consignment:

Is when the vendor retails the ownership of the goods and usually establishes the selling price; it is paid only when the goods are sold by the retailer.

LO 3

Inventory Planning

Extra dating:

Is when the vendor allows the retailer extra time before payment is due for goods.

LO 3

Inventory Mgmt for a Retailer Selling a Basic Stock Item

LO 3Exhibit 9.2

Inventory Mgmt for a Retailer Selling a Seasonal Item

LO 3Exhibit 9.3

Managing the Inventory

Successful retailers, such as Lane Bryant, realize that a third of all women now wear a size larger than 14. As a result they disregarded past sales records and now offer large selections of plus sizes featuring the latest looks, including the same designer-made fitted dresses and coats worn by fashion models.

LO 3

Managing the Inventory

Predicting future sales for toys is always difficult. During the 1996 Christmas season many retailers were caught by surprise when Rosie O’Donnell featured Tickle Me Elmo on her television show just before Thanksgiving.

LO 3

Blockbuster Conflict Solution

To minimize out-of-stock situations, Blockbuster developed a revenue sharing agreement with suppliers to reduce the average cost of each video from $80 to $8.

LO 3

Two-Seasons Vendor Profitability Analysis

LO 4Exhibit 9.4

Selection of Merchandising Sources

Vendor profitability analysis statement:

Is a 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.

LO 4

Selection of Merchandising Sources

Confidential vendor analysis:

Is 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 4

Confidential Vendor Analysis

LO 4Exhibit 9.5 - Sample

Selection of Merchandising Sources

Class A vendors

Are those from whom the retailer purchases large and profitable amounts of merchandise.

Class B vendors

Are those that generate satisfactory sales and profits for the retailer. Class C vendors

Are those that carry outstanding merchandise lines but do not currently sell to the retailer.

Class D vendors

Are those from whom the retailer purchases small quantities of goods on an irregular basis.

Class E vendors

Are those with whom the retailer has had an unfavorable experience.

LO 4

Vendor Negotiations

Negotiation:

Is the process of finding mutually satisfying solutions when the retail buyer and vendor have conflicting objectives.

LO 5

Vendor Negotiations

Trade discount:

Is also referred to as a functional discount and is a form of compensation that the buyer may receive for performing certain wholesaling or retailing services for the manufacturer.

LO 5

Vendor Negotiations

Quantity discount:

Is a price reduction offered as an inducement to purchase large quantities of merchandise.

LO 5

Trade Discount

Often expressed in a chain, or series, such as “list less 40-20-10.” The computations would look like this:

List price $1,000Less 40% - 400

600Less 20% - 120

480Less 10% - 48Purchase price $432

LO 5

Vendor Negotiations

Noncumulative quantity discount:

Is a discount based on a single purchase.

LO 5

Vendor Negotiations

Cumulative quantity discount:

Is a discount based on the total amount purchased over a period of time.

LO 5

Vendor Negotiations

Free merchandise:

Is a discount whereby merchandise is offered in lieu of price concessions.

LO 5

Quantity Discount

For an example of how a quantity discount works, consider the following schedule:

Order Quantity Discount from List Price

1 to 999 0%

1,000 to 9,999 5%

10,000 to 24,999 8%

25,000 to 49,999 10%

LO 5

Vendor Negotiations

Promotional discount:

Is a discount provided for the retailer performing an advertising or promotional service for the manufacturer.

LO 5

Vendor Negotiations

Seasonal discount:

Is a discount provided to retailers if they purchase and take delivery of merchandise in the off season.

LO 5

Vendor Negotiations

Cash discount:

Is a discount offered to the retailer for the prompt payment of bills.

LO 5

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.

LO 5

Vendor Negotiations

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.

LO 5

Vendor Negotiations

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.

LO 5

Vendor Negotiations

Extra dating (Ex):

Allows the retailer extra or interest-free days before the period of payment begins.

LO 5

Vendor Negotiations

Anticipation:

Allows the retailer to pay the invoice in advance of the end of the cash discount period and earn an extra discount.

LO 5

Vendor Negotiations

Free on board (FOB) factory:

Is a method of charging for transportation where the buyer assumes title to the goods at the factory and pays all transportation costs for the vendor’s factory.

LO 5

Vendor Negotiations

Free on board (FOB) shipping point:

Is a method of 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.

LO 5

Vendor Negotiations

Free on board (FOB) destination:

Is a method of charging for transportation in which the vendor pays for all transportation costs and the buyer takes title on delivery.

LO 5

In-store Merchandise Handling

Shrinkage:

Is the loss of merchandise due to theft, loss, damage, or bookkeeping errors.

LO 6

In-store Merchandise Handling

Vendor collusion:

Occurs when an employee of one of the retailer’s vendors steals merchandise as it is delivered to the retailer.

LO 6

In-store Merchandise Handling

Employee theft:

Occurs when employees of the retailer steal merchandise where they work.

LO 6

In-store Merchandise Handling

Customer theft:

Is also known as shoplifting and occurs when customers or individuals disguised as customers steal merchandise from the retailer’s store.

LO 6

5 of the 50 Tricks for Bartenders

LO 6Exhibit 9.6 - Sample

Additional Slides

Dollar Merchandise Planning

BasicStock

Method

PercentageVariationMethod

Weeks’ Supply Method

Stock-to-SaleMethod

LO 1

Inventory Planning

OptimalMerchandise

MixConstrainingFactors

Managing the

Inventory

Conflicts inUnit StockPlanning

LO 3

Inventory Planning

AllocateDollars or

Units

IdentifyLevels

IdentifyAttributes

LO 3