unit-07-slm
TRANSCRIPT
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Unit 7 Placing the Order
Structure:
7.1 Introduction
Objectives
7.2 Negotiating the purchase
7.3 Negotiating the terms of sale
7.4 Kinds of orders
7.5 Placing the order
7.6 Follow-up
7.7 Summary
7.8 Glossary7.9 Terminal Questions
7.10 Answers
7.11 Caselet
7.1 Introduction
In the prior units we have studied buying and merchandising practices, role
of a buyer and that of a merchandiser. We have also learnt various buying
techniques used in domestic and international markets and also illustrated
the wholesale buying process. This unit will through some light on how to
place an order. We will also illustrate some negotiating techniques anddifferent types of orders.
Retail business believes that everything is negotiable. Negotiation and
ordering is what we will study in this unit.
Objectives:
After studying this unit, you should be able to:
describe the importance of price negotiation
detail how market and product knowledge helps in price negotiation
illustrate how to negotiate the terms of sale
identify and understand various types of orders
explain the process of placing an order
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7.2 Negotiating the Purchase
Negotiation is a process of trying to increase or decrease something suchas price, timelines, or grades. Here we are talking about the negotiation
between a vendor (supplier, manufacturer or distributor) and a retailer.
Negotiation is a part of our daily life. When we buy vegetables from the
vegetable market (Sabzimandi) we dont forget to negotiate the price for
whatever we buy. Even if a retailer reduces the price by 50 paisa or 1 rupee
its a negotiation. On a larger scale negotiation can happen between a
consumer and retailer while buying new or used automobiles, appliances,
and other goods.
Along with the consumer-retailer negotiation, negotiation is also an
important part of retailers relationship with a wholesaler, manufacturer, or adistributor. Negotiation is not just a part of manufacturer retailer
relationship. Consider a Diwali season. While the season ends think
whether people will buy new cloths? Will they buy grocery in bulk? Will they
buy sweets and savories? The answer to this is no or even some people
may buy these things. However majority of the people will not be interested
in buying more cloths, grocery, or sweets. This is called as end of season.
Thus, having extra inventory in stock will cost money to the retailers, to the
manufacturers, as well as to the raw material supplier. Thus, everyone
negotiates to get the merchandise prices down. Thus, you can see lot of
advertisements for End of season sale. The reduction is price is allbecause of this negotiation. However, this is a process where everyone
involved should participate.
Retailers carry regular goods and some seasonal goods or special goods.
Regular goods are sold round the year, however the seasonal or special
goods are sold only for particular time. A good example of this is grocery
items are regular goods while X-mas decorations or Diwali decorations
contribute to special goods. These special goods require more negotiation
from the retailer.
Negotiation between a buyer and seller (e.g. Retailer and manufacturer) canbe categorized into
Negotiation for the price of goods
Negotiation for discounts
Negotiation for transportation
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Let us discuss these parameters one by one in detail.
Negotiation for the Price of GoodsWhile negotiating the price of goods a buyer must make sure that they are
negotiating for the right kind of merchandise. Here right merchandise
mean the goods that the customers want and not the goods that the buyer
wants to sell. If the customers do not get the type of goods they want, they
will not buy the unwanted goods even at extremely low prices. Thus, it is
crucial for buyers to understand the market and have detail product
information before negotiation. This approach of buying is called as
customer centric or objective approach. Following are the two parameters
important for negotiation for the price of goods.
I) Understanding the market trendII) Collecting detail product information
Let us have a brief understanding of these parameters.
I) Understanding the Market Trend
Understanding the market trend is like doing the homework for buyers.
Buyers should shop at competitors store before conducting a negotiation
meeting. This is considered to be the best method to understand the market.
This way buyers can study the competition price, strategy, product range,
offers, promotions, as well as various types of resources they can buy the
products from. Buyers can also attend trade shows, read trade journals,read newspapers, and talk to sales people for understanding the market.
Preparing buy meeting various vendors and studying their catalogues will
also definitely help. This homework will enable buyers to be equipped with
lot of relevant market data. This data can help them negotiate better.
II) Collecting Detail Product Information
Before finalizing a product line buyers visit various vendors whom they
consider doing business with. Buyers should have detailed product line
information. This product information will help them negotiate better. An
experienced buyer will always try to gain more and more knowledge about a
product line, about vendors costs, and vendor strategy. Thus, they alwaystry to purchase a better product for a competitive price.
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Negotiation for Discounts
Buyers can negotiate with vendors in many different ways. They cannegotiate for cash, quantity, or even trade. Thus, if a vendor quotes a price
X forspecific merchandise, a buyer is permitted to deduct this price by a
specific amount (normally in %). This deduction (X-some %) is called as a
discount. There are following types of discounts that a buyer can negotiate
for.
I) Cash discount
II) Anticipation
III) Trade discounts
IV) Quantity discounts
V) Seasonal discounts
VI) Advertising and promotional discounts
Let us illustrate these discounts in brief detail.
I) Cash Discount
Cash discounts are also called as sales discounts. Let us illustrate this
discount with an example. Assume a buyer makes a purchase of Rs.1000
from a vendor and he has 30 days to pay this amount to the vendor. If a
vendor needs money early, he may say that if a buyer (retailer) pays within
eight days then they get a discount of 5% of the total amount. This means
the if the buyer pays the vendor within eight days they need not pay
Rs.1000 instead they will pay only Rs.950. Rs.50 (5% of 1000) is the cash
discount for paying within eight days. If the payment date exceeds the given
eight days they will need to pay the complete amount i.e.Rs.1000.
Cash discounts are gained because of the availability of money and timely
payment to the vendors. Thus, the credit for this discount will be given to the
business or store and not to the buyer. Thus, the product pricing is still done
as per the actual merchandise price without the discount (Rs.1000). The 5%
amount is kept as a profit margin for the business.
II) Anticipation
Anticipation discount is a special form of cash discount. In this a buyer getsa discount from the vendor for making a pre payment for the purchased
merchandise. Pre-payment can reduce the cost of shipment and also
enhance retailers credit standing. The amount of discount that a retailer
gets is based on the following parameters
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The payment amount due
The time when payment is made The rate of discount
The date of merchandise shipment
III) Trade Discounts
In some retail business the manufacturer suggests the price at which a
retailer can resell a particular product. This manufacturer suggested price is
called as list price for a product. Trade discount is a percentage amount that
is deducted from the list price. This discount percentage varies according to
various customers of a manufacturer such as a wholesaler, a dealer, or a
distributor. A wholesaler may buy products in bulk with a list price and the
trade discount of 50% or more. Such discounts may draw attention ofcustomers and may also increase the sale of other items. However,
remember that retailers are not obligated to sell the products at list price.
IV) Quantity Discounts
Quantity discounts as the name indicates is related to the quantity of
products that a retailer or buyer orders from a vendor. Quantity discounts
works with the formula more the quantity ordered more the discounts.
Following is an example
Number of Parle-G packets Price per unit
1000 `102000 `93000 & up `8Thus, this indicates more the quantity ordered more is the discount. This
saves the bookkeeping and transportation cost for the buyer. It also reduces
the cost of goods because of bulk purchase. It also benefits the seller in
terms of bulk manufacturing. Bulk orders are very common in FMCG and
staples. Merchandise is not purchased in bulk if its a seasonal item or a
fashion item. Ordering in bulk may not always mean that the retailer is able
to sell all the merchandise. Thus, it is important to know the customers
buying pattern and the market trend. This knowledge will enable theretailers to buy in bulk but only in the affordable quantity.
If retailers keep buying merchandise from a vendor worth a specific amount
they will also get another type of discount form the vendor. This is called as
a cumulative discount and this is a type of quantity discount. Cumulative
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discount is always calculated on the amount of business done with the
vendor over a specific period of time. Following is an example-Total purchase in 6 months Cumulative discount
`0 - 10,000 3%`10, 001 - 20,000 4%`20, 001 and up 5%Cumulative discounts encourage buyers to place bulk orders and do
business with the same vendor.
V) Seasonal Discounts
There are some goods that sell well throughout the year and some sell only
during some seasons. Merchandise such as winter cloths, school uniforms,firecrackers, diwali decorations, and jewelry sell well only in particular
seasons. During other seasons these goods are dormant. This storage of
such goods may increase the inventory storage and overhead costs for a
retailer. However, some vendors offer discounts for retailers who are ready
to accept delivery for such seasonal items during these dormant periods.
Thus, the vendor saves on the overhead and storage costs. The buyer must
also consider these costs for his business and then place an order during
the dormant season.
VI) Advertising and Promotional Discounts
Vendors are also interested in advertising their product as much as theretailer. More advertising and promotions may contribute to more sales.
Thus, to share the costs involved with the retailer vendors provide
advertising and promotional discounts. These discounts are also based on
the location of the product in store. For example end caps are the most
visible locations in a store. Thus, vendors provide more discounts for
products placed at the end caps or other visible location in store.
Negotiation for Transportation
Along with the cost of merchandise this is another big cost to be borne by
the retailer. A buyer or a retailer owns the merchandise once it leaves the
vendor premises. The transportation and the insurance of merchandise (if
any) is the buyers responsibility. The transportation costs can be negotiated
with the vendor as per the competition in the market. For example A
retailer is getting an item at Rs.100 including the transportation cost from a
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vendor A in Pune. Anothervendor in Mumbai can also provide the retailer
the same item at Rs.100 including the transportation cost. This is done tomeet the competition.
In most cases a buyer pays the shipping costs. Though, the vendor makes
all the shipping arrangements as per their convenience. Thus, it is
necessary for buyers to well understand various shipping alternatives so as
to select the best one. Let us discuss some areas where a buyer can reduce
the shipping or transportation costs.
Size Size of the load determines the transportation costs. A full
carload may turn out to be cost effective than ordering a half carload. In
this case buyers must consider ordering large amounts less frequently.
Time Shipping costs also depend upon the mode of transportationi.e. roadways, airways, or waterways. Slower carriers such as
waterways are more cost effective than the faster ones. Thus, ordering
well in advance and having ample time to receive the load via slower
carriers can be very economical.
Packaging Good packaging makes a product attractive and salable.
However, it also increases the shipping costs. Thus, type of packaging
should be checked against the shipping costs involved.
Type of insurance The buyer should decide if the insurance is
necessary or not. This can be done based upon the type of merchandise
being shipped.
Detailed instructions for vendor Vendor must be clearly informed
about the shipping instructions for the merchandise. These may be
written carefully and completely on the order form. Also, after reception
of goods the retailer must check if they were shipped as instructed.
Selection of carriers Buyers need to aware of all the types of carriers
and choose the right one for the merchandise. This can also save some
money on the transportation.
Merchandise classification Shippers classify the goods shipped into
various categories. Some of these categories are charged higher price
and some lesser depending upon type of goods. For example fragile
goods are charged more for being shipped. Thus, buyers should make
sure that their merchandise is classified properly and is not placed in the
higher range of classification.
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Self Assessment Questions
1. Negotiation can be done for _______, discounts, and transportation.2. What is the special form of cash discount called?
3. Who pays the shipping costs for the merchandise?
4. Shipping is charged as per the merchandise ______.
7.3 Negotiating the Terms of Sale
When we go to a vegetable market for buying vegetables we see that it is
not always possible to negotiate the price. Some retailers have a fixed price
policy; some of them look and claim to be stubborn about the vegetable
prices. Still it is up to us to identify how and where to bargain for the price.
Same rule applies to any negotiation between a vendor and retailer. Allvendors do not have a negotiable price. Some of them do negotiate the
price and some of them claim to have fixed price. However, it is up to the
buyer to understand with whom and how to negotiate the price. This will
happen only when they have done their homework well i.e. they have the
market knowledge especially regarding vendors.
We always see a lot of sale in the market during the end of season or for
obsolete fashion clothing. The reason is if the merchandise is left over even
after the end of season, a retailer runs a sale. Manufacturers also work in
the same way. They too run a sale for obsolete or excess inventory. Thus,
there is a reduction in the original price and these goods are sold at a newlower price. This new price is most of the times negotiable.
We should remember that negotiation is a skill and can be learnt only with
more and more experience. There is no class to attend or college degree to
learn negotiation. Following are the negotiation parameters one must
understand:
I) Limits
II) Justification
III) Splitting the difference
IV) Future relationship
Let us understand these parameters a little more in detail.
I) Setting the limits
Knowing your limits always helps. The buyer as well as the seller should
know their limits. Consider an event where you visit a store for buying a gift
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for someone. Most of the times you have a budget in mind e.g. your gift
should within the price range of Rs.100 to Rs.150. Thus, when look for giftsin a store you will consider the limits and if you like an expensive gift worth
Rs.300 you try to bargain. However, the bargain should be intelligent. You
cannot ask the item for Rs.100 just because your budget is that much. The
retailer will never reduce the price so much. Thus, it becomes important to
know the limits, bargain accordingly and intelligently.
Similarly a buyer and a vendor also set their limits. A buyer sets a maximum
limit that they are willing to spend for the merchandise and a seller sets a
maximum limit at which they are ready to sell merchandise. While
negotiation both the parties try to improve their limits i.e. buyer tries to
negotiate to reduce the price further while a seller tries to get more amountfrom the buyer. It also helps to know each others limits, though it is a rare
situation. A buyer should keep his limits secret and try to get a better deal.
II) Justify the negotiation
It is necessary for the buyer to justify the negotiation. This again needs a lot
of background work. This work includes market study, customer demand,
season trend, selling price, competition price etc. By providing proper
reasons for negotiation builds a base. A buyer should also include what the
vendor is looking for i.e. whats in it for me?. Mention how the deal will help
them clear up their excess goods; reduce the storage and overhead costs.
III) Splitting the difference
This is a process of coming to a consensus. Assume the negotiation
process is going on for a while. The vendor asks for a price of Rs.100 and
buyer is offering a price of Rs.50. Both of them are not ready to increase or
decrease the price. Thus, there is a third solution for this situation. Both of
them can split the difference and settle at a center price. Splitting the
difference means coming to a consensus i.e. Rs.75. A buyer offers more
prices and the vendor also reduces their asking price. This process often
helps in closing a deal. A retailer shouldremember that Rs.75 is still closer to
the end result they are looking for.IV) Future relationship
Buyers should always keep in mind that there are limits to every negotiation.
They should know these limits and should not push the negotiation beyond
these limits. Pushing beyond limits can spoil their relationship with the
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vendor. This can turn out to be a big disadvantage for buyers in future. They
should also remember this would also spoil their name in the market. Buyersnegotiating unreasonably will also see vendors offering them a higher price
so that they have room for negotiation.
Self Assessment Questions
5. Manufacturers run a sale for clearing obsolete and _____ inventory.
6. Before negotiating buyers and vendors should set their _________.
7. Coming to consensus is called as _______________.
7.4 Kinds of Orders
By now we know what products to buy, where to buy them from, and how to
negotiate the terms of sale with the vendor. Let understand different types oforders that a retailer can place with the vendor. Let us see some of them:
I) Cooperative buying
II) Consignment buying
III) Credit buying
Let us illustrate these terms in detail.
I) Cooperative Buying
As discussed above all the manufacturers have a certain minimum limit to
accept the orders from retailers. Some small retailers do not qualify for
ordering from manufacturers directly because they cannot meet theminimum order criterion. Thus, they need to order from wholesalers by
paying an extra amount. To overcome this problem many small retailers
pool their orders and place one order with the manufacturer. This enables
them to meet the minimum order criterion and also save money. The
retailers share shipping and any other expenses incurred while
orderingapart from the merchandise cost. This type of ordering is called as
cooperative buying.
II) Consignment Buying
Sometimes retailers buy from vendors, sell the products and return any
unsold products to the vendor. In this method a vendor holds the ownershipfor all the goods though they are physically with the retailer. Also, the
payment is made only for the amount of goods sold. This type of buying is
called as consignment or memorandum buying. This type of buying is very
common in jewelry business. Consignment buying reduces retailers risk as
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well as the mark up. Here the vendor takes the risk and for baring this risk
they charge buyers a premium price for merchandise. Most retailers preferto take risk, order at once and pay the negotiated price. This enables them
to maximize profits rather than losing them by paying premium price for the
sold merchandise. Consignment buying is suggested in any of the following
situations
Retailers carry some items just because their competitors carries them.
These include some of the low volume items and they may or may not
sell well. Buying these items on consignment is a good idea.
Any newly launched merchandise in the market is ordered on
consignment. This is because the retailers do not know if the product will
be sold, and how much profit will they make. Some new entrees in retail business like to play safe and take less risk
with buying merchandise. This is another situation where consignment
buying is suggested.
Some retailers like to help vendors to clear out all excess or non-
seasonal items. This is done just to build a strong relationship with
vendors. Thus, retailers can negotiate for a lower price and buy these
items on consignment.
If there is lot of demand for a product, but the demand is not defined and
is for a very short period of time. For example school uniforms. There
is a lot of demand but it is for a very short period. The retailer pays onlyfor the uniforms sold and returns any remaining uniforms to the
manufacturer or supplier.
III) Credit Buying
Retailers like to buy the merchandise on credit. Getting credit on goods
depends upon retailers credit history and also suppliers willingness to
extend the credit. Mostly vendors are willing to extend credit to expand their
business as well as to retail the old clients. Credit can be in terms of
accepting and fulfilling small orders, extending no interest payment for a few
months (normally one or two months), and extending the period of
repayment.
Self Assessment Questions
8. Small retailers pool their orders and place only one order with the
vendor. This type of buying is called as _______________.
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9. Paying after the merchandise is sold is called as ____________.
10. Getting credit on goods depends upon retailers _____________.
7.5 Placing the order
The buyer has decided what to buy, and also has negotiated the terms of
sale with the vendor. Now is the right time to place an order. First lets begin
with defining the term purchase order or a PO.
I) Purchase order or PO
A written sales contract between buyer and seller detailing the exact
merchandise or services to be rendered from a single vendor. It will specify
payment terms, delivery dates, item identification, quantities, shipping terms
and all other obligations and conditions.Purchase orders are generally preprinted, numbered documents generated
by the retailer's financial management system, which shows that purchase
details have been recorded and payment will be made.
Thus, every time a retailer needs to purchase any merchandise from a
vendor they need to submit a purchase order. PO is a formal document that
allows tracking of outstanding orders and accounts payable.
A PO includes details such as PO number, Supplier name and address,
Ship to deliver to details, date of PO, payment terms, shipping method,
F.O.B (Free on Board), freight terms, quantity, unit price, and total amount
due.
II) Writing the order
Writing an order is the last stage of finalizing an order. IT is a very important
task that is done once the merchandise is finalized and negotiated for. The
order placing process is very time consuming and tedious. Buyers need to
be very careful while placing an order. They need to take care of every
minor aspect of the order. Most retailers (specially large and medium scale
retailers) have their own customized purchase order form. Having a
customized order form makes it easy to order for all departments. It also
eases the record keeping process.
The activity below will help you understand the PO form. Let us discuss
various parameters or fields commonly found in most PO.
PO number Every PO is assigned a unique number called as PO
number. This also helps in tracking orders and record keeping.
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Vendor name and address This field refers to the complete name
and address of the vendor from whom the merchandise is ordered. Deliver to and delivery address This field indicates the complete
name and address of the retailer or the company who orders the
merchandise.
Ship to details This field indicates the shipping details (name and
address) of the receiving party including the shipping terms.
Ship via This is the field in which a buyer needs to fill in all the
shipping details very clearly.
F.O.B. F.O.B. stands for Free on Board and refers to the shipping
terms defined by the purchasing department.
Freight termsThese are the shipping (cargo) terms defined by thepurchasing department.
PO date This field indicates the date on which the PO was generated.
Payment details This field indicates the payment terms and
conditions agreed upon by the retailer and vendor.
Quantity This field indicates the quantity of the merchandise being
purchased.
UOP UOP stands for unit of purchase. The unit can be indicated in
each, package, crates, dozen, box etc.
Unit price This field indicates the price for every unit purchased.
Extended price This is the total price of the order (only for themerchandise) i.e. total quantity of merchandise multiplied by price for
each unit.
Product description This field indicates the detailed description of the
item ordered.
Total This field indicates the total amount of all items on the PO.
Self Assessment Questions
11. A written sales contract between buyer and seller is called as
________________.
12. Expand the term UOP.
13. PO date indicates the date on which the PO was ____________.
Activity 1
Study the sample purchase order (PO) given in the link below.
http://main.uab.edu/show.asp?durki=10923
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7.6 Follow up
Every process in retail needs a follow- up. The process of placing an orderalso needs a follow up once the order is placed. Follow up is done in the
follow way
Checking the status of the PO and keeping a record
If the PO is pending for more than the agreed upon delivery time,
contacting the vendor for understanding the problem
Checking the received goods for quantity and quality. Also, it is required
to report any shortfall, excess, damaged, or defective goods.
If delivery is not done on time buyer should follow up with the vendor
and negotiate for the new dates and the penalty for late delivery.
Once the delivery is received it is necessary to close a PO. Closing POalso means recording all details of the order with any special comments.
These comments will help buyers in future ventures with the vendor.
Self Assessment Questions
14. Once the delivery is received it is necessary to __________.
15. Vendor will have penalty in case of __________.
7.7 Summary
Let us recap on what we studied in this unit.
Negotiation is an integral part of the retail industry. A buyer and a vendorcan negotiate for discounts, price, and transportation. Negotiation can
specifically be done for the seasonal goods. Sometimes there is also an
opportunity to negotiate for non-seasonal items. A buyer should know when,
how, and what for to negotiate.
Before having a negotiation meeting a buyer should make sure that the
goods are right for their store, and also it is crucial to do their homework.
This includes knowledge of products, competition, vendors, market, and last
but not the least customers. Buyers can negotiate for cash discounts,
anticipation, trade discounts, quantity or seasonal discounts, and advertising
and promotional discounts. Negotiation on transportation can be based onorder size, timing, and selection of carriers, packaging, merchandise
classification, and type of insurance.
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We also studied different types of orders cooperative buying, consignment
buying, and credit buying. While negotiating a buyer should be aware oftheir limits, should justify the negotiation, and should also focus on their
future relationship with vendors. A PO needs to be filled in detail and
carefully for placing an order. Any mistake in filling PO can result in retailer
losses.
7.8 Glossary
Term Description
Dormant Inactive
Exemplify Demonstrate or illustrate
Justify Give a good reason for
Savory Salty or spicy
Unreasonable Difficult to deal with, irrational
Venture Business enterprise, project
7.9 Terminal Questions
1. Explain the process of negotiating the purchase.
2. Illustrate the parameters involved in negotiating the terms of sale.
3. Explain different kinds of orders.
4. Clarify the process of placing an order and steps in order follow up.
7.10 Answers
Self Assessment Questions:
1. Price of goods
2. Anticipation
3. Buyer
4. Classification
5. Excess
6. Limits
7. Splitting the difference8. Cooperative buying
9. Consignment buying
10. Credit history
11. Purchase order
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12. Unit of purchase
13. Generated14. Close a PO
15. Late delivery
Reference to TQs:
1. Refer section 7.2, Negotiating the purchase
2. Refer section 7.3, Negotiating the terms of sale
3. Refer section 7.4, Kinds of orders
4. Refer section 7.5 &7.6, Placing the order and Follow-up
7.11 Caselet
Acme Store
The Acme store is a large, successful one-unit retail store in a downtown
urban area in the Midwest. The store was founded in mid 1930s, and it
grew steadily from its inception through the mid 1980s. Since then, though
still profitable, its growth has been shrinking. This is due in large part to the
departure of many of its customers to the suburbs.
The stores merchandising division has been and continues to be excellent.
Thanks to aggressive, tasteful buying, the organization attracts far more
than its normal share of the market. More over the goods are sold at a
markup in excess of that achieved by its competitors. It has become
apparent to top management that the stores operation is not likely to beimproved. Under such conditions, the continued shrinkage of volume and
profits will be offset only by seeking out non-selling weak spots and
applying corrective measures. One area that assumes to offer possibilities
for savings is the reduction of transportation costs. A preliminary spot
check of completed orders has revealed that most buyers indicate shipping
instructions to the vendor by noting best way or cheapest way.
Discussion Questions
You have been hired by the store as an expert in transportation. All the
stores records are available to you.
1. What will you look for?
2. What suggestions will you make?Hints:
Refer to section 7.2.3, Negotiation for transportation
Source: Jay Diamond, Gerald Pintel (1998). Retail Buying (3rd edition).
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Recommended Reading
Varley, R. (2006). Retail Product Management: Buying andMerchandising .Second Edition. USA: Routledge Taylor and Francis
Group.
Pradhan, S. (2010). Retail Merchandising. New Delhi: Tata McGraw Hill
Education Private Limited.
References
Books
Diamond, J., Pintel, G. (1998). Retail Buying (3rd edition). New Delhi:
Prentice-Hall of India Private Limited
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