Chapter Nine: Merchandise Buying and Handling

Different is what sells. Our customers want to go into a place of business that's different. They want to shop at stores that stock diverse merchandise and have diverse promotions. It's the key to not only staying ahead, but

staying in business.

– Rick Segel, retail consultant and founder of Rick Segel

and Associates

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Integrated Retail Management Flowchart

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Objectives

• Explain the process of dollar merchandise planning and forecasting.

• Discuss how a retailer returns its investment in inventory.

• Calculate the formulas related to inventory planning.

• Describe the various aspects of the merchandise mix.

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Objectives (cont’d)

• Discuss the variables that affect the merchandise mix.

• Explain the process used to identify vendors and the negotiation interactions that occur with vendors.

• Explain the importance of logistics and supply chain management.

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Merchandise Buying and Handling

• Physical purchase of products and services

• How those products and services are brought to the retail outlet, handled, and finally placed ready for sale

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Dollar Merchandise Planning and Forecasting

• Buyer’s goal - make the best possible purchases for the retailer

• Sophisticated planning process

• Involves quantitative and qualitative assessments – “rocket science retailing”

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Buyer

• Must understand

– The company

– The industry

– Physical site vs. online needs

– Dollar volumes

– Negotiation basics

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Table 9.1 Return on Inventory Investments

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Inventory Turnover

• Measure of how many times a store sells its average investment in inventory during a year

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Inventory Turnover (cont’d)

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Two Methods

Inventory turnover = Cost of goods sold (COGS) (at cost)

Average inventory (at cost)

Inventory turnover = Net sales (at retail)

Average inventory (at retail)

Inventory Turnover in Units

Number of units sold for the year

Average inventory (in units)

Average inventory = (month 1 + month 2 + month 3…)

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The Cash Conversion Cycle (CCC)

• Important for merchandise managers

• To effectively manage cash, the retailer – Must turn inventory as quickly as possible

– Avoid stockouts

– Collect accounts receivable quickly

– Take advantage of cash discounts

– Pay accounts payable as late as possible without damaging credit rating

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The Cash Conversion Cycle (CCC)

Source: Jane M. Cote, and Klaire Kamm Latham, “The Merchandising Ratio: A Comprehensive Measure of Working Capital Strategy," Issues in Accounting Education, May 1999, pp. 255-267.

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Best Ways To Improve the CCC

• Train team members on the entire CCC

• Prioritize the largest receivables outstanding and problem accounts on a daily basis

• Implement a system to capture communication and track reports

• Make sure all parties involved in the CCC have shared goals and incentives

• Eliminate any non-value-added activities

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Inventory Planning

• Four main methods

– Basic Stock

– Percentage Variation

– Stock-to-Sales

– Weeks’ Supply

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Basic Stock Method

• Calculated at the beginning of month (BOM) stock

• Based on projected sales

• Includes “fudge factor”

• Good for retailers who have a low inventory turnover

• Used by retailers who experience erratic sales over the sales period

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Basic Stock Method Calculations

• Beginning of Month (BOM) stock (at retail) = Planned sales (monthly) + Basic stock

• Basic stock (at retail) = Average monthly stock for the sales period (at retail) – Average monthly sales for the sales period

• Average monthly sales for the sales period = Total planned sales for the sales period/Number of months in the sales period

• Average monthly stock for the sales period = Total planned sales for the sales period/Inventory turnover for the sales period (estimated)

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Percentage Variation Method (PVM)

• Used by retailers with annual inventory turns greater than 6

• Assumes that stock percentage fluctuations each month will be no greater than one-half of the average stock on hand

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PVM Calculation

• BOM stock (at retail) = Average stock for the sales period (at retail) x ½ [1 + (Planned monthly sales/Average monthly sales)]

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Stock-to-Sales Method

• Inventory investment is measured as cost instead of retail

• BOM stock = Stock-to-sales ratio x Planned sales

• Stock to sales ratio - how much product is needed at the beginning of the month to reach the months sales forecast

• Stock-to-sales ratio = Value of stock/Actual sales

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Stock-to-Sales Method (cont’d)

• Disadvantage

– May attempt to adjust inventory to a greater extent than sales may require resulting in fluctuation in inventory levels

• Advantage

– Retailer can generate comparisons from external sources

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Weeks’ Supply Method

• BOM (at retail) planned inventory = Average weekly sales (estimated) x Number of weeks to be stocked

• Number of weeks to be stocked = Number of weeks in sales period/Stock turnover rate (for sales period)

• Average weekly sales estimate = Estimated total sales (for sales period)/Number of weeks in sales period

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Open-to-Buy

• Open-to-buy (at retail) = Planned purchases– Purchase commitments

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The Merchandise Mix

• Combination of merchandise, variety, assortment, depth, quality, and price points

• Must meet or exceed needs of target market

• Variety (or breadth) – number of different product lines (or categories)

– Described along a continuum of narrow or broad

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The Merchandise Mix (cont’d)

• Assortment (or depth) – stockkeping units (SKUs) within a category (could includes types of brands, colors, or sizes)

• Described on a continuum of shallow to deep

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The Merchandise Mix: Variety and Assortment

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Private vs. National Brands

Private Brands

• Advantages

– Higher profit margin

• Disadvantages

– Higher IMC costs

– Harder to establish brand loyalty

National Brands

• Advantages

– Supported with national IMC

– Higher consumer demand

• Disadvantages

– Smaller profit margin

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Variables that Affect the Merchandise Mix

• Budget constraints

• Space limitations

• Product turnover rates

• Stock replenishment

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Vendor Interactions

• Vital in the merchandise buying and handling process

• 3 Main Areas to Consider

– Vendor Identification

– Technology

– Vendor Negotiations

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Vendor Identification

• When seeking potential vendors, retailers should assess:

– Whether the vendor’s merchandise is aligned with the retailer’s goals, mission, vision, image

– The vendor’s distribution policies and price points

– If the vendor sells to competitors

– What type of support is provided to the retailer?

– The vendor’s flexibility

– The vendor’s credit and return policies

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Technology (VMI and EDI)

• Use of technology ensures less errors and faster delivery of products

• Advancements

– Vendor-managed inventory (VMI)

– Electronic data interchange (EDI)

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Vendor Negotiations

• Types of Discounts

– Trade

– Quantity

– Cumulative

– Seasonal

– Cash

– Allowances (includes slotting allowances)

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Merchandise Logistics and Logistics Management

• Includes selecting modes of transportation, receiving, checking and storing merchandise and supply chain management

• Reverse logistics

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Receiving Merchandise

• Typically handled by

– Centralized receiving departments

– Decentralized (district or regional) receiving centers

– Single store

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Supply Chain Management

• Coordination of a retailer’s vendors and trading partners for the purposes of improving the long-tem performance of the individual companies and the supply chain as a whole

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