Introduction to Retail Buying

The Buyer

A retail Buyer may be identified as the key individual in the retail institution who is responsible for providing merchandise that will meet the needs of consumers.

The action or activity performed by the buyer is called Buying

The retail buyer, whether for a department store, chain operation or discount house is responsible for the operation of the entire department and for making profit for the department or store

The Buyer’s Assistant

A buyer’s duties are far-reaching and often complex The assistant buyer is an individual who has been

selected for managerial potential and is capable of assuming the managerial functions of the department in the absence of the buyer

This is usually the first position in the middle management in the retail store

It provides the graduates with the experience and training necessary for upper management positions, especially the position of retail buyer

Buying Responsibilities

Management responsibilities Market forecasting and technology Merchandise planning, selection and

development Working with resources – domestic &

foreign Pricing & promoting merchandise for sale

Management Responsibilities:

Successful buying depends on a great deal of team play – the ability of people to work together for a common objective or goal.

He or She has the responsibility of running a good department, attracting consumers to the store and of course maximizing profit. To fulfill these basic responsibilities, the buyer must have the ability to function as a manager

Market forecasting and technology

The buyer must be aware of demographic and psychographic marketing trends, economic forces and technological advancements that will affect customer attitude

The buyer needs to be knowledgeable about computer applications in merchandising, understand consumer behavior and what affects customer behavior in marketplace and understand the importance and application of fashion

Merchandise planning, selection and development The buyer is a planner who understands the essentials

of good planning and the importance of record keeping, as they are instrumental in preparing the merchandise budget

Buyers must know how assortment plans are developed Buyer is vital in the application of a control system to

merchandising and knowing what to buy as well as how much to buy

Buyers are product developers, whereby they scan both domestic and foreign markets that will not only meet the needs and tastes of customers, but provide exclusivity to their department or store

Working with resources – domestic & foreign The buying specialist must be aware of the

techniques used in making buying contracts as well as developing good vendor relations

The contemporary buyer seeks goods and services continuously

Pricing & promoting merchandise for sale Retail buyers must price merchandise that will maximize

profits Must be aware of legal aspects of pricing Determining the Maximum retail price, taking markdowns

or markups are all part of buyer’s job Buyer must be an effective communicator He or she should be aware of the psychological aspects

of advertising and determine how advertising is planned and the importance of ethics in advertising

Merchandise Budget A merchandise budget may be defined as a plan that forecasts

specific merchandising activities for a department or store for a specific period of time

The buyer will work with numerous store executives in developing a plan to guide him or her in the various phases of the merchandising activity.

For example, the finance manager will provide information regarding the availability of funds, future cash needs etc. The merchandise manager will provide valuable guidance based on company objectives and procedures and will maintain a proper balance among the departments under his jurisdiction with regard to departmental opportunities and needs. A buyer will rely on past experience, on his or her ability as a manager and merchandising objectives when planning a workable merchandise budget

Merchandise budget

Once all available information regarding business conditions, consumer trends, market and supply conditions, competition, business philosophies and future forecasts are gathered, actual planning for the year ahead may begin.

A small store will usually adopt a six month plan that is very simple. For example, the desired results of the various merchandising activities for a specific period are put down on paper in the form of financial figures. Comparisons and adjustments are made at frequent intervals in relation to the actual performance.

What the merchandise budget includes: Sales Stocks Reductions Markups Gross margin and operating profit Expenses Purchases

Planning - DefinitionAcademic definitions of planning :

• “Integrated decision making”. Mintzberg (The Rise and Fall of Strategic Planning)

• “Design of a future, and of effective ways of bringing it about”. Bill and Roy Richardson (Business Planning)

• “Explaining the past which in turn helps understand the present, which helps with predicting the future, leading to more influence over future events and less disturbance from the unexpected” Hardy (Understanding Organisations)

WHY WE PLAN?

WHY WE PLAN? TO DRIVE THE BUSINESS’S ACTIVITIES

The primary purpose of planning is to drive these activities. Planning leads to a series of actions which are executed. The results of these actions are reviewed, following which two things will happen. Firstly, you may need to react to performance and take additional actions so that your original objectives can be achieved or surpassed and secondly, you will amend future plans to take account of the actual effect of the first set of plan actions. And so on, and on…...

WHY WE PLAN?

TO GIVE THE BUSINESS FOCUS

Quite clearly, if a business doesn’t have clear and measurable objectives it will be directionless and won’t operate effectively. The plan specifies what these objectives are and ensures that they are consistent across all the separate business functions – Buying and Merchandising, Retail Operations, Marketing, Finance etc.. At the same time, by coordinating the activities needed to achieve the objectives, planning ensures that efforts are focussed on the tasks necessary to achieve them.

WHY WE PLAN?

TO PROVIDE A BASE FOR THE MEASUREMENT

The plan is the benchmark against which we determine if performance is good or bad.

If we didn’t have a plan what would there be to review and how would we know when to react? We wouldn’t know what we were expected to achieve or by when, if or when to take corrective actions, whether we’d achieved what we set out to achieve or what individual contributions to performance were.

Sales Planning

Also called forecasting is the first step in merchandise budget. This is the key element as all other planning follows from it for example planning for stocks, reductions, gross margins, markups and purchases.

Careful sales forecasting is critical since buyers are held responsible for their decisions in this profit or loss area.

If sales estimates are unrealistically high, there will be too much unsold merchandise at the end of the season. If sales are planned too low, the buyer will not have enough merchandise available to meet customer demands.

Steps to Sales Planning The first step in planning sales is to refer to department sales records

and consider the overall sales performance of the store or chain as a whole, as well as sales trends for each department in individual branches or units. Next, consider how the department will achieve the sales goals based on the store’s overall projections.

Next the buyer must consider the external factors that may affect sales such as economic trends, growth of shopping centers, competitive conditions and so forth.

The buyer will also plan the sales in terms of units of merchandise according to classification, price line, size, colour or other breakdowns that are applicable.

For e.g., if you are a buyer for Men’s sweaters, you may find that classic drew neck is an important fashion look for the season. Plan your stock in units with this classification given priority, while less popular styles are offered in limited selection.

Monthly Sales Plan

To plan the six month budget realistically, buyers must first plan sales goals for each month since all 6 months will not contribute equally. For example, the months of October and November will have higher sales goal than June & July due to changes in seasonal demand.

Spring 2002 - Sales Planning

Dep - Mens

  April May June July Aug Sep Total

Sales % Distribution 15% 14% 13% 12% 26% 20% 100%

Monthly Sales 19500 18200 16900 15600 33800 26000 130000

Methods used in Planning Departmental sales:

Top-down plan may be defined as the planning of overall sales management based on economic trends, external conditions and changes in store policies. Such goals are further broken down into plans for each department in the chain and into plans for each store for that department.

Bottom-up plan may e defined as the planning for specific department, whether it is located in one store or in many units. In this method the initial planning is accomplished by those directly responsible for implementing the sales plan and storewide plans are primarily built up from the plans formulated from within each department and selling unit.

Planning stocks

The second step in merchandise plan is to maintain a balanced stock in relation to anticipated sales.

Stock planning includes (1) an understanding of the various methods used to plan stock needs (2) the computation of stock turnover (3) the computation of average inventory (4) an understanding of methods to increase turnover (5) an understanding of different rates of stock turnover and (6)stock planning for branches and store units

Methods Used to Plan Needed Stocks

The basic stock method Percentage –variation method Week’s supply method Stock-sales ratio method

Basic Stock Method

Basic Stock method shows the necessity of having a base stock on hand at all the times. Beginning of the month stock is determined as follows

BOM = Planned sales for Month + (Average stock at retail – Average monthly sales)

For E.g., during a six month period, season sales may be planned at Rs.57,000, planned turnover, 3; June sales estimated at Rs.15000 and July at Rs.17000

Average stock at retail = 57000/3 = Rs.19000 Average monthly sales = 57000/6 = Rs.9500 Stock, June 1 = 1500 + (19000 – 9500) = Rs.24500 Similarly stock, July 1 = Rs.26500

Percentage Variation Method

The percentage variation method is based on the premise that BOM stock is increased or decreased from the planned average stock by approximately 50% of the sales variations from the average monthly sales

The planned yearly sales may be Rs.48000; planned sales for the month of Sep Rs.2500 and planned yearly turnover 6. Then

BOM Sep 1 = average yearly sales/turnover * [1/2(1+sales for month/ average monthly sale)]

= 48000/6 * [1/2(1+2500/(4800/12))]=Rs.6500

Week’s Supply Method

Week’s supply Method is to plan the stock on a weekly basis and to set stocks equal to predetermined number of week’s supply depending upon the stock turnover desired

Week’s supply = 52 weeks / desired stock turnover

If the desired stock turnover is 8, then Week’s supply = 52/8 = 6.5 weeks cover

Stock-sale Ratio Method

Stock sales ratio is the BOM stock expressed as a ratio of sales. It shows the number of months that would be necessary to dispose the BOM stock at the rate of sale for that month

Stock-sales ratio = beginning stock / sales For e.g., it may be found that the Jan stock – sales ratio

for a department is 5. This means that the stocks on the 1st of Jan is 5 times the sales of Jan. Thus if the department forecast is Rs.15000 for Jan, this fig multiplied by the stock sale ratio of 5 gives the BOM stock of Rs.75000 on Jan 1st

VARIOUS METHODS USED TO PLAN NEEDED STOCKS

STOCK-SALESRATIO METHOD

BEGINNING STOCK

SALES

WEEKS SUPPLY METHOD

52 WEEKSDESIRED STOCK

TURN

AVERAGE MONTHLY SALE

SALES FORMONTH

AVERAGE YEARLYSALES

TURNOVER

PERCENTAGE-VARIATION/

DEVIATION METHOD

BASIC STOCK METHOD (BOM)

AVERAGE MONTHLY SALE

AVERAGE STOCK AT RETAIL

PLANNED SALESFOR MONTH =

=

=

=

+

X[1/2(1+

_

:

:

: )]

1

2

4

3

Computation of stock turnover

Stock turn or stock turnover is the rate at which stock is disposed of or replaced in a given period of time, generally a period of one year

Stock turn (retail basis) = net sales / Average stock at retail price

Stock turn (cost basis) = cost of goods sold / average cost of stock

Stock turn (unit basis) = Number of units sold / Average number of units in stock

Annual Median Stock Turnover Rates for Selected Type of Retailers

Type of RetailerAnnual Median Stock Turnover rate

(Times)

Drug Stores 12.4

Eating Places 91.5

Furniture Stores 5.2

Family Clothing stores 4.6

Gasoline Service Stations 41

Grocery Stores 19.1

Hardware Stores 4.8

Household Appliance Stores 6.5

Jewelry Stores 2.5

Men's & Boys Clothing 4.7

Shoe stores 4.1

Women's Clothing Stores 6.1

Planned Reductions

Retail reduction may be defined as the allowance for the difference between the original retail value of merchandise and the actual final sales value of the merchandise.

It consists of three major factors Merchandise shortage and overages Employee discounts and discounts for other

special groups Markdowns

Merchandise shortage and overages Merchandise shortage is the difference between

the book inventory and the physical inventory, when the book inventory is larger.

Merchandise Shortage = Book Inventory – Physical Inventory

Merchandise overage is the difference between the book inventory and the physical inventory, when the physical inventory is larger

Merchandise Overage = Physical Inventory – Book Inventory

Employee discounts and discounts for other special groups Employee discounts and Discounts for

other special groups The employee discount is a price

reduction granted to store employees. Such discounts are also granted to other groups

Employee Discount % = Employee discounts for the month / Net sales

Markdowns

A reduction in price from the original price is called markdown.

The buyer will plan markdowns because it is frequently necessary to reduce the price of items to sell them. There are two major reasons for markdowns:

To sell merchandise to which customers have not satisfactorily responded

To induce customers to come to the department or store seeking bargains and thus stimulate the sales for regularly priced goods

Markdowns

There are many reasons why goods should be sold at a price lower than the retail price.

For example, buying errors may occur, such as purchasing too many goods in one size, price, fabric, or colour, careless selling may result in return of merchandise, pricing errors as when goods are priced too high

The markdown percent is the difference between the net value markdown and the original retail price divided by the net sales

Markdown % = (Original retail price – Markdown price)/original price

Merchandise Shortage

Original Retail Price

NetSales

Discounts forMonth

Employee &Special Discounts

Physical Inventory

Book InventoryMerchandise

Overage

Book Inventory

Physical Inventory

NetSales

MarkdownPrice

Net Markdown

Markdown

Markdown Percentage

Formulae

Markups

A retail buyer must sell merchandise at a price that will cover the cost of the goods and expenses incurred as a result of acquiring the goods and that will yield a profit.

The term markup may be defined as the difference between the cost price and retail price of an item

Markup = Retail Price – Cost Price Most retail buyers think of markup in terms of percent.

The markup percent equation is as follows Markup % at retail = Markup/ Retail Price

Markups

The fourth step in the merchandise plan is to plan markup

A retail buyer must sell merchandise at a price that will cover the cost of goods and expenses incurred

Markup = Retail Price – Cost Price Markup % = Markup / Retail price

Markups

The buyer should seek the following information to plan markup

Total amount of sales for the planned selling season

Planned expenses for the season Planned reductions such as markdowns,

shortages Profit goal planned for the season

Planned expenses

The primary objective of expense planning is to make careful and accurate forecasts of expenses so that proper controls can be established to meet them thus safeguarding the store’s profit objective.

Planned Gross Margin and Operating Profit Gross margin is the difference between net

sales and the cost of goods sold. Gross Margin represents what is available for operating expenses and profit .It is what is left after costs have been deducted but before operating expenses have been considered.

Net Sales – Cost of goods sold = Gross Margin The net profit may be computed by deducting

the total operating expenses from the gross margin

Planning Purchases The final step in planning the budget is to

plan the amount of goods that can be bought into the department or store during a specified period or season.

Purchased are planned at retail prices and then converted to cost value by applying the planned markup %

Planning Purchases

Planned purchases

= Planned sales for the month + Planned reductions for the month + Planned end of the month stock – Beginning of month stock

Planning Purchases

Open to buy is the difference between Planned Purchases and the purchase commitments already made by a buyer for a given period, often a month

It represents the amount the buyer has left to spend for that month and is reduced each time a purchase is made

At the beginning of the month, a firm’s planned purchases and open to buy are equal if no purchase commitments have been made before that month starts

Planning Purchases

Store A projects June 2007 sales to be Rs.108666 and total planned reductions to be 5% of sales, planned end of month inventory at retail to be Rs.72000 and has a beginning of month inventory at retail of Rs.80000. Planned purchases for June

= 108666+5433+72000-80000=Rs.106099 If the buyer has made purchase commitments for June

for Rs.55000. OTB=106099-55000=Rs.51099

Problem - OTB

The inventory at retail for shoes budget at Robin's Departmental Store figured at Rs.30,000 on Aug 1, with an inventory planned at Rs.40,000 on Aug 31st. Planned sales were Rs.14,000, with markdowns of Rs.1000 for the month. The buyer had already made commitments for August of Rs.12000 at retail. What is the OTB?

Solution

OTB = (Planned sales for the month + Planned reductions for the month + Planned end of the month stock – Beginning of month stock)-Purchase commitments

=(14000+1000+40000-30000)-12000 =Rs.13000

Problem - OTB

Toby, Sweater buyer for Aviv's is contemplating a sizeable purchase of off-price merchandise for immediate delivery to be used in Jan Sale. To make certain she has the available funds, she must determine her OTB for this date Dec 19. The following figures are available to her

Present Inventory at retail = $8000 Inventory commitments=$1200 Planned end of the month inventory = $18000 Planned sales = $6500 Actual sales = $5200 Planned Mark Down = $175 Actual Mark Down = $150

Solution

Balance sales to be achieved =13000 Balance reductions for the month = 25 Requirement for the month

=(1325+18000)

Merchandise assortments

Since no retail store can carry all products available in the market place, decisions about what merchandise assortments to carry are based on a number of important factors such as type of retail Institution, past sales records, determination of customer wants, internal and external sources of information, type of goods offered and elimination of merchandise items.

The retail buyer has to decide how many separate items to carry and how many units of each item.

Factors such as Quality, Price Range, brands, good taste, timing, product life cycle and product mix affect the assortment planning

Product Mix

Product line may be defined as a broad category of products having reasonably similar characteristics and similar end uses

Product mix is the variety of product lines offered in a store. This may be limited in a specialty store or may be numerous in a department store.

Assortment Depth

Assortment Depth may be defined as a characteristic of an inventory assortment offering limited versions of proved popular styles. This is called “narrow and deep” assortment. Mass merchandise usually use this method of stock inventory, since it has been proven most efficient from cost point of view.

Assortment Depth – Advantages & Disadvantages Advantages are (1)faster turnover (2) ease

of stocking (3)using less room and display area (5)simplified counting and (6)avoidance of mark downs.

Major disadvantage is that customers are not offered a wide selection of products and might have to shop in competing stores to find what they want.

Assortment breadth

Assortment breadth may be defined as a characteristic of an inventory assortment offering a large number of different categories or classifications, but not a large stock of any one style. This is a “broad and shallow” assortment. Stores catering to middle and upper income consumers usually use this kind of inventory assortment

Assortment breadth – Advantages & Disadvantages Advantages are (1) presentation of a wide

variety of goods (2) a high degree of stopping and pulling power (3) a slat to those customers of discriminating taste.

The major disadvantage is that, because of the shallowness of the assortment, alert and frequent reordering is needed to keep everything in stock. Consequently, this is a costly method of inventory

Assortment Strategies

The balanced assortment may be defined as an inventory assortment using both assortment breadth and depth to develop an assortment that is balanced.

Assortment Strategies

ASSORTMENT DEPTH

A NUMBER OFCATEGORIES

(BROAD)

A NUMBER OFPOPULAR STYLES

(DEEP)

LIMITED NUMBER OF CATEGORIES

(NARROW)

ASSORTMENT BREADTH

BALANCEDASSORTMENT

=

=

=

+

+

+

LIMITED NUMBER OF STYLES(SHALLOW)

A NUMBER OFPOPULAR STYLES

(DEEP)

A NUMBER OFCATEGORIES

(BROAD)

Basic Stock List

In a retail store, basic stock list are composed of staple type of merchandise. For example, in a store, staple goods may include toothpaste, deodorants, detergents, bulbs and underwear. The list will specify in detail the items to be carried in stock

While planning for staple merchandise the buying specialist should consider (1) Homogeneous & heterogeneous staples and (2) Seasonal & non seasonal staples

Homogeneous & heterogeneous staples Homogeneous staples may be defined as staple goods

that are all of the same size, colour, fabric & style. E.g.: 100 watt light bulbs produced by each company are alike in that they are the same size, provide same amount of light, fit into standard light bulb sockets

Heterogeneous staples may be defined as staple goods that are alike but not identical. E.g.: shoe laces of same length and width will come in assorted colors, patterns, textures though they all perform the same function

Seasonal & non seasonal staples

Non-Seasonal staples - Some staples may be in demand regularly for years and not be affected by seasonal variations. E.g.: toiletries, foodstuff

Seasonal staples – Some staples tend to be seasonal since sales will vary throughout the year or during specific times of the year in a manner that is predictable. E.g.: Easter egg during Easter, Christmas tree trimmings during Christmas season

Periodic fill ins of staple stocks

To ensure a well balanced assortment of merchandise, it is essential that the staples are reordered periodically. However the buyer must have certain information available before reorder formulas can be applied. The necessary information are

The normal sales rate expected during the delivery and reorder periods

The delivery period The reorder period The reserve stock on hand Merchandise on order

Formulas for determining Fill-Ins of Staple Stock Maximum =(Reorder Period + Delivery Period) Rate Of Sales +

Reserves Unit Open To Buy = Maximum –(On Hand Orders + Outstanding

Orders) Reserve = 2.3 x √(Lead time) Sales Reserve = 1.6 x √ (Lead time) Sales Lead Time = Reorder Period + Delivery Period M = (RP+DP)S+R M=(LT)S+R For example, determine the total number of units on order and on

hand and maximum. The item is selling at 100 items per week, with 58 units left in reserve. Ensure ample supply of stock to cover the reorder period of 4 weeks and delivery period of 2 weeks.

Model stock List

The model stock plan is the second method a buyer may use to develop the assortment plan.

A model stock may be defined as the desired assortment of stock broken down according to predictable factors such as classification, price, material, colour and size, based on customer demand.

Model stock List The model stock plan is used by buyers of fashion goods

to plan fashion assortments since, unlike staple goods, fashion items are identified by general characteristics rather than by specific details.

In planning a model stock, accurate sales and stock information is necessary to achieve maximum sales from the merchandise assortment.

The buyers must be guided by current trends as well as previous sales patterns.

The buyer will develop a specific buying plan that gives consideration to what to buy, when to purchase, and when to have them delivered for the model stock plan to be fulfilled.

Suppliers of Fashion Goods

Suppliers of Fashion Goods

Suppliers from Domestic Market Suppliers from Foreign Markets

Local ManufacturersImporter wholesaler

Exporter Foreign selling agentsResident buying Office

Import trade fairs

Buying trips abroad to market & Manufacturers

Foreign Buying OfficeForeign trade fairs

Advantages of Domestic Manufacturers Delivery Proven specification Availability of merchandise in selected quantities Availability of reorder Very close control on the merchandise planning and

production Accommodation of changes due to any reason is easy Planning and control of stock relatively easy Permit the stock adjustment to new trends

Merchandise Resources

Middlemen: Middlemen are defined as the individuals or organizations who operate between producers and users. A synonym is the term Wholesaler. They merely pass the goods through the distribution system. They can be classified into (1)Merchant Middlemen and (2) Non-merchant middlemen

Middlemen

Merchant middlemen may be defined as wholesalers who take title or assume ownership by taking possession of goods they purchase for resale. E.g. service wholesalers or regular wholesalers, Limited function or cash and carry wholesalers, rack jobbers

Non-merchant middlemen may be defined as those middlemen who do not take title or assume ownership by taking possession of goods they purchase for resale. They usually act on behalf of the sellers by negotiating sales and performance of other services for their principals. The non-merchant middleman receives a fee for bringing buyer and seller together. Examples – commission people, selling agents, manufactures agents and auctions

Manufacturers

A Manufacturer may be defined as an individual or firm who engages in assembling goods for use by ultimate consumer.

Many retailers prefer to purchase their merchandise directly from the manufacturer, since this may save both time and money and often results in better service which includes special assistance like goods made as per required specification and sales training, advise on sales and promotion, suggestion on display techniques and materials

Farmers and Growers

They are an important source of supply primarily to those in food retailing field.

Selecting Merchandise Resources

Buyers usually prefer to work with few resources than with many, since a concentrated source of supply will encourage lower prices and better service. The buyer will select resources on the basis of what they will do for the retail firm that he or she represents. Merchandise resources are evaluated on the basis of the amount of goods they supply and the profit potential.

Vendor Relations & Negotiation

There are number of guidelines the buyer should observe when negotiating with vendors, and the vendors have certain obligations to the buyer. Certain trade practices must be observed by vendor and buyer. Activities such as returns and adjustments, order cancellations, shipping problems, special ordering and so forth should be discussed by all parties concerned to avoid friction between vendor and buyer.

Negotiation Process

The negotiation process involves the mutual discussion and agreement between the retail buyer and merchandise resources as to the terms of various business transactions.

Its the bargaining activity that occurs between the buyer and the seller over certain goods and services.

Variety of activities involved in the process are Buying authority, securing discounts and allowances, arranging transportation and distribution, establishing the terms of sale and seeking price guarantees

Negotiation Process – Buying Authority Buying authority: The authority delegated to the

buyer by the retail firm is important to the negotiation process. The merchandise resource is aware that contracts placed and signed by the buyer are valid and will be honored by the retail firm involved. The buyer has to be loyal and give an account of all purchases made and make no personal profit

Negotiation Process – Securing Discounts Securing Discounts and allowances: This is defined as any

reduction in the list or quoted price given to the retailer by the merchandise resource. They are as follows:

Quantity Discounts Seasonal Discounts Trade Discounts Cash Discounts

Types of Discounts Quantity Discount may be defined as the reduction from list price given to

buyers purchasing in usually large quantities. Example “1 dozen free with every 10 dozens purchased”

Seasonal Discount may be defined as a reduction in list price granted to the retail buyer for purchasing during off season. Example, bathing suits are in demand during summer. Vendors will offer discounts to retailers to encourage them to order and take delivery of goods during off season.

Trade Discount may be defined as a reduction in price granted to certain category or trade of customer to cover the costs of particular trading function. This is offered in addition to quantity discount. This is not a form of price concession but a method of quoting prices based on list prices. For example, a clock may be listed at Rs.500/- but sold to a buyer at Rs.150/-. The buyer then resells the clock at Rs.350/- but advertises it as a “gigantic bargain”

Cash Discount may be defined as a reduction in price granted to the retail buyer if the buyer pays within the specified period of time. The time period is usually expressed as a certain number of days after the invoice date. For example, the buyer may take a cash discount of 2% by paying within ten days after the invoice date.

Negotiation Process – Arranging Transportation and Distribution Arranging Transportation and Distribution: When

considering the transportation arrangements, the buyer should ask himself or herself two important questions, who is to pay for the cost of transportation and who is to own the merchandise and be responsible for it while it is en route

Transportation terms may take any one of the following form – Free on board (FOB) factory, FOB destination, FOB shipping point, FOB destination, charges reversed or FOB factory, freight prepaid

Negotiation Process – Establishing the Terms of Sale The terms of sale are often offered to the retail buyer in the form of

vendor services. The buyer comes in agreement with the vendor on the terms of payment and ownership of the merchandise. Few terms of sale are

COD – Cash On Delivery terms state that the merchandise may be sold for Cash on delivery

Consignment – Merchandise sold on consignment does not become property of the buyer, but remains the property of seller. Unsold goods are returned to vendor and the vendor gets paid for the goods sold

Outright – The goods are the property of the retailer and the buyer agrees with the period of payment either end of the month, 30 days from the date of receipt or 60 days from the invoice date etc…

Methods of Buying

Regular Buying: Regular buying or buying goods at regular retail prices is the method used by most buyers for staple goods. The buyer is assured of normal delivery period from 2 – 4 weeks and prefixed terms of sale

Buying Job Lots: A job lot may be defined as an assortment of merchandise the vendor has been unable to sell at regular prices and is now offering at a reduced price per item. The buyer will not buy job lots unless the price is low enough to ensure that the entire lot will sell at a satisfactory markup.

Methods of Buying

Buying Irregulars and Seconds: an irregular may be defined as an item that contains an imperfection or repair not visible to naked eye. A second may be defined as an item that contains a more obvious damage or repair. A vendor will offer these at reduced prices to deplete the stocks, as well as to provide special buys to store merchants.

Advance Buying: Advance buying is used primarily by buyers of staple & fashion goods. It permits the buyer to place orders in advance of the selling season. This ensures adequate delivery and a steady flow of merchandise.

Methods of Buying

Promotional Buying: Stores are always featuring special events and general sales promotions and buyers are continuously seeking special purchases. The buyer must be careful in calculating the amount of merchandise required for the sale.

Special Order Buying: a store may offer an individualized service where customers may order special merchandise. In this case, the buyer must place orders with a vendor indicating a particular colour, size or style.

Methods of Buying

Buying Manufacture’s Brands: Many retailers purchase manufacturers’ branded merchandise. The advantages are

Successful manufacturers’ brands have an established reputation so customers will be attracted to a store carrying the brand

Branded manufacturers’ will often share advertising costs Since manufacturers’ brands are usually well known, a store’s

selling expenses are minimized Store may also reorder more frequently reducing inventory cost

as the brand usually carries large inventories Quality is maintained Brands add reputation to the store

Methods of Buying

Private Label Buying: Private label buying or specification buying is a request by a store merchandising team for minor changes in product that has already been produced or it may include specifications for production from raw materials to final package.

Today many stores urge their buyers to provide private label buying as the advantages are

It enables the store to offer merchandise that is different from that offered by its competition and often of better quality and better prices compared to national brands

Creates a unique and distinctive assortment of merchandise Since the merchandise is controlled by the retailer, price cutting, style

changes and poor quality are eliminated It adds profits No comparison with competition Customer is built for the store and not the manufacturer

Measures of Productivity

Productivity is a measure of the number of units of output produced per unit of input

Productivity = output

input

Turnover

Turnover or stock turn is the number of times that an average inventory is sold within a time period

Turnover = Sales

______________

Average Inventory

Average Inventory

An average inventory is the average amount of inventory on hand within a time period

Average inventory of a month can be computed by dividing the sum of the beginning and ending inventory of a period divided by two

Average inventory for a year is calculated by dividing the sum of average inventories of each month divided by 12

Average inventory for a month=(BOM+EOM)/2 Average inventory for a year =BOM1+BOM2+BOM3…..

+BOM12+EOM12

13

Computing TurnoverMonth BOM EOM

1 2500 25002 2500 25003 2500 50004 5000 25005 2500 75006 7500 25007 2500 50008 5000 50009 5000 5000

10 5000 750011 7500 1250012 12500 5000

High Versus Low turnover

Turn over can be increased by increasing sales or decreasing average inventory

Retailers objective is to generate more sales with less inventory When the inventories turn slowly, customers see the “same old

thing” Slow moving goods often become shopworn The money and space tied up in stagnant slow turning inventories

inhibit investments in fresh new goods

Disadvantages of excessively high turnover Just as low inventory is a indicative of too much of inventory, high

turnover can be an indicative of too little inventory Placing too many orders in place of few large orders can add to the

cost of processing the orders, tracking them, paying invoices etc Buyers who purchase small quantities often forego quantity

discounts, which are price incentives based on quantities purchased

The buyers job involves making critical decisions relative to how much inventory to carry. These decisions are driven by multiple factors including desired turnover, availability of goods, availability of cash to pay and the amount of inventory needed to maintain adequate selection.

Stock to sale ratio

A stock to sales ratio is the propotionate relationship between a BOM and sales for the corresponding month

Stock to sales ratio = BOM/Sales A 3.0 stock to sales ratio indicates that the

BOM is 3 times the sales

Computing Stock-to-sale ratio

Month Sales BOM Stock-to-sale ratio1 20000 40000 2.02 20000 40000 2.03 25000 45000 1.84 10000 30000 3.05 10000 30000 3.06 5000 25000 5.07 5000 25000 5.08 5000 25000 5.09 40000 60000 1.5

10 30000 50000 1.711 40000 60000 1.512 30000 50000 1.7

Total 240000 480000 2.0

Sales per Square Foot

Sales per square foot is a measure of productivity that reflects the amount of sales generated relative to the amount of space dedicated to selling the goods

As input in productivity ratio, suare footage represents the capital outlay for constructing retail space and the operational expenses associated with rent, air conditioning, lighting, cleaning and staffing

Sales per square foot = sales / square footage

Sales per Square Foot

As a measure of productivity, high sales/Sq.ft values are desirable

Sales per square foot can be increased by increasing sales or decreasing square footage

Generating more sales in less square footage is the objective for every retailer