Retail

Management
Chapter 4 –
Merchandise Buying
and Handling

Berman, B. and Evans, J.R. (2010),”Retail Management : A Strategic Approach”, Pearson.

 Retailing Truism

If a retailer doesn’t have the

merchandise, there is nothing to
promote and sell

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 Merchandise Planning

• Merchandise
Management is the
analysis, planning,
acquisition, handling,
and control of the
merchandise
investments of a retail
operation

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 Merchandise Planning

• Gross Margin Return on

Inventory (GMROI) 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)

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 Merchandise Planning

• GMROI can be computed as follows:

•
(Gross margin/Net sales) X (Net sales/Average
inventory at cost) = (Gross margin/Average
inventory at cost)

(2,000/10,000) x (10,000/100,000)
0.2 x 0.1 = 0.02
2%

(2,000/10,000) x (10,000/200,000)
0.2 x 0.05 = 0.01
1%

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 Merchandise Planning
• Basic Stock Method (BSM) is a technique for
planning 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
amount as the period’s expected sales

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 Merchandise Planning

• The BSM can be calculated as follows:

• ∑ monthly sales for the season = Total planned
sales for the season/Number of months in the
season

10,000 = 120,000 / 12

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 Merchandise Planning

• The BSM can be calculated as follows:

• ∑ stock for the season = Total planned sales for the
season/Estimated inventory turnover rate for the
season
25,000 = 120,000 / 4.8

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 Merchandise Planning

• The BSM can be calculated as follows:

• Basic stock = ∑ stock for the season – ∑ monthly
sales for the season

15,000 = 25,000 – 10,000

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 Merchandise Planning

• The BSM can be calculated as follows:

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

25,000 = 15,000 + 10,000

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 Merchandise Planning
• Percentage Variation Method (PVM) is a technique for
planning inventory investments that assumes the
percentage fluctuations in monthly stock from average
stock should be half as great as the percentage
fluctuations in monthly sales from average sales

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 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)]

BOM Stock = (½(25,000) (1+ 12,000/10,000)

= 12,500 (2.2)
= 27,500

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 Merchandise Planning

• Weeks’ Supply Method

(WSM) is a technique for
planning inventory
investments that states 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

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 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

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 Merchandise Planning

• Stock-to-Sales Method
(SSM) is a technique for
planning 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,

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 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

2.5 = 12 / 4.8

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 Merchandise Control
• Open-to-buy (OTB) refers to the amount that a buyer can
currently spend on merchandise without exceeding the
planned stock. Computations for OTB are as follows:

• Planned sales for month + Planned reductions for month

+ End-of-Month (EOM) planned retail stock – Beginning-
of-Month (BOM) stock = Planned purchases at retail

• Planned purchases at retail – Commitments at retail for

current delivery = Open-to-Buy (OTB)

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 Merchandise Control
Com m on 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
• 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)
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 Inventory Planning

• Optimal Merchandise Mix

• Constraining Factors
• Managing the Inventory
• Conflicts in Unit Stock Planning

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 Optimal Merchandise Mix

• 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)

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 Optimal Merchandise Mix

• Category Management
refers to the management of
merchandise categories, or
lines, rather than individual
products, as strategic
business unit

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 Optimal Merchandise Mix

• Variety refers to the number of different merchandise

lines that the retail stocks in the store
• Breath (or assortment) is the number of merchandise
brands that are found in a merchandise line
• 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
• Depth is the average number of stock-keeping units
within each brand of the merchandise line

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 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

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 Merchandise Constraining Factors

 Currency Constraints
 Space Constraints
 Turnover Constrains
 Market Constraints

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 Merchandise Constraints

 Consignment is when the vendor retains the

ownership of the goods and usually establishes
the selling price; it is paid only when the goods are
sold by the retailer
 Extra Dating is when the vendor allows the retailer
extra time before payment is due for goods

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 Managing the Inventory

• Model Stock Plan is a unit stock

plan that shows the precise items
and quantities that should be on
hand for each merchandise line
• Identify attributes
• Identify levels
• Allocate Dollars or Units

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Inventory Management for a Retailer
Selling a Basic Stock Item

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B. and Evans, J.R. (2010),”Retail Management : A Strategic Approach”, Pearson.
 Inventory Management for a Retailer
Selling a Seasonal Item

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 Conflicts in Stock Planning
• Maintain a strong in-stock position on
genuinely new items while trying to avoid
the 90 percent of new products that fail in
the introductory stage
• Maintain an adequate stock of the basic
popular items while having sufficient
inventory to capitalize on unforeseen
opportunities
• Maintain high merchandise turnover while
maintaining high margin goals
• Maintain adequate selection for customers
while not confusing them
• Maintain space productivity and utilization
while not congesting the store

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 Selection of Merchandising Sources

 In selecting merchandising sources the

following criteria should be considered:
○ Selling history
○ Consumers’ perception of the manufacturer’s
reputation
○ Reliability of delivery
○ Trade terms
○ Projected markup
○ Quality of Merchandise

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 Selection of Merchandising Sources

 In selecting merchandising sources the

following criteria should be considered:
○ After sales service
○ Transportation time
○ Distribution center processing time
○ Inventory carrying cost
○ Country of Origin
○ Fashionability
○ Net-landed cost

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 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

• 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

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 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 sold 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

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 Vendor Negotiations
• Negotiation
is the process of finding mutually satisfying
solutions when the retail buyer and vendor have
conflicting objectives,
The retailer must negotiate price, delivery
dates, discounts, shipping terms,
and return privileges

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 Vendor Negotiations

• Trade Discount
• Quantity Discount
• Promotional Discount
• Seasonal Discount
• Cash Discount
• Delivery Terms

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 Trade Discount
• 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

Often expresses in a chain, or series, such as

“list less 40-20-10.” The computations would
look like this:
List price $1,000
Less 40% - 400
600
Less 20% - 120
480
Less 10% - 48
Purchase price $432
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B. and Evans, J.R. (2010),”Retail Management : A Strategic Approach”, Pearson.
 Quantity Discount

• Quantity Discount is a price reduction offered as an

inducement to purchase large quantities of
merchandise
• Non-Cumulative Quantity Discount is a discount
based on a single purchase
• Cumulative Quantity Discount is a discount based on
the total amount purchased over a period of time
• Free Merchandise is a discount whereby merchandise
is offered in lieu of price concessions

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 Quantity Discount

• For an example of how a quantity discount works,

consider the following schedule:

Order Quantity (in kg) 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%

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 Promotional Discount

• Promotional Discount is a
discount provided for the
retailer performing an
advertising or promotional
service for the manufacturer

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 Seasonal Discount

• Seasonal Discount Is a discount provided to retailers if

they purchase and take delivery of merchandise in the off
season

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 Cash Discount
• Cash Discount is a discount offered to the retailer for the
prompt payment of bills
• End-of-Month (EOM) Dating allows the retailer to take a
cash discount and the full payment period to begin on the
first day of the following month instead of on the invoice
date
• Middle-of-Month (MOM) Dating allows the retailer to take a
cash discount and the full payment period to begin on the
middle of the month

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 Cash Discount
• Receipt of Goods (ROG) Dating allows the retailer to take
a cash discount and the full payment period to begin when
the goods are received by the retailer
• Extra Dating (Ex) allows the retailer extra or interest-free
days before the period of payment begins
• Anticipation allows the retailer to pay the invoice in
advance of the end of the cash discount period and earn
an extra discount

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 Delivery Terms

• 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 at transportation costs from the
vendor’s factory
• 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
• 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

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 In-Store Merchandise Handling

• Shrinkage is the loss of merchandise due to theft,

loss, damage, or bookkeeping errors
• Vendor collusion occurs when an employee of one of
the retailer’s vendors steals merchandise as it is
delivered to the retailer
• Employee theft occurs when employees of the retailer
steal merchandise where they work
• Customer theft is also know as shoplifting and occurs
when customers or individuals disguised as
customers steal merchandise from the retailer’s store

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 Thank you

Berman, B. and Evans, J.R. (2010),”Retail Management : A Strategic Approach”, Pearson.