Dunne, Lusch, & Carver

Chapter 9

Merchandise Buying & Handling

 Merchandise Management
• The analysis, planning, acquisition, handling,
and control of the merchandise investments of
a retail operation.
• Can be performed by a retail worker, salesperson,
etc.

• Most entry-level marketing positions involve some

form of contact with merchandise management.
 Gross Margin Return on Inventory
(GMROI)
• Incorporates into a single measure the idea of
both inventory turnover and profit, and is used
because inventory is the largest investment a
retailer makes.
• Formula:
• (Gross Margin/Net Sales) x (Net Sales/Avg. Inventory at
Cost)
• (Gross Margin/Average Inventory at Cost)
• Note that (Sales/Dollars Invested) is not the same as inventory
turnover, because inventory turnover is (Sales/Dollars Invested at
retail)
• We use cost because it measures investment activities in carrying
inventory.
 Four Methods of
Planning Dollars Invested in Stock
1. Basic Stock Method (BSM)

2. Percentage Variation Method (PVM)

3. Weeks’ Supply Method (WSM)

4. Stock-to-Sales Method (SSM)

 Basic Stock Method
• Allows for a base stock level plus a variable
amount of inventory that will increase or
decrease at the beginning of each sales period
(e.g., month) in the same dollar amount as the
period’s expected sales.
• Works best when a retailer has a low turnover rate
or sales are erratic.
 Basic Stock Method
• It fails to perform when the turnover is greater
than once every two months (or 6 times per yr),
because in this situation the basic stock level for
each month would be negative.
• Average Stock for the Season = Total Planned Sales for the
Season/Estimated Inventory Turnover Rate for the Season
• Average Monthly Sales = Total Planned Sales for the
Season/Number of Months in the Season
• Basic Stock = Average Stock for the Season – Average
Monthly Sales for the Season
• BOM Stock = Planned Monthly Sales + Basic Stock
 Percentage Variation Method
• Assumes that the percentage fluctuations in
monthly stock from average stock should be
half as great as the percentage fluctuations in
monthly sales from average sales.
• Works best with an annual turnover of six or more

• BOM Stock = Avg. Stock for the Season x

½[1+(Planned Sales for the Month/Average
Monthly Sales)]
 Weeks’ Supply Method
• 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.
• Works for retailers where inventories are planned
on a weekly, not monthly, basis, and where sales do
not fluctuate substantially.
 Stock-to-Sales Method
• 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.
• This is the method used in our merchandise budget and
is quite easy; however, it requires the retailer to have a
BOM stock-to-sales ratio, which can be gained from:
1. POS data
2. Trade Associations
3. Turnover goals
 If desired Turn over rate is 2.0 for the upcoming
six months, what is the average BOM stock-to-
sales ratio?

Process divide the # of months in the season by

the desired inventory turnover rate.

Answer : 3 (6/2)
 Dollar Merchandise Control
• Open-to-Buy (OTB) – represents the dollar
amount a buyer can currently spend on
merchandise without exceeding the planned dollar
stock.
• Calculated as follows:
1. EOM planned retail stock
2. Plus planned sales for the month
3. Plus planned reductions for the month
4. Minus stock on hand at retail
5. Equals planned purchases at retail
6. Minus commitments at retail for current delivery
Assume that at the beginning of Feb. the buyer
for Department 353 has already ordered, but not
yet received.
 Dollar Merchandise Control
• The OTB should be flexible because consumer
demand is “King”; however, changing it should
not be a common occurrence.
• Some common buying errors include:
1. Buying merchandise that is priced either too high or too
low for the store’s target market.
2. Buying the wrong type of merchandise or buying
merchandise that is too trendy.
3. Having too much or too little basic stock on hand.
4. Buying from too many vendors.
Four Constraining Factors
of the Merchandise Mix
 Conflicts in Unit Stock Planning
• Successful retailers will:
1. Maintain a strong in-stock position on genuinely new items,
while trying to avoid the 90% of new products that fail.

2. Maintain an adequate stock of the basic popular items,

while having enough inventory money available for
unforeseen opportunities.

3. Maintain high merchandise turnover goals, while

maintaining high margin goals.

4. Maintain adequate selection for customers, while not

confusing them.

5. Maintain space productivity, while not congesting the store.

 Considerations When
Selecting a Merchandise Source
• Generally, one must consider such things as…
1. Selling history
2. Product quality
3. Consumers’ perceptions of the manufacturer
4. Reliability of delivery
5. Trade terms
6. Projected markup
7. After-sale service
8. Transportation time
9. Distribution center processing time
10. Inventory carrying costs
11. Country of origin
 Selecting a Vendor
• Retailers should always enter the market with two
pieces of information concerning vendors:
1. Vendor Profitability Analysis Statement
• Provides a record of all the purchases you have made over
the last year, the discounts received, transportation costs,
the original markup, markdowns, and season ending GMs

2. Confidential Vendor Analysis

• Same as the vendor profit analysis statement, but also
includes a 3 year financial statement, as well as
annotations on the vendor’s sales staff’s negotiating points
 Vendor Negotiations
• Negotiation
• Process of finding mutually satisfying solutions
when the retail buyer and vendor have conflicting
objectives.

• The essence of negotiation is to trade what is

cheap to you but valuable to the other party for
what is valuable to you but cheap to the other party
(i.e., collaboration – ref. handout and quiz).
 Vendor Negotiations
• Given price is often one of the first factors to
be negotiated, the buyer should be aware of the
different types of discounts available.
1. Trade (or functional) discount
2. Promotional discount
3. Seasonal discount
4. Quantity discount
5. Cash discount
 Delivery Terms
• Specify where title to the merchandise passes to
the retailer, who pays shipping costs, and who is
responsible for insurance/damage claims.
1. Free on Board (FOB) Factory
• The buyer assumes title at the factory and pays all transportation costs
from the factory.

2. Free on Board (FOB) Shipping Point

• The vendor pays the transportation to a local shipping point, but the
buyer assumes title there and pays all further transportation costs.

3. Free on Board (FOB) Destination

• The seller pays the transportation and the buyer takes title upon
delivery.
 In-Store Merchandise Handling
• The retailer must consider the employees’ and
customers’ rights to privacy versus the
retailer’s right to security.
• Retailers must not only plan to have the
appropriate amount of merchandise on hand
for customers but also ensure that the
merchandise purchased for the store shelves
actually arrives.
 In-store Merchandise Control
• Retailers must concern themselves with the
management and minimization of:
1. Vendor collusion

2. Employee theft

3. Customer theft
 What You Should Have Learned…
Chapter’s Learning Objectives
1. The major steps in the merchandise buying and handling
process.
2. Differences between the four methods of dollar merchandise
planning.
3. How retailers use dollar-merchandise control and describe
how open-to-buy is used in the retail buying process.
4. How a retailer selects proper merchandise sources.
5. What is involved in the vendor–buyer negotiation process
and what vendor contract terms can be negotiated.
6. Methods of handling the merchandise once it is received in
the store so as to control shrinkage, including vendor
collusion, and theft.