Subject: Apparel Merchandising

Unit 9: Sourcing and vendor management

Quadrant 1 – e-Text

Learning Objectives

The learning objectives of this unit are to:

 Explain the significance of buying function.

 Outline various buying responsibilities and sourcing hubs.

 Outline the vendor selection process.

 Outline the vendor evaluation process.

 Describe the importance of vendor development.

9.1 Sourcing

Sourcing is the term used to describe the process of determining how and where merchandise
will be procured. The different sources are: Manufacturers, Wholesalers, Middleman, Drop
Shipper, Broker, Contractor, and Co-operatives.

1. Manufacturers:

Offer goods for sale that they have produced. They are also referred to as vendors, suppliers or
resources.

2. Wholesalers:

They are the resellers of the merchandise. They buy merchandise in large quantities to break
down and then sell the goods in smaller quantities.

3. Middleman:

This is an agent who processes goods in one way or other from the manufacturer to the retailers.

a. Drop Shipper: They take the title to merchandise, but do not take actual possession of the
goods and just arrange shipment of the goods to the retailer.
b. Broker: He is a middleman who helps negotiate business between the buyer (retailer) and
seller (manufacturer).

4. Contractor:

Is an independent producer who performs aspects of manufacturing, such as sewing, cutting and
finishing.

Exclusive Contractor:

Is a supplier that only works for a particular company.

5. Cooperatives:

When a group of manufacturers or contractors work together for a company.

Domestic Sourcing:

Is the purchasing of the merchandise within the borders of the country.

The advantages are:

A faster lead time is usually available. It refers to the amount of time that lapses between the
placement of an order, and the arrival of the merchandise at the retail establishment.

More assurance of getting exactly what was ordered.

The main disadvantages are:

1. The cost of goods in apparel is often higher due to higher labour cost.

2. Close proximity to the source does not always.

International Sourcing is the process of buying goods offshore, from other countries. Buying
merchandise offshore and bringing it into another country to sell refers to importing or
purchasing imports.

After deciding on the amount and type of inventory to be purchased, the retailer must determine
the best possible vendor to supply these items, and negotiate the best deal possible with that
vendor.

Unless the retailer owns a manufacturing and/or wholesale operation, the retailer must consider
many criteria when choosing a supplier. When selecting a merchandise source, the retailer
should consider:
Selling history, Consumers' perception of the manufacturer's reputation, Reliability of delivery,
Trade terms, Projected mark-up, After-sale service, Transportation center processing time,
Inventory carrying cost, Country of origin, Fashionability and Net cost.

Retailers that use private label brands have found that private branding:

Increases as the perceived consequences of making a buying mistake decreases. Increases when
the different brands in the category are perceived to vary more in their quality, and decreases if
the category benefits are deemed to require actual trial / experience instead of being able to
assess through search of package label information.

9.2 Information on Current Vendors

1. Vendor profitability analysis statement

This lists the retailer’s purchases within the past year, the discount(s) granted by the vendor, the
transportation charges paid, original mark-up, markdowns, and the season ending gross margin
on each of the vendor’s products.

2. Confidential vendor analysis

This not only lists the same information as in the vendor profitability analysis statement, but also
provides a three-year financial summary and the names, titles, and negotiating points of all the
vendor's sales staff.

Classification of Vendors

Class A Vendors

These vendors and the retailer work together as partners. These are the vendors from which the
retailer purchases large and profitable amounts of merchandise.

Class B Vendors

These are the vendors that generate satisfactory sales and profits for the retailer.

Class C Vendors

These are the vendors who carry outstanding lines but do not currently sell to the retailer.

Class D Vendors
These are the vendors from whom the retailer purchases small quantities of goods on an irregular
basis.

Class E Vendors

These are the vendors with whom the retailer has had an unfavourable experience. After
selecting the vendors, the retailer should select the specific merchandise to be purchased after
considering the following key questions: Where does this product fit into the strategic position
that I have staked out for my department within my firm? Will I have an exclusive agreement
with this product? What is the estimated demand for this product in my target market? What is
my anticipated gross margin for the product?
Will I be able to get reliable, speedy replacement stock? Can this product stand on its own, or is
it a me-too item? What is my expected turnover rate with this product? Does this product
complement the rest of my inventory?

The climax of a successful buying plan is active negotiation with suppliers. The effectiveness of
the buyer-vendor relationship depends on the negotiation skills of the buyer and the economic
power of the firms involved. The retail buyer must negotiate prices, freight, delivery dates,
method of shipment and shipping costs, exclusivity, guaranteed sales, markdown money,
promotional allowances, return privileges, and discounts. The smart buyer will discuss
everything, leaving nothing to chance.

Price

Price is probably the first factor to be negotiated. The retailer should be aware of the following
five types of available discounts: Trade discounts, Quantity discounts, Promotional discounts,
Seasonal discounts and Cash discounts.

Trade Discounts

This is a form of compensation which the buyer may receive for performing certain services for
the manufacturer.

Quantity Discounts
Price reductions offered as an inducement to purchase large quantities of merchandise. There are
three types of quantity discounts:

1. Non-cumulative (based on single purchase).

2. Cumulative (based on total amount purchased over a period of time).

3. Free merchandise (merchandise is offered in lieu of price concessions).

Promotional Discounts
These are given when the retailer performs an advertising or promotional service for the
manufacturer.

Seasonal Discounts
These can be earned by retailers if they purchase and take delivery of goods in off seasons.
Seasonal Discounts can be earned by retailers if they purchase and take delivery of goods in off
seasons. Cash Discounts are earned by retailers for prompt payment of their bills.

9.3 Types of Cash Discounts

End of month (EOM)

An end of month dating allows for the cash discount and full payment period to begin on the first
day of the following month instead of on the invoice date.

Middle of month (MOM)

This dating is similar to EOM except that the middle of the month is used as the starting date.
Receipt of goods (ROG) dating sets the starting date as the date the goods are received by the
retailer.

Extra dating (Ex)

This merely allows the retailer some extra or free days before the period of payment begins.
Anticipation allows a retailer to pay the invoice in advance of the expiration of the cash discount
period and earn an extra discount.

Terms of Delivery
Delivery terms are also important to negotiate, because they specify where the title to the
merchandise passes to the retailer, whether the vendor or buyer will pay the freight charges, and
who is obligated to file any damage claims.
The three most common shipping terms are:

In the Free on board (FOB) factory, the buyer assumes title at the factory and pays all
transportation costs from the vendor's factory. In the 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. In the Free on board (FOB) destination, the seller pays the
freight and the buyer takes title upon delivery. Retailers need to have some means of handling
incoming merchandise, including merchandise handling and receiving space. Several types of
theft occur, and most can be controlled.

Vendor Collusion
Vendor collusion includes losses that occur when the merchandise is delivered.
Such losses, typically involve the delivery of less merchandise than is charged for, the removal
of good merchandise disguised as old or stale merchandise, and the theft of other merchandise
from the stockroom or the selling floor while making delivery.

Employee Theft

Employee theft occurs when employees believe that free merchandise is part of their pay.
Although some of the stolen goods come from the selling floor, a larger percentage is taken from
the stockroom to the employee lounge and lockers, where it is kept until the employees leave
with it at quitting time.

As many as 30% of American workers admit to stealing from their employers, even if it is only
small items like a pen or pencil. Employee theft, which amounts to over $800 per apprehension,
is most prevalent in food stores, department stores, and discount stores.

Customer Theft
Customer theft is also a problem. In fact over a dozen shoppers are caught for every case of
employee theft, although the average amount of merchandise recovered is under $50. Stealing
merchandise from the stockroom and receiving area may be easier than taking it from the selling
floor for several reasons:

Much of the stockroom merchandise is not ticketed, so it is easier to get it through electronic
anti-shoplifting devices. Once the thief enters the stock area, there is very little antitheft security.
Most security guards watch the exits and fitting rooms. There is usually an exit in the immediate
area of the stockroom through which the thief can carry out the stolen goods.

9.4 Vendor Management

The most basic role of a buyer is to seek, evaluate, select, cultivate and develop resources from
which suitable stock and information can be secured for the benefit of the store. The basic
responsibility of the buyer is to obtain the right goods from the right manufacturers for the
customer. Following the birth of ready to wear merchandise in 1920, fashion became the major
volume producer of numerous retail organizations. In short, fashion merchandising became a
specialization.

Two developments that occurred in the market are significant in how and where resources are
selected: Foreign markets and Regional markets. After the 2nd World War, retailers have
dramatically increased purchases of ‘foreign-produced merchandise’. In the past decade, several
‘regional markets ‘have been constructed in strategically located cities. The criteria for resource
selection are directly related to the type of organization and its segmented customer group –
potential customer.

One important question to consider while selecting resources is: How many resources are
necessary to achieve merchandising goals?
Here two, resource selecting extremes are: To concentrate on as few resources as possible and To
spread commitments on the basis of profit opportunity or broadened stock assortments.

Supplier of Fashion Goods

Supplier of fashion goods can be grouped in 3 major categories: Manufacturers, Wholesalers or

jobbers and Importers.

Manufacturers

Manufacturers are the most important supplier of fashion goods. They make or contract for
goods. Even contractors come under this category.

Wholesalers or Jobbers

Wholesalers or jobbers buy large quantities from manufacturers and resell them to smaller stores
which visit markets infrequently or not at all- mostly “mom and pop stores”. Mom and Pop
outlets are generally small stores operated by husband and wife, with limited capital, in a
restricted selling area and are very much dependant on wholesaler and or distributor for financial
support. Sometimes, wholesalers offer to buy close out / promotional goods. They buy at end of
season on discount-mixed colours and sizes.

Importers

Importers buy goods that are made overseas, merchandised produced in foreign countries and
then delivered to their country. Domestic merchandise is obtained by visiting the market.

When and how they visit the market depends on: Size of the department, speed at which the
market develops new styles, the lead time a market requires for delivery and distance of the store
from the market.

Some Thumb Rules

Large Store= High Inventory Level=More Trips.

Development of New Styles= More Trips.

Timing of market visits for sourcing are also dependent on price of the merchandise. The Highest
priced goods are developed first, moderate garments later and popular priced at the end.

Store buyers are not market specialists and cannot be in market on constant basis. So they have
Resident Buying Houses as their eyes and ears. However, the Open-to-Buy function only lies in
the hands of retail buyer. The buying house buyer can only buy with permission of the retail
store buyer.
Ordering
Orders are sent by store buyers in many forms. These include: Open order, Specific order,
Distribution order and Sample order.

Open order

In an Open order there is limited detailing. For example, there is an order to buy 25 coats at a
retail $ 50.00 in best colours. Here, the resource is discretionary and the buying house
representative exercises judgement.

Specific order

In a Specific order, all details such as manufacturer, styles, colour and sizes are listed.

Distribution order

A Distribution order is sent by the buying house resident buyer to selected stores, where they feel
that the merchandise represents market newness. If a store buyer feels it has place in the stock
and he has an open to buy-for it, a confirmation is sent for placement with manufacturer.

Sample order

This depends on the relation between the store buyer and resident buying house representative. If
the store buyer has confidence in the resident buyer, limited discretion is given, so that if
anything new is in the market that deserves representation, then an order of modest size can be
placed without specific approval.

Example: An open order of 6 pieces of any selected style on weekly basis.

Majority of fashion firms have representatives who are largely commission sales agents, who
visit stores, to obtain orders. They establish a good relationship with the buyers and are able to
offer advice about styles and trends too.

Many countries have marts or regional apparel markets and market weeks which attract many
buyers and apparel manufacturers as common meeting ground. Apparel marts become cities
where buyers can select resources in an environment that contains, theatres, restaurants, basic
medical facilities, living quarters etc. Orders can be confirmed by Telephone and emails.

9.5 Methods of Obtaining Foreign Merchandise

The easiest way to secure foreign merchandise is to buy from the Importer who stocks goods.
The main advantages are limited transportation costs, shorter delivery terms and responsibility
for the goods. The disadvantages are the same merchandise is available to other stores and
additional mark-up cannot be obtained so resident buying offices are very important due to
importance of foreign merchandise.
The advantages of Buying from a Foreign Market are: Prices can be cheaper making
promotionally priced goods available. Certain products are not available in the countries like the
US, so they get a wide variety of art, crafts, techniques and machine know-how. Exclusivity of
styling based on specification merchandising offers a store improved mark-up potential. Certain
foreign merchandise has status meaning. There is also the opportunity to the store to offer a
wider variety of merchandise.

Objections to Foreign Markets

Extended trips means extended absences of buyer from store. This is a costly venture-living,
travelling in another country. Commitments are for long periods, reorders may not be filled for
timely selling. Specifications of foreign merchandise may not always be made as per American
consumption, though has been taken care of to large extent with close monitoring and standard
specs. Because of the required lead time, the buyer must predict fashion acceptance-a job that
domestic manufacturer usually takes. Now the practice is widespread, so exclusivity to foreign
merchandise is not very rare. A store depends on the buyers’ ability of handling the hazards like,
inaccurate assessment of fashion trends, deep commitment, long delivery lead time etc.

Domestic Manufacturers vs. Foreign Manufacturers

The advantages of working with domestic manufacturers are: Faster delivery. There is proven
specification of merchandise. Relationship with manufacturer results in certain other advantages
this includes the availability of merchandise in selected quantities, the availability of faster
reorders. Responsibility of merchandise received and the ability to test the selling rate. There is
also the opportunity to weigh line the importance to total market. Planning and control of stock is
comparatively easy. Permits stock adjustments to new trends.

Whatever the values, stores recognize the present need for both types of resources, with heavier
concentration on the domestic market for the reasons cited. The markets in general became
global after World War II.

9.6 Criteria for Selecting Vendors and Suppliers

Many sources of information are available to learn where resources are located, what they
manufacture, and their level of success.

This includes: Resident buying house, Competing stores, Reporting services, Other buyers,
Market centers, Trade advertising, Trade directories, Observation at events, affairs etc., Unit
control records reveal a complete record of every manufacturer used by a store. This includes
information on delivery, selling, customer relations, mark-ups and mark-downs.

Factors to Remember while Selecting Suppliers

The most important factors that a buyer keeps in mind while selection of suppliers are:
Appropriate merchandise for customer group, Manufacturers distribution policies, Timing-
fashion leader or fashion follower (depending on stores target customer group), Specifications,
Retail price maintenance, Clearance policies, Delivery policies, Advertising policies, Prices and
terms, Brand identification.

Appropriate Merchandise for Customer Group

While selecting appropriate merchandise for customer groups the quality, styling and price
ranges are taken into consideration. Some style distinctiveness must be offered which is
important for customers.

Manufacturers Distribution Policies

The Buyer asks: What do you sell in my area?

Three general distribution policies followed by a manufacturer are: A franchise applies to limited
number of stores sometimes on an exclusive basis in the trading area, time or part of line.
Selecting this involves a controlled number of stores within a trading area, based on population
and potential volume availability. In Open, anyone with good credit rating can buy.

Timing

Design name manufacturers sell to retailers who have high income bracket customers and are
part of the early acceptance group. Their styles show fashion leadership. Medium priced vendors
follow the leaders. Popular or budget priced vendors follow the majority accepted styles. Also
reorder policy of vendor.

Specifications
Characteristics of fit, quality and style represent know-how. The garments should fit well.
Popular priced buyers should take care of checking fits, from time to time, as budget
manufacturers tend to make garments in less than ample proportions in order to save material
cost.

Retail Price Maintenance

Retail price maintenance is directly related to the selling rate of goods. A poor selling style will
be marked down. When the markdown takes place depends on the policy of the store, amount of
merchandise stocked and time of the year.

Many retailers do not use a resource whose goods are found in a discount store. But sometimes,
they make exceptions for foreign resources who supply a wide assortment of goods to anyone
with money.

Clearance Policies
No merchant at manufacturing or retail levels can sell all the goods handled. Some will be
leftover. Retailers use store promotional events or EOSS (End of Season Sale) to dispose this
extra stock. A manufacturer, sells to stores or wholesalers as per his distribution policy, quantity
and nature of goods.

Delivery Policies

Two situations important for buyer:

 When the original orders are delivered and in what quantity.

 Time for reordering.

A manufacturer knows that the stock preparation for reorders, without early retail success is
hazardous. Stores dislike broken shipments of colours and sizes as this may lead to customer
dissatisfaction.

Advertising Policies

The retail truth is a buyer should not buy advertising. Goods should be bought only on merit.

Prices and Terms

It is the buyer’s job to evaluate the level of merchandise offerings, and to determine whether
goods are competitively priced. Most manufacturers are firm in pricing, except off-price and
promotional items, where they may be open to negotiation.

Brand Identification

In fashion merchandise, a designer name is considered a brand name. The inclusion of a brand
name becomes a tactic of the store in its attempt to apparel to its customers. But brand
requirement necessitates a certain amount of stock each season. Overstocking brands, limits
money available for market development of unbranded merchandise.

Classification of Resources

Resources can be classified in a number of ways, such as: Key or preferred resources, Stock
resources, Item resources, Classification resources, Secondary resources, Shopping resources and
Trouble resources.

Key or Preferred Resources are the most profitable money makers.

Stock Resources have a good success and stocked on fairly regular basis but level is lower than
key.

Item Resources are used for specific styles, events based on fashion and promotional needs.
For example, a firm may be famous for blue jeans, but offer complete sportswear lines. A buyer
may buy one item, the jeans and bypass al other items.

Classification Resources are specialists in given classification, such as bathing suits, pants and
leather jackets.

Secondary Resources are used on sporadic basis, when styles suitable for keeping in stock.

Shopping Resources are good resources, but with whom there is no reason to do current
business. They are in the potential and the manufacturer hopes they will get a chance to supply
sometime in the future.

Trouble Resources have been omitted from the shopping list, as they have had quality issues,
defects in merchandise, lack of timely delivery etc.,

Benefits from a Close Relationship between a Store and a Resource

By limiting the number of resources the buyer can establish good relation with existing ones.
Markdown money for styles that are sold poorly. Returns of poor selling styles. Manufacturers
fashion shows in stores (trunk showings). Interior displays (racks, blow-up advertisements).
Specification merchandise made exclusively for store.

Problems that can arise due to overconfidence in limited resources could be: Merchandise may
not be delivered as ordered for styles, colours and quantities. The manufacturer, certain of
arrangements, may look for new markets to conquer and flirt with competition. A buyer may
become lethargic and make little attempt to cultivate new resources. New trends may escape
attention, because of lack of market exposure.

Vendor Partnership

A working relationship formed to achieve a mutually beneficial goal between the retailer and the
vendor. Causes of Conflicts between retailers and vendors are: Cancellation of merchandise by
the retailer, substitution of merchandise by the vendor, merchandise returns and adjustments,
delivery and transportation, exclusivity, special orders, reorders and minimum orders, discounts
and allowance as well as unreasonable conduct and dishonesty.

9.7 Techniques of Successful Vendor Negotiations

Act collectively not competitively.

Prepare and gather as much information as possible about the parties.
Know what you want. Don’t let your ego get in the way.
Learn to make time your ally.
If you can’t agree on point one, go to point two.
Be a Creative Risk taker.
Close the Negotiation at the right time.
Develop long term Relationships.

Some matters that are frequently negotiated:

Obtaining specific merchandise (for promotions or other specific needs.

Extra mark-up or markdown money (to help with profitability).
Transportation and delivery charges (to reduce costs).
Cooperative advertising (for media costs or in-store promotions).
Terms of sale (conditions in a purchase agreement between retailer and vendor that include
discounts, delivery and transportations costs).
Dating: A predetermined amount of time during which discounts can be taken and the invoice is
to be paid.

9.8 Conclusion
To summarize, in this unit you have learnt about the various responsibilities of buying and the
importance of vendor development.