THE METHODS OF MERCHANDISING

PROCUREMENT
 Merchandise Sourcing
 The first decision that has to be considered whether
merchandise should be sourced from:
•Domestic market
•Regional market
•International market
Basically it depends upon the type of:
•Retail format
•Product being offered
•Target consumer
•Example: Product like high fashion garments, exclusive
watches, perfumes, cosmetics etc., may obtained from the
international market.
 FIVE- STEPS PROCESS OF MERCHANDISE
BUYING
Identifying the
Source of
supply
Contacting &
Evaluating the
Sources of
Supply

Negotiation

Establishing
Vendor
relations
Analysis of
Vendor
Performance
 IDENTIFYING THE SOURCE OF SUPPLY

1. By visiting Central Market, Trade

Shows, expositions.

2. It helps the buyer to understand the

trends in the market and to evaluate
the new resources and merchandise
DOMESTIC
offerings.
MARKET
3. In case of agriculture produce, many
retail chains reaching out to farmers
& even investing in concepts like
contract farming.

4. Example: Reliance retail—sourcing

of Spices (EXHIBIT 1.1)
 RETAIL SNAPSHOT: 1.1 RELIANCE RETAIL—sourcing of
spices

In a development that could augur well for spice growers,

retail major Reliance Retail is in the process of making
KERALA its national sourcing centre for spices.
The items that the retail major has identified to be
sourced are pepper, cardamom, nutmeg, turmeric and dry
ginger etc.
Round the year demand from the retail major would ensure
a steady income for growers, sources said. Moreover,
support operations like the logistics of sourcing operations,
cold chain maintenance and procurement operations would
have the state as their focal point.

Cont…
 RETAIL SNAPSHOT: 1.1 RELIANCE RETAIL—sourcing of
spices
Though some of the identified items are available elsewhere
also, what clinched the deal in favour of the state is the
superior quality of spices that it produces. Reliance Retail has
already started buying ginger from the state in small
quantities, to sell in all south Indian states. Presently, ginger
from the state is sold in Bangalore, Hyderabad and Chennai.
Farmers expect that the requirement would be huge when the
operations of the company start in full swing. KERALA
accounts for 95% of the pepper that is produced in the
country. In the case of cardamom and nutmeg, the state’s
share is 75% and 95%, respectively. However, Kerala’s share in
ginger and turmeric production has come down in recent years
to 12% and 2%, respectively. As for vanilla, the share of the
state is 50%. For many of these crops, especially cardamom
and vanilla, farmers have been facing fluctuating price trends.
 IDENTIFYING THE SOURCE OF SUPPLY

1. This is common trend in the West

where trade barriers are considerably
lower.
INTENATIONAL 2. Reasons:
MARKET 1. Uniqueness of the merchandise
or unavailability of the merchand-
ise in domestic market.
2. Low cost & good quality of
merchandise.
Common methods of gathering information about new
suppliers would include:
•Talking to Salesperson
•Trade magazines
•Yellow pages
•Visiting trade exhibitions
CONTACTING & EVALUATING THE SOURCE OF SUPPLY
It involves two types of contacts:-
•Vendor initiated contacts: (Representative visit the office
& meet the buyer and showcase collection of merchandise
Retailer initiated contacts: ( the buyer visiting the Central
Market Place)

Central Market Place:

•It is characterized by a collection of a large number of
suppliers selling similar or the same product
•May be different for different products & would vary from
city to city.
•Example: Manish Market & Crawford Market in Mumbai
Khan Market in New Delhi
CONTACTING & EVALUATING THE SOURCE OF SUPPLY
Evaluation criteria would vary from retailer to retailer: Key
factors which need to be kept in mind are:

The suitability and quality of the merchandise

The price that is charged

The adaptability of the supplier to the requirements of the

Retailers in terms of delivery schedules, adjusting
production, quantity discounts, Recycling & repackaging
of products, participating in schemes, Promotions &
advertising.

The Vendor’s reputation and reliability

 NEGOTIATION WITH VENDORS

 The retailer needs to negotiate :

•The price
•The delivery dates
•The discounts
•The shipping terms and possibilities of returns

Simultaneously, the buyer needs to be:

•aware of real deadlines and
•able to work towards fulfilling them
 The types of discounts that could be available to the buyer

Trade Discounts
These are reductions in the manufacturer’s suggested retail
price, granted to wholesalers or retailers.

Trade discounts are often expressed in a chain, or series,

such as “List less 40-20-10”.
Quantity Discount
 This can be cumulative and non-cumulative; retailers earn
quantity discounts by purchasing certain quantities over a
specified period of time

 Cumulative discount:
A discount based on total amount purchased over a
period of time.

•Non-cumulative discount:
A discount based on a single purchase
Seasonal Discount
 Retailers can earn a seasonal discount if they purchase
and take delivery of the merchandise in the off-season

Cash Discount
 The final discount available to the buyer is a cash discount
for prompt payment of bills.
 Cash discounts are usually stated as 2/10. net 30, which
means that a 2 percent discount is given if payment is
received within 10 days of the invoice date and the net
amount is due within 30 days
 ESTABLISHING VENDOR RELATIONS

 To maintain strategic partnerships with vendors, the buyer

needs to build on:
 ANALYSING VENDOR PERFORMANCE

 Each retailer have his own criteria for the selection of

vendors
 Retailer has to scrutinize vendor registration form indicating
details of address, preferred mode of payment, sales tax
number, etc.
 Vendor performance can be checked by listing out the
following:
The total orders placed on the vendor in a year
The total returns to the vendor—the quality of the
merchandise
The initial markup on the products
 ANALYSING VENDOR PERFORMANCE

The markdown, if any

 Participation of the vendor in various schemes and
promotions
 Transportation expenses if borne by the retailer
 Cash discounts offered by the vendor
 The sales performance of the merchandise

A proper vendor analysis is necessary for evaluating

vendor performance and determining whether to continue
with the same suppliers or to find new ones.
 ANALYSING VENDOR PERFORMANCE

Key criteria considered while analysis vendor performance

are:
Gross margin contribution
Adherence to company policy
Customer acceptance level
Merchandise quality
 STOCK KEEPING UNIT
SKU’s or Stock Keeping Unit are commonly referred to, are the individual
products that the store carries, defined by brand, size, colour, price, style
and pattern.
Let us understand with the help of an example.
Let us assume that the merchandise line under consideration is men’s
formal shirts.
The department store under consideration, stocks three different brands
of shirts—Arrow, Louis Philippe and Van Heusen.
The store then needs to stock them in different sizes, colours, styles, and
price.
Let us assume that the store stocks them in four sizes, at five different
price points, in five colours and in two styles each.
Their total would determine the total number of SKU’s in that particular
merchandise line.
Thus, e.g., Depth of Product Mix – Shirts
3 brands – (Arrow, Louis Philippe, Van Heusen) = 3 SKU’s
X 4 sizes = 12 SKU’s
X 5 price points = 60 SKU’s
X 5 colours = 300 SKU’s
X 2 styles = 600 SKU’s

Can you imagine the magnitude of the SKU’s that a large

department store, or a large grocery store or hypermarket
would handle?

Basic reason behind this is to provide the consumer with the

right product at the right place.
Discussion