Implementing Retail Merchandise Plans

The implementation of merchandise plans comprises the eight sequential steps shown in Figure 15-1 and discussed next.

Gathering Information

After overall merchandising plans are set, more information about target market needs and pro­spective suppliers is required before buying or rebuying merchandise. In gathering data about the marketplace, a retailer has several possible sources. The most valuable is the consumer. By regularly researching target-market demographics, lifestyles, product preferences, and potential shopping plans, a retailer can learn about consumer demand directly. Loyalty programs and social- media comments are especially useful in tracking consumer purchases and interests.

Other information sources can be used when direct consumer data are insufficient. Suppliers (manufacturers and wholesalers) usually do their own sales forecasts and marketing research (such as test marketing). They also know how much outside promotional support a retailer will get. In closing a deal with the retailer, a supplier may present charts and graphs, showing forecasts and promotional support. Yet, the retailer should remember that it is the party with direct access to the target market and its needs.

Retail sales and display personnel interact with consumers and can pass their observations along to management. A want book (want slip) system is a formal way to record consumer requests for unstocked or out-of-stock merchandise. It is very helpful to a retailer’s buyers. Aside from customers, salespeople may provide the most useful information for merchandising decisions.

Competitors represent another information source. A risk-averse retailer may not stock an item until competitors do and may employ comparison shoppers to study the offerings and prices of competitors. The most sophisticated comparison shopping involves the use of Web-based

FIGURE 15-1 The Process for Implementing Merchandise Plans

FIGURE 15-2 A Competition Shopping Report

Learn why High Point (www.highpointmarket.org) is a world-class trade show.

California Market Center (www .californiamarketcenter .com) offers a lot of online information for retailers.

COMPETITION SHOPPING REPORT

Store #_________ Date__________________________________________________________________

Dept. #________ Qualified Competition Shopped:

1.____________________________________ 2.____________________________________ Our Style No. Mfr. Model or Style Description Our Price 1st Compet. Price 2nd Compet. Price Store’s Recom. Price Buyer’s Recom. Price

Item Seen at Our Competitor’s Store Which We Should Carry:
Manufacturer	Mfr. Model or Style	Description	Reg. or List Price	Sale Price	Buyer’s Comments

Signature of Shopper                                                                         Store Manager

shopping bots (Web robots) such as mySimon.com, whereby competitors’ offerings and prices are tracked electronically. Rakuten.com, for one, constantly checks its prices to make sure that it is not undersold. In addition, trade publications report on trends in each aspect of retailing and provide another way of gathering data from competitors. Figure 15-2 is an example of a competi­tion shopping report.

In addition, government sources indicate unemployment, inflation, and product safety data; independent news sources conduct their own consumer polls and do investigative reporting; and commercial data can be purchased.

To learn about the attributes of specific suppliers and their merchandise, retailers can do the following:

Talk to suppliers, get specification sheets, read trade publications, and seek references.

• Attend trade shows that feature numerous exhibitors (suppliers). There are hundreds of trade shows yearly in New York. In Paris, the semiannual Pret a Porter show attracts representa­tives of more than 700 apparel brands and 50,000 attendees. The National Hardware Show in Las Vegas has 2,800 exhibitors and 30,000 attendees each year. The High Point Furniture Market in North Carolina has semiannual shows that attract more than 2,000 manufacturers and 75,000 attendees—from all 50 states and 110 countries.
• Visit year-round merchandise marts such as AmericasMart Atlanta (americasmart.com); California Market Center in Los Angeles (www.californiamarketcenter.com); Dallas Market Center (www.dallasmarketcenter.com); and The Mart in Chicago (http://themart.com). These marts have daily hours for permanent vendor showrooms and large areas for trade shows.
• Search the Web. One newer application is GoExhibit (goexhibit.com). A trade show coordinator can use this Web-based application to create a 3D virtual reality environment of a trade show on a Web site. Like a physical trade show, the coordinator can add and design booths, modify the exhibit hall layout, and manage exhibit hall features. In addition, the
  coordinator can view and analyze trade-show chatter among attendees, as well as traffic counts and flow at exhibits—which are difficult to do at a traditional trade show. Attendees can access product information visit booths and chat with exhibitors and other attendees. Other technology allows exhibitors to stream on-demand webinars 24/7 anywhere in the world.³

Whatever information acquired, a retailer should feel comfortable that it is sufficient for good decision making. For routine decisions (staple products), limited information may be adequate. On the other hand, new fashions’ sales fluctuate widely and require extensive data for forecasts.

Selecting and Interacting with Merchandise Sources

The next step is to select merchandise sources and to interact with them. Three major options exist:

Company-owned: A large retailer owns a manufacturing and/or wholesaling facility. A company-owned supplier handles all or part of the merchandise the retailer requests.

• Outside, regularly used supplier:This supplier is not owned by the retailer but used regu­larly. A retailer knows the quality of merchandise and the reliability of the supplier from its experience.
• Outside, new supplier:This supplier is not owned by the retailer, nor has the retailer bought from it before. The retailer may be unfamiliar with merchandise quality and supplier reliability.

A retailer can rely on one kind of supplier or use a combination (the biggest retailers often use all three formats). The types of outside suppliers (regularly used and new) are described in Figure 15-3. In choosing vendors, the criteria listed in the Figure 15-4 checklist should be considered.

Big Lots places emphasis on supplier relations (www .biglots.com/corporate/ vendors).

Big Lots, which buys merchandise to stock its national chain of closeout stores, can attest to the complicated process of choosing suppliers. An important competitive advantage of its business model is to opportunistically purchase quality brand-name merchandise directly from manufactur­ers, vendors, and, in some cases, bankruptcies, liquidations, and insurance claims at substantially lower prices than those paid by traditional retailers. It buys significant quantities of a vendor’s closeout merchandise in specific product categories and controls distribution in accordance with vendor instructions. In addition, purchases are supplemented with direct import and domesti­cally sourced merchandise in some departments. The firm purchases 24 percent of merchandise directly from overseas vendors, including 20 percent from vendors in China.⁴

Retailers and suppliers often interact well together, as highlighted in Figure 15-5. Other times, there are conflicts. As noted earlier, relationship building can be invaluable. Yet, there remain sore points between retailers and suppliers. On the one hand, many retailers have beefed up their use of private brands because they are upset when suppliers such as Gucci open their own stores in the same shopping centers. Most Gucci sales now come from company-owned and franchised shops. On the other hand, many suppliers are distressed by what they believe is retailers’ exces­sive use of chargebacks, whereby retailers, at their sole discretion, make deductions in their bills for infractions ranging from late shipments to damaged and expired goods. Some suppliers have even taken their retailers to court over the practice. Attain Consulting Group divides chargebacks into three categories:⁵

• Intentional deductionsare offered by manufacturers to retailers with the goal of increasing the revenue of the manufacturers. Examples are discounts, rebates, advertising, and markdown allowances that provide retailers with an extra incentive to promote products.
• Unauthorized deductionsare not foreseen by manufacturers. Examples are retailer charge­backs for alleged merchandise shortages, customer returns to the retailer, and allegations of price discrepancies from what the retailer agreed to pay. Some retailers are aggressive in applying unauthorized deductions.
• Preventable deductionscan be avoided by manufacturers through better performance. These deductions are due to suppliers not fully complying with retailers’ rules as to order fulfillment, shipper routing, container labeling, shipment documentation, or E-commerce practices. For example, a retailer might require that shipments be labeled with a specific barcode or that every item be folded and marked with the suggested retail price.

Selecting merchandise sources must be viewed as a two-way street. Given the growth of E-commerce, many manufacturers sell products online directly to customers. Most manufacturers

FIGURE 15-3 Outside Sources of Supply

take into account their retailers’ or resellers’ commercial interests and keep prices on their direct E-commerce sites high enough so retailers can still be competitive. Some manufacturers do not, however; prices on those manufacturer Web sites may be equal to or lower than retailers’ whole­sale prices. The retailer has to pay for logistics, warehousing, rent, and employee salaries and may not be able to be competitive.⁶ Many retailers are able to counter the entry of manufacturer flagship stores by offering enhanced services and product add-ons.

Evaluating Merchandise

Whatever source is chosen, there must be a procedure to evaluate the merchandise under con­sideration. Three procedures are possible: inspection, sampling, and description. The technique depends on the item’s cost, its attributes, and purchase regularity.

Inspection occurs when every single unit is examined before purchase and after delivery. Jewelry and art are examples of expensive, rather unique purchases for which the retailer care­fully inspects all items.

Sampling is used with regular purchases of large quantities of breakable, perishable, or expen­sive items. Because inspection is inefficient, items are sampled for quality and condition. A retailer ready to buy several hundred light fixtures, bunches of bananas, or inexpensive watches does not inspect each item. A number of units are sampled, and the entire selection is bought if the sample

FIGURE 15-4 A Checklist of Points to Review in Choosing Vendors

■/ Reliability—Will a supplier consistently fulfill all written promises?

■/ Price-quality—Who provides the best merchandise at the lowest price? y Order-processing time—How fast will deliveries be made?

y Exclusive rights—Will a supplier give exclusive selling rights or customize products? y Functions provided—Will a supplier undertake shipping, storing, and other functions, if needed? y Information—Will a supplier pass along important data?

y Ethics—Will a supplier fulfill all verbal promises and not engage in unfair business or labor practices? y Guarantee—Does a supplier stand behind its offerings? y Credit—Can credit purchases be made from a supplier? On what terms? y Long-term relationships—Will a supplier be available over an extended period? y Reorders—Can a supplier promptly fill reorders? y Markup—Will markup (price margins) be adequate? y Innovativeness—Is a supplier’s line innovative or conservative? y Local advertising—Does a supplier advertise in local media? y Investment—How large are total investment costs with a supplier? y Risk—How much risk is involved in dealing with a supplier?

is okay. An unsatisfactory sample might cause a whole shipment to be rejected (or a discount negotiated). Sampling may also occur upon receipt of merchandise.

Description buying is used with standardized, nonbreakable, and nonperishable merchandise. Items are not inspected or sampled; they are ordered in quantity based on a verbal, written, or pic­torial description. A stationery store can order paper clips, pads, and printer paper from a catalog or Web site. After it receives an order, only a count of those items is conducted.

Negotiating the Purchase

FIGURE 15-5 Every Link Must Be Strong in Supplier-Retailer Relationships So long as every member of a retail distribution channel is on the same page, they will interact well and cooperate to reach the same goal—to satisfy the customer. If one party disappoints, the retailer and the customer will not be satisfied. Source: cosma/Shutterstock. Reprinted by permission.

Next, a retailer negotiates purchase terms. A new or special order usually leads to a negotiated contract, and a retailer and a supplier carefully discuss all aspects of the purchase. A regular order or reorder often involves a uniform contract, because terms are standard or have already been set and the order is handled routinely.

Off-price retailers and other deep discounters may require negotiated contracts for most pur­chases. These firms employ opportunistic buying, by which especially low prices are negotiated for merchandise whose sales have not lived up to expectations, end-of-season goods, items con­sumers have returned to the manufacturer or another retailer, and closeouts. TJX is different from typical retailers that place merchandise orders well in advance of the selling season. Its buying organization has more than 1,000 associates in 15 buying offices in 11 countries and executes an opportunistic buying strategy depending on market conditions. This allows TJX to have better insights into fashion and market trends, as well as pricing—and it provides more flexibility to expand or contract product categories since TJX buys closer to the time merchandise is sold, thus reducing the need for markdowns. It acquires merchandise on an ongoing basis from many sources so as to offer a desirable and rapidly changing mix of branded designer and other quality merchan­dise for less than the regular prices for comparable merchandise at department and specialty stores.⁷

Several purchase terms must be specified, whether a negotiated or a uniform contract is involved. These include the delivery date, quantity purchased, price and payment arrangements, discounts, form of delivery, and point of transfer of title, as well as special clauses.

Delivery dates and quantity purchased must be clear. A retailer should be able to cancel an order if either provision is not fulfilled. The purchase price, payment arrangements, and permis­sible discounts must also be addressed. What is the retailer’s cost per item (including handling)? What forms of payment are permitted (cash and credit)? What discounts are given? Retailers’ purchase prices are often discounted for early payments (“2/10/net 30” means there is a 2 percent discount if the full bill is paid in 10 days; the full bill is due in 30 days); support activities (setting up displays); and quantity purchases. Stipulations are needed for the form of delivery (truck, rail, and so on) and the party responsible for shipping fees (FOB factory—free on board—means a supplier places merchandise with the shipper, but the retailer pays the freight). Last, the point of transfer of title—when ownership changes from supplier to buyer—must be stated in a contract.

To learn more about the slotting allowance controversy, visit this Web site (www.customdirect .com/slotting-fees- expensive-battle-shelf- space).

Special clauses may be inserted by either party. Sometimes, they are beneficial to both parties (such as an agreement about the advertising support each party provides). Other times, clauses are inserted by the more powerful party. A major disagreement between vendors and large retailers is the latter’s increasing use of slotting allowances—payments that retailers require of vendors for providing shelf space, which varies based on number of product facings, prominence on a shelf or location within the store. Slotting fees were investigated by the Senate and Federal Trade Commission (FTC) in the 1990s, since they reduce product variety for customers and is anti­competitive, a disadvantage for new or small manufacturers. The proprietary nature of negotiations on slotting allowances and the ensuing vertical contracts made it difficult for the FTC to ban slotting allowances because of lack of empirical evidence.⁸

Unlike many other retailers, industry leader Walmart does not charge any slotting allowances and often gets new products first from suppliers as a result of this policy.

Concluding Purchases

There is EDI/QR software (http://edi.gxs.com) to fit almost any budget.

Many medium-sized and large retailers use computers to complete and process orders (based on electronic data interchange [EDI] and quick response [QR] inventory planning), and each purchase is fed into a computer data bank. Smaller retailers often write up and process orders manually, and purchase amounts are added to their inventory in the same way. Yet, with the advances in computerized ordering software, even small retailers may have the capability of placing orders electronically—especially if they buy from large wholesalers that use EDI and QR systems.

Multiunit retailers must determine whether the final purchase decision is made by central or regional management or by local managers. Advantages and disadvantages accrue to each approach.

Several alternatives are possible regarding the transfer of title between parties. The retailer’s responsibilities and rights differ in each of these situations:

The retailer takes title immediately on purchase.

• The retailer assumes ownership after items are loaded onto the mode of transportation.
• The retailer takes title when a shipment is received.
• The retailer does not take title until the end of a billing cycle, when the supplier is paid.
• The retailer accepts merchandise on consignment and does not own the items. The supplier

is paid after merchandise is sold.

Opportunistic Buying by Discounters

Buyers for membership (warehouse) clubs and off-price chains such as Burlington Coat Factory (now known simply as Bur­lington) and Marshall’s often engage in opportunistic buying. Buyers for specialty stores and department stores—who buy much of their merchandise from traditional sources—purchase merchandise 8 to 10 weeks ahead of the selling season, pur­chase a full range of sizes and colors, and are strictly governed by open-to-buy restrictions. In contrast, opportunistic buyers purchase goods from a variety of nonrecurring sources, often
acquire end-of-season merchandise, may purchase odd lots (bro­ken sizes), and are less constrained by budgets developed at the beginning of a year. Opportunistic buying results in retail prices so low that many shoppers can’t resist, even though an item was not on their shopping list.

Evaluate the pros and cons of an opportunistic buyer’s pur­chasing end-of-season merchandise versus broken lots (unequal size distributions) for men’s clothing.

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A consignment or memorandum deal may be possible if a vendor is in a weak position and wants to persuade retailers to carry its items. In a consignment purchase, a retailer has no risk because title is not taken; the supplier owns the goods until sold. An electronic version (scan- based trading) is being tried at some supermarkets. It saves time and money for all parties due to paperless steps in a purchase. In a memorandum purchase, risk is still low, but a retailer takes title on delivery and is responsible for damages. In both cases, retailers do not pay for items until they are sold, and they can return them.

Receiving and Stocking Merchandise

The retailer is now set to receive and handle items. This involves receiving and storing, checking and paying invoices, price and inventory marking, setting up displays, figuring on-floor assort­ments, completing transactions, arranging delivery or pickup, processing returns and damaged goods, monitoring pilferage, and controlling merchandise. See Figure 15-6. Good distribution management is key.

Items may be shipped from suppliers to warehouses (for storage and disbursement) or directly to retailers’ store(s). The Walgreens drugstore chain has fully automated warehouses that stock thousands of products and speed their delivery to stores. Amazon.com uses U.S. and international fulfillment centers and warehouses that it operates itself, as well as fulfillment centers that are operated under co-sourcing arrangements.

One important emerging technology that may greatly advance the merchandise tracking and handling process for retailers involves an RFID (radio frequency identification) system—a method of storing and remotely retrieving data using devices called RFID tags or transponders. In an RFID system, information is sent via RFID tags by a reader that uses radio waves. In a pas­sive system, which is the most often utilized, an RFID reader provides the power for the tag to

FiGURE 15-6

Receiving and Verifying Inventory

Every time merchandise orders are received by the retailer, they must be verified in terms of the quantity, assortment, and condition of the goods.

Source: Marcin Balcerzak/ Shutterstock. Reprinted by permission.

communicate with the reader. In an active system, a battery in the RFID tag boosts the effective geographic range of the tag and supports other features not available with passive tags, such as sensing temperature changes in the environment. Data from RFID tags go through communication interfaces to host computers in a manner similar to that involving barcode labels—with data sent to computer systems to interpret, store, and act upon.

In comparison to a barcode, an RFID system has greater range and speed. An RFID tag can be read from many feet between the tag and a scanner. In addition, unlike a barcode, the RFID tag does not have to be passed along the line of sight of the scanner. There are two types of RFID tags: passive and active. Passive tags have unpowered chips that are programmed with data. These tags must be near a hand-held or fixed-position reader to be read. With passive RFID tags, the tags and reader can be purchased from different manufacturers. Active tags are internally powered, and can be read from a range of several hundred feet and located in a single central location. These tags and machinery are proprietary and must be purchased from the same manufacturer.

One study found that 78 percent of retailers received at least some RFID tagged merchandise (mostly apparel and footwear). On average, 40 percent of items made by apparel and general merchandise manufacturers have RFID tags.⁹ Suppliers are responsible for most of the work and costs. The costs for an RFID system include computer equipment, network configuration, backup systems, software, cabling, and installation. Fortunately, the price of RFID tags has dropped to 10 cents for a basic passive RFID tag and $15 to $20 for an active RFID tag.¹⁰

Macy’s is aware that, even though the accuracy of inventory data is 95 percent or better at the warehouse level, it’s very different at the store level. Because of such factors as pilferage and errors associated with the checkout procedure (a cashier can scan the same shirt three times, when a customer purchases three different colors), inventory accuracy at the store level can be 60 to 70 percent during the holiday season. Macy’s began using RFID technology in 2011, initially to maintain inventory information on a group of products (denim, men’s basics, and women’s intimate apparel) that accounted for 30 percent of sales. Due to the RFID success with these goods, Macy’s now uses RFID tags to allow fulfillment of omnichannel orders where only one unit is shown to be available in-store. Prior to RFID adoption, inventory counts—especially when only one unit was listed as being in inventory—were not reliable.¹¹

At present, RFID use is still somewhat limited. It is too early to predict how widespread RFID use will be or how long it will take to be accepted by most retailers and their suppliers. Suppliers are responsible for most of the work and costs. The current costs for an RFID system range from under $100,000 to $300,000 for a small or medium-sized supplier to several million dollars for a large supplier. Both retailers (such as Macy’s, Lululemon, and Athletica) and suppliers (such as Levi Strauss and Co.) benefit from using RFID systems.

Item-level RFID tagging at the source improves inventory accuracy by up to 80 percent, stock visibility and availability, and loss prevention, and allows identification of an item throughout an entire supply chain of an omnichannel retailer. RFID tags in apparel retailing can typically cut out-of-stocks by up to 50 percent, saving 80 percent of the time needed for inventory management. Item-level RFID tagging by suppliers at source also reduces chargebacks, efficiently audits every item in cartons without opening them, and reduces inventory audit and packing times.¹²

As orders are received, they must be checked for completeness and product condition. Invoices must be reviewed for accuracy and payments made as specified. This step cannot be taken for granted.

Seagull Scientific (www .seagullscientific.com) markets popular labeling software.

At this point, prices and inventory information are marked on merchandise. Supermarkets estimate that price marking on individual items costs them an amount equal to their annual profits. Marking can be done in various ways. Small firms may hand-post prices and manually keep inven­tory records. Some retailers use their own computer-generated price tags and rely on pre-printed UPC data on packages to keep records. Others buy tags, with computer- and human-readable price and inventory data, from outside suppliers. Still others expect vendors to provide source tag­ging. An inventory system works best when there are more data on labels or tags. With portable devices, UPC-based labels can be printed and connected to store computers.

Store displays and on-floor quantities and assortments depend on the retailer and products involved. Supermarkets have bin-and-rack displays and place most inventory on the sales floor. Traditional department stores have all kinds of interior displays and place a lot of inventory off the sales floor. See Figure 15-7. Displays and on-floor merchandising are discussed in Chapter 18.

FIGURE 15-7 On-Floor Assortments and Men’s Shirts On-floor inventory planning is complicated for items such as men’s shirts—due to the choices that must be offered and the various sizes that must be readily available. Source: Rob Bouwman/ Shutterstock. Reprinted by permission.

Merchandise handling is not complete until the customer buys and receives it from a retailer. This means order taking, credit or cash transactions, packaging, and delivery or pickup. Automa­tion has improved retailer performance in each of these areas.

A procedure for processing returns and damaged goods is needed. A retailer must determine the party responsible for customer returns (supplier or retailer) and situations in which dam­aged goods would be accepted for refund or exchange (such as the length of time a warranty is honored).

As discussed later in the chapter, more retailers are taking aggressive actions to monitor and reduce inventory losses. This is a major problem due to the high costs of merchandise theft.

Merchandise control involves assessing sales, profits, turnover, inventory shortages, sea­sonality, and costs for each product category and item carried. Control is usually achieved by preparing computerized inventory data and doing physical inventories. A physical inventory must be adjusted to reflect damaged goods, pilferage, customer returns, and other factors. See Figure 15-8. A discussion of this topic appears in Chapter 16.

Merchandise receiving and handling is discussed further later in this chapter.

Reordering Merchandise

Four factors are critical in reordering merchandise that the retailer purchases more than once: order and delivery time, inventory turnover, financial outlays, and inventory versus ordering costs.

How long does it take for a retailer to process an order and a supplier to fulfill and deliver it? It is possible for delivery time to be so lengthy that a retailer must reorder while having a full inventory. On the other hand, overnight delivery may be available for some items.

How long does it take for a retailer to sell out inventory? A fast-selling product gives a retailer two choices: (1) order a surplus of items and spread out reorder periods or (2) keep a low inven­tory and order frequently. A slow-selling item may let a retailer reduce its initial inventory and spread out reorders.

What are the financial outlays under various purchase options? A large order, with a quantity discount, may require a big cash outlay. A small order, although more expensive per item, results in lower total costs at any one time because less inventory is held.

There are trade-offs between inventory holding and ordering costs. A large inventory fosters customer satisfaction, volume discounts, low per-item shipping costs, and easier handling. It also means high investments; greater obsolescence and damages; and storage, insurance, and

FIGURE 15-8 Automated Inventory Management

Through an automated inventory management system, retailers can efficiently and continuously track inventory in any store or warehouse. This system would be complemented by a semiannual or annual physical inventory.

Source: NAN728/ Shutterstock. Reprinted by permission.

opportunity costs. Placing many orders and keeping a small inventory mean a low investment, low opportunity costs, low storage costs, and little obsolescence. Yet, there may be disappointed customers if items are out of stock, higher unit costs, adverse effects from order delays, a need for partial shipments, service charges, and complex handling. Retailers try to hold enough stock to satisfy customers yet not having a high surplus. Quick response inventory planning lowers inven­tory and ordering costs via close retailer-supplier relationships.

Re-evaluating on a Regular Basis

A merchandising plan should be re-evaluated regularly, with management reviewing the buying organization and that organization assessing the implementation. The overall procedure, as well as the handling of individual goods and services, should be monitored. Conclusions during this stage become part of the information-gathering stage for future efforts.

Source: Barry Berman, Joel R Evans, Patrali Chatterjee (2017), Retail Management: A Strategic Approach, Pearson; 13th edition.