Course Code :- BRL–010
Course Title :- Buying and Merchandising- II
Assignment Code :- BRL–010/TMA/2014-15
Coverage :- All Blocks
Maximum Marks :- 100
Attempt all the questions
(A) Short Type Questions
1. What is process of merchandising? Explain the role of merchandiser.
Solution:-
- Merchandising is any practice which contributes to the sale of products to a retail consumer.
- Merchandiser is the interface between Buyer & Exporter.
- He is the responsible from order analysis to shipment. So Merchandising is the very valuable department in the Apparel Industry.
- Merchandising is the department which mediates marketing and production departments. Sometimes, merchandising department will have to do costing and pricing also.
- In any case, the merchandiser is the person whose responsibility is to execute the orders perfectly as per the costing and pricing.
Process Flow Chart of Merchandising:
Receive product package form buyer
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Sample development
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Price negotiation
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Order confirmation and receive order sheet.
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Sourcing low good quality right time
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Material collection and receive it in factory
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Check and listing
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Swart card making and approval
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Pre production meeting
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Daily collect daily production report and daily quality report
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Arrange final inspection
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Shipment
Role of merchandiser:
Work activities vary depending upon the company and the particular retail sectors:-
Planning product ranges and preparing sales and stock plans in conjunction with buyer
Liaising with buyers, analysts, stores, suppliers and distributors
Maintaining a comprehensive library of appropriate data.
Working with visual display staff and department heads
Analyzing every aspects of best sellers
Monitoring slow sellers and taking action to reduce prices or set promotion as necessary.
Gathering info on customers reactions to products
Analyzing previous seasons sales and reposting on the current seasons lines
Making financial presentations to senior manager
Accompanying buyers on visit to manufacturers to appreciate production process
Forecasting profits and sales and optimizing the sales volume and profitability of designated products area.
Planning budgets and presenting sales forecasts and figures for new ranges
Controlling stocks levels based on forecasts for the season
Using specialist computer software
Meeting with suppliers and managing the distributions of stock
Identifying production and supply difficulties and dealing with any problems or delays as they arises
Managing, training and supervising the junior staffs
2. What are the objectives of buying? Explain the buying behavior of retailers, with examples.
Solution:-
Meaning and Definition of Buying or Purchasing:
Purchasing is the first phase of Materials Management. Purchasing means procurement of goods and services from some external agencies. The object of purchase department is to arrange the supply of materials, spare parts and services or semi-finished goods, required by the organisation to produce the desired product, from some agency or source outside the organisation.
The purchased items should be of specified quality in desired quantity available at the prescribed time at a competitive price. In the words of Alford and Beatty, ”Purchasing is the procuring of materials, supplies, machines, tools and services required for equipment, maintenance, and operation of a manufacturing plant”.
According to Walters, purchasing function means ‘the procurement by purchase of the proper materials, machinery, equipment and supplies for stores used in the manufacture of a product adopted to marketing in the proper quality and quantity at the proper time and at the lowest price, consistent with quality desired.”
Thus, purchasing is an operation of market exploration to procure goods and services of desired quality, quantity at lowest price and at the desired time. Supplier who can provide standard items at the competitive price are selected.
Purchasing in an enterprise has now become a specialised function. It was experienced that by giving the purchase responsibility to a specialist, the firm can obtain greater economies in purchasing. Moreover purchasing involves more than 50% of capital expenditure budgeted by the firm.
According to Westing, Fine and Zenz “Purchasing is a managerial activity that goes beyond the simple act of buying. It includes research and development for the proper selection of materials and sources, follow-up to ensure timely delivery; inspection to ensure both quantity and quality; to control traffic, receiving, storekeeping and accounting operations related to purchases.” The modern thinking is that Purchasing is a strategic managerial function and any negligence will ultimately result into decrease in profits.
Importance of Purchasing:
1. Purchasing function provides materials to the factory without which wheels of machines cannot move.
2. A one percent saving in materials cost is equivalent to a 10 percent increase in turnover. Efficient buying can achieve this.
3. Purchasing manager is the custodian of his firm’s is purse as he spends more than 50 per cent of his company’s earnings on purchases.
4. Increasing proportion of one’s requirements are now bought instead of being made as was the practice in the earlier days. Buying, therefore, assumes significance.
5. Purchasing can contribute to import substitution and save foreign exchange.
6. Purchasing is the main factor in timely execution of industrial projects.
7. Materials management organisations that exist now have evolved out or purchasing departments.
8. Other factors like:
(i) Post-war shortages,
(ii) Cyclical swings of surpluses and shortages and the fast rising materials costs,
(iii) Heavy competition, and
(iv) Growing worldwide markets have contributed to the importance of purchasing.
Objectives of Purchasing:
The purchasing objective is sometimes understood as buying materials of the right quality, in the right quantity, at the right time, at the right price, and from the right source. This is a broad generalisation, indicating the scope of purchasing function, which involves policy decisions and analysis of various alternative possibilities prior to their act of purchase.
The specific objectives of purchasing are:
1) To pay reasonably low prices for the best values obtainable, negotiating and executing all company commitments.
2) To keep inventories as low as is consistent with maintaining production.
3) To develop satisfactory sources of supply and maintain good relations with them.
4) To secure good vendor performance including prompt deliveries and acceptable quality.
5) To locate new materials or products as required.
6) To develop good procedures, together with adequate controls and purchasing policy.
7) To implement such programmes as value analysis, cost analysis, and make-or-buy to reduce cost of purchases.
8) To secure high caliber personnel and allow each to develop to his maximum ability.
9) To maintain as economical a department as is possible, commensurate with good performance.
10) To keep top management informed of material development which could affect company profit or performance.
11) To achieve a high degree of co-operation and co-ordination with other departments in the organisation.
Buying Behavior of Retailer
The definition of retailing according to Levy & Weitz (2012) is the set of business activities that adds value to the products and services sold to consumers for their personal or family use. From the perspective of a supply chain system. A retailer serves as a medium to purchase goods or products in large quantities from upstream manufacturers or through wholesalers and then sell smaller quantities of goods or products to the consumer at a price usually higher than its cost in order to earn profit. As mentioned in the introduction part, the rising power and position of retailers has become a serious concern for manufacturers or other upstream players.
In order to gain the knowledge of retailers, the first step just like understanding consumers is to study the buying behavior of retailer. According to Sheth (1980, p.1), retailer is neither like a consumer nor like a producer, even though it is one of the integral entity in the vertical flow of goods from producer to the ultimate consumer. Retailer buying behavior in his point of view is unique.
In one sense, a retailer is much more like a consumer than a producer: merchandise items it buys are primarily finished products rather than raw materials, components or parts. A retailer usually has very little need in terms of acquiring production facilities or plant, but instead it needs a large variety of inventory of products. In another sense, a retailer is business entity, often a big business entity, with the same set of corporate objectives, legal and financial constraints, and multiple stakeholders to whom he is accountable similar to a producer. A retailer is more likely to document his merchandise buying behavior and manage the process of buying similar to the producers. In summary, a retailer is more like a consumer
in what he buys, and more like a producer in how he buys his merchandise. The content of buying behavior should be similar to household behavior and the process of merchandising buying behavior should be similar to industrial buying behavior.
A model of retailer buying behavior
In the original paper, Sheth use the diction merchandise buying behavior which ultimately means retailer buying behavior. Therefore, the word retailer and merchandise are interchangeable. According to Sheth, the retailer buying behavior model takes a broader and more macro perspective instead of a behavioral perspective. This means instead of trying to understand the buying behavior of an individual member from retail organization, the model describe the buying behavior of the retailer as a whole. Furthermore, personal attributes such as characteristics, demographics, life style, personal values and beliefs, etc. related to individual decision making process will not be included and considered in the model.
The model of retailer buying behavior is listed in Figure below:
From the figure, we can see that the models consist of five constructs: Merchandise requirements, Choice calculus, Supplier accessibility, Ideal supplier/product choice and actual supplier/ product choice. Some constructs will influence other constructs and some constructs themselves are influenced by several variables
1. Merchandise Requirements
The construct merchandise requirements include the motivation for purchasing certain products (Explanation of need) and the relevant product selection criteria. Merchandise requirements can be looked from functional and non-functional perspectives. The functional requirements which can be expressed as the buying needs derived from retailer’s customer needs, whereas the nonfunctional requirements are those buying motives or purchase criteria that are not derived from customers, e.g. personal values of a member retailer buying center, competitor imitation or other factors. The more functional merchandise requirements drive the retailer company, the better it is for retailer as non-functional requirements normally result in losses.
Sheth points out that merchandise requirements differs from one retailer to another taking into individual company’s market position and strategy into account. He also points out that merchandise requirements also vary from one product line to another within the same organization. The former is called inter-organizational differences which include the factors such as size and type of organization, its location (positioning) and management mentality. The latter belongs to the intra-organizational differences such as type of merchandise, product positioning, type of merchandise decision and legal/regulatory restrictions
2. Supplier Accessibility
Sheth (1980) points out that unless under the ideal situation of perfect competition that all suppliers are accessible to every retailer, supplier accessibility varies a lot. There are three distinct factors which are the main determinants of supplier accessibility. The first factor is the competitive structure of the supplier industry. Whether the industry is oligopolistic or monopolistic or it is close to an ideal perfect competition, the accessibility of supplier will be influenced greatly. For example, in the oil industry, due to geographical and resource limitation, the supplier is always the dominant party in the supply chain which make the number of accessible supplier very limited. The second factor that determines the supplier accessibility is the relative marketing effort by different suppliers. Relative marketing effort can be explained as how the suppliers promote themselves compared with other competitors. As every supplier has its own different strategy and business orientation, it is hard to judge which supplier has the best marketing effort. The last factor that would influence the supplier accessibility is the corporate image.
This actually could be the dominant factor among the three factors. For example, famous brands such as IBM, Coca-Cola, Apple, Nikon, etc. carry a very positive image in most retailers mind beforehand. This positive impression may well be buried deep inside one’s mind and once a retailer has the merchandise requirement matched with the these suppliers’ product, the likelihood that it becomes the actual supplier is very high.
3. Choice Calculus
The construct choice calculus in plain words is the choice rules or policies of the retailer. Three prevalent choice rules are trade-off choice calculus, dominant choice calculus and sequential choice calculus. To explain these three choice rules, I will use one example to illustrate. For example, three retailers try to purchase a same product. The first retailers select the product from different suppliers based on several criteria such as price, quality, delivery time, etc. Afterwards, the retailer selects the product from one supplier based on overall score of these criteria. This means that a supplier that has the best performance in one aspect will not necessarily be chosen. This is the trade-off choice calculus. The second retailer selects the product from all suppliers based on only one criterion such as price. This is the dominant choice calculus. The third supplier selects the product from different suppliers based on many criteria just like the first retailer. However, the difference here is that these factors are not equally important and they are actually ranked based on the importance. This is the sequential choice calculus.
4. Ideal Supplier/Product Choice
The ideal choice of supplier is the best choice of retailer and products among the accessible suppliers that satisfy the merchandise requirements. It is called ideal because the actual supplier/product choice often deviates from this normative standard.
5. Actual Supplier/Product Choice
The actual supplier/product choice is influenced by a number of ad hoc situational factors which result in deviation from the ideal supplier/product choice.grouped ad hoc situational factors into four categories: business climate, business negotiation, company’s financial position and market disturbance.
These four ad hoc situational factors are separated from other choice determinants because their influence cannot be anticipated or modeled. In that sense, the ideal supplier/product choice behavior is based on a consistent analysis, whereas the actual supplier/product choice represents the outcome of a conditional analysis.
To conclude, the discrepancy between the ideal and actual supplier/product choice reflects the influence of situational factors. The more similar the ideal and actual choices are, the fewer impact the situational factors have on the actual choice.
With an overview of three foundational models for organizational buying behavior as well as a simply yet applicable retailer buying behavior model, we will now proceed towards the company analysis.
3. What do you mean by operating profit? How is it calculated?
Solution:-
Operating profit is a measure of income that tells investors how much of revenue will eventually become profit for a company.
How it works/Example:
The formula is for calculating operating profit is:
Operating Profit = Revenue – cost of goods sold, labor, and other day-to-day expenses incurred in the normal course of business
It is important to understand what expenses are included and excluded when calculating operating profit. It typically excludes interest expense, nonrecurring items (such as accounting adjustments, legal judgments, or one-time transactions), and other income statement items not directly related to a company’s core business operations.
To see how operating profit works, consider Company XYZ’s income statement:
Using this information and the formula above, we can calculate that Company XYZ’s operating profit is:
Operating Profit = $1,000,000 – $500,000 – $300,000 – $50,000 = $150,000
Operating profit as a percentage of revenue is called operating margin. In this example, Company XYZ makes $0.15 in operating profit ($150,000 / $1,000,000) for every $1 in sales.
4. Define mark-up. Explain its importance in retail business.
Solution:-
Mark – Up:
Markup is one of the most important fundamental concepts used in merchandising operations. It is a basic factor in achieving profit. It is important that you work with markup as a percent. As a percent, markup can be used as a standard of comparison with many items regardless of the cost and retail prices.
Markup is the difference between the cost price of merchandise and its retail price and may be expressed as a dollar amount or as a percent. If stated as a percent, it may be based on either cost or retail price. Most retailers base markup on the retail price.
Although the term markup is sometimes used synonymously with the term markon, they have slightly different meanings. Markup percent is based on retail, whereas markon percent is based on cost. Another distinction is that markup is the term most commonly applied to the amount added to cost price to determine the retail price for individual items, and markon is sometimes used to refer to the total amount added to cost of all the merchandise in a department. The term markon is used more frequently at the manufacturing level and markup at the retail level of the distribution chain.
Markup would be the amount you raise the price to over what you originally paid for it. Example: You buy a shirt for $5, and then you put designs and things on it and price it to sell for $8. This means $3 is your markup.
5. What is the method of calculating the discount and reduction? Explain with suitable examples.
Solution:-See the Book for the answer of this question for better understanding, or we will upload soon.
6. What is meant by stock turnover? How is average stock value calculated for a given time period?
Solution:-
Stock/ Inventory Turnover
Inventory turnover is an efficiency ratio that shows how quickly a company uses up its supply of goods over a given time frame.
While inventory turnover is faster in some industries, such as grocery
A ratio showing how many times a company’s inventory is sold and replaced over a period. The days in the period can then be divided by the inventory turnover formula to calculate the days it takes to sell the inventory on hand or “inventory turnover days.”
Managing inventory levels is important for most businesses and this is especially true for retailers and any company that sells physical goods. The inventory turnover ratio is a key measure for evaluating just how efficient management is at managing company inventory and generating sales from it.
Like a typical turnover ratio, inventory turnover details how much inventory is sold over a period of time. It is calculated as:
Cost of Goods Sold ÷ Average Inventory
Or
Sales ÷ Inventory
Usually, a higher inventory turnover ratio is preferred, as it indicates that more sales are being generated given a certain amount of inventory. Alternatively, for a given amount of sales, using fewer inventories to do so will improve the ratio.
A calculation comparing the value or number of a particular good or set of goods during two or more specified time periods. Average inventory is the median value of an inventory throughout a certain time period. A basic calculation for average inventory would be:
(Current Inventory + Previous Inventory) / 2
In this example, the current inventory, $10,000, is added to a previous inventory – for example, the inventory on the same day of the previous year, such as $8,000 – and divided by the two balance points, for an average of $9,000 (($10,000 + $8,000) / 2 = $9,000).
7. Write short notes on:
a) OTB (Open to buy)
b) Stock management at the front and back end.
a) OTB (Open to buy)
An open-to-buy is a tool that in the hands of a fully committed small retailer can profoundly improve financial performance. It allows a retailer to manage inventory, plan purchases, and budget effectively. Find out what goes into a good open-to-buy and how you can put it to use in your business.
It’s a tool that in the hands of a fully committed small retailer can profoundly improve financial performance.
The clearest and simplest definition is that it is a financial budget for retail merchandise. Let’s look at this more closely.
An Open-To-Buy relates directly to retail merchandise, is structured specifically to address the needs of retailers, and is a tool designed to assist retailers manage and replenish their most significant asset, their inventory investment.
An Open-To-Buy is a budget, and involves the full range of budgetary functions. It begins with the planning process, is future oriented, provides guidance on how much to buy, and provides benchmarks for evaluating progress, and adjusting future plans.
An Open-To-Buy is a financial tool, in that the units of measure are typically dollars, usually retail dollars but sometimes cost dollars, and that it can be tied back to the financial control process.
An Open-To-Buy can work on any level that a retailer needs it to. It can be used to track merchandise at the company, department, and classification or sub-classification level. In rare cases for a small retailer, it can even be used to track an individual item.
b) Stock management at the front and back end.
Stock management largely refers to when a company works to obtain and preserve a suitable assortment of goods while also keeping track of all orders, shipping and handling, and other related costs.
Primarily, stock management is about specifying the size and placement of the goods that a company has in stock. Stock management is often important for numerous departments within a facility in order to protect the planned course of production against the possibility of running out of critical materials or goods.
By balancing these competing requirements, a company will discover their optimal stock levels. This is a never-ending process, as the company will need to shift and react to its environment as it changes and grows.
Successful inventory management involves creating a purchasing plan that will ensure that items are available when they are needed (but that neither too much nor too little is purchased) and keeping track of existing inventory and its use. Two common inventory-management strategies are the just-in-time method, where companies plan to receive items as they are needed rather than maintaining high inventory levels, and materials requirement planning, which schedules material deliveries based on sales forecasts.
(B) Essay Type Questions
8. Explain various types of reductions offered by retail store. How is reduction percentage calculated?
9. What is ‘unit planning? How is it useful in replenishment? Explain in details.