Reviewed October 1993
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One of the most important ways retailers can serve customers is by having merchandise on hand when customers want it. There are few things more frustrating than making a special trip to the store for a specific item only to discover that it is out of stock.
Purchasing merchandise for resale is challenging and complex. After you decide what kinds of merchandise to buy for your customers, you must decide exactly what to buy, how much to buy and in what styles/colors/sizes. You must locate sources for your merchandise and negotiate prices, terms and considerations. You will then write the orders, receive and check in the merchandise, and keep inventory records to help you determine what to order next and when.
Every store tries to attract some specific group of shoppers by projecting an image that appeals to that group and by carrying the merchandise that group usually buys. The individuals in that group are your target customers. Before you can decide what specific merchandise to carry in your store, you have to know who your target customers are.
A good way to get a feeling for the market is to check out the competition. Look at the merchandise your competition carries. Can you operate a better store than the competition? Is there a market area that is not being served?
Look at stores similar to yours located outside your area. Figure out their pricing strategy. These store owners might be willing to share some of what they have learned with you. If you want more help, you could offer to pay for it.
Demographic information about your area is available through the chamber of commerce, city hall and local merchants' associations. From this type of information, you can find out about the people who live in our area. If demographic information tells you that 50 percent of the people in your community are over age 50, 65 percent are female and 75 percent live on small farms, you do not want to open an expensive boutique or a video arcade. There are not enough people living in your community who will spend money in boutiques and arcades.
Identifying your target customer will help you narrow the range of merchandise that you can carry in your store. Rarely today can a store succeed by being all things to all people. The "general store" era is gone.
Where do you buy the merchandise you will sell? Nearly all classes of merchandise are available from a variety of vendors. What your vendor can and should be willing to provide for you depends partly on the merchandise area, and partly on how much the vendor wants to please you. To help you choose among several vendors, look at the following areas:
For example, small items, such as screws, thread or hair bows, must be displayed if they are to sell. If one vendor provides a display and another does not but is slightly less expensive, consider what it will cost you in time and money to provide your own display.
Where do you find vendors?
Vendors' offices are located in large cities. You deal with them by mail, over the telephone and in person when they send a sales representative to your store or you go to a buying market.
Going to market, however, means getting someone else to cover the store for you while you are gone and incurring the expense of travel and a hotel room for several days. Even though these are tax-deductible business expenses, a trip to one of the large markets may be too costly for you. Smaller markets held in medium-sized cities, such as St. Louis and Kansas City, may be more reasonable for some retailers. Most apparel retailers go to at least two markets per year. In merchandise areas where there are seasonal changes, retailers will go to at least one market per season.
The buying offices that provide services to smaller stores are generally privately owned and independent. Members pay a fee that may be based on a percent of annual sales or a percent of orders, or the fee may be determined by services rendered. Some buying offices charge a flat annual or monthly amount. Among these are Atlas Buying Corporation and Independent Retailers Syndicate.
When you go to market, you must be organized about what you need and how much you are going to spend. Before you go, prepare a list of the merchandise items you know you need. Create and maintain a cash flow calendar so that you know exactly how much money is available to you at all times.
Plan to spend part, not all, of your "open to buy," (that is, the amount of money available for you to spend) so that if something wonderful comes your way later in the month, you will still be able to buy it. When you are at market, keep an accurate account of what you have bought and when it will have to be paid for. Stagger your delivery dates. Staggered delivery dates will help keep your cash flow under control and also keep your inventory fresh.
To help with your planning, you can order a market directory that will tell you which lines will be shown at the market you are planning to attend.
Trade-market schedules are available in trade publications. Once you have established a relationship with several vendors, they will also notify you when they will be at a market.
Communicate to ensure a successful relationship. Your business success can depend largely on your relationship with your vendors. If you do not have the merchandise in the store, you cannot sell it. If you pay too much for the merchandise, or if you have the wrong merchandise and must mark it down to get rid of it, you will not make a profit.
The most important aspect of vendor/retailer relations is communication. You are both in business to succeed -- that is, to make money. The vendor wants to make you happy, just as you want to make your customers happy. If you tell your vendors what you want, they will do their best to supply it to you.
When you talk with a potential new vendor, describe your store and your clientele to the sales representative. Invite the sales rep to visit your store and see it firsthand. When sales representatives know who your target customer is and what kind of merchandise you want to carry, they know much better what to show you.
Both of you will save time, money and frustration if you will communicate your needs, requirements and capabilities.
Pay close attention to the terms of the sale. In return for prompt payment, the retailer is often allowed to take a percentage reduction from the billed price. A cash discount is money in the bank. If it is available, take it. If you do not take the discount, you are paying interest for using the vendor's money for less than 30 days.
A typical cash discount is written: "2/10, n/30." This means that you may take 2 percent off the price of the merchandise (do not include the shipping charges) if payment is made within ten days of the invoice date. Otherwise, the entire amount (net) is due in 30 days. In other words, if you choose to keep your money for 20 extra days, it will cost you 2 percent of the amount of the invoice. On a $500 invoice, you will save $10 by paying within 10 days. If you do not pay the invoice until the 30-day deadline, you have "borrowed" $490 for 20 days and the extra $10 is interest. The annual percentage rate on this "loan" is nearly 36 percent.
Another type of cash discount is written: "8/10 EOM," This means that you may take 8 percent off the price of the merchandise if the invoice is paid with 10 days after the end of the month (EOM). If the invoice is dated on the 25th of the month, or later, it is treated as if it were the first day of the following month. This means that an invoice dated Jan. 27 is eligible for a cash discount until March 10. Again, if you do not take advantage of this discount, you are paying a stiff interest rate for borrowing money for a short time.
Future dating is used to encourage retailers to buy in advance of the selling season. An example is: "2/10, 60 days extra" which means that the buyer has an extra 60 days before the usual terms of 2/10, n/30 take effect. Therefore, merchandise invoiced in June will be eligible for the 2 percent cash discount until September. In another type of future dating the invoice will be dates: "as of Sept. 1." The discount period begins on that date.
The wholesale price of an item purchased early can go down rather than up as the season approaches. You might persuade your vendor to offer a price guarantee that assures a refund of the difference if this should happen.
Merchandise that is out of season, not selling as well as the manufacturer expected, or that has been returned to the vendor is sometimes available as "off-price merchandise."
Some vendors can make this merchandise available to small retailers if they request it. Often, the amount of off-price merchandise that the retailer may purchase is based on a percent of the amount of regular merchandise that the retailer has purchased.
Usually when you take off-price merchandise, you will not have any choice about the sizes and styles shipped to you. Also, this merchandise cannot be returned to the vendor. Before you order off-price merchandise, consider whether you will be able to sell it when it comes in or whether it will take up valuable space in your storeroom until next season.
Whether you buy at market or from a sales representative who comes to your store, you must negotiate a contract about the goods you are buying. That contract is the purchase order.
When possible, it is better to design and use your own purchase order form. Vendor-supplied order blanks may include statements you do not want (no returns after 10 days, for instance). In either case, the purchase order should ask for standard information:
Most merchandise is FOB (free on board) from supplier's warehouse or factory. This means the retailer pays the shipping from the wholesaler or distributor to the store. Occasionally, the vendor will pay the shipping charges.
The retailer may specify the method of shipping on the order form. Sometimes "cheapest" is appropriate; sometimes you will want "fastest." Another consideration is "safest." Tracing a lost shipment is expensive and time consuming. Compare several alternatives including freight (truck), United Parcel Service (UPS) and parcel post (U.S. mail). Transportation charges will be added to the invoice and are not eligible for the early payment discount.
Many major manufacturers offer cooperative advertising plans where the cost of advertising certain goods is shared between the retailer and the manufacturer. For many small retailers, these cooperative plans result in more advertising and reduced advertising costs. The amount of the advertising allowance is usually a percentage of your order.
When the supplier controls the plan, predesigned formats for ads may be provided to you or placed directly in local newspapers or on local radio stations. Retailer-controlled advertising means that you may create your own advertising campaign within the limits of the agreement with the manufacturer.
There are disadvantages as well as advantages to cooperative advertising plans. Sometimes the format of the manufacturer-supplied ad is incompatible with the image the retailer has worked so hard to project. Sometimes the time frames designated by the manufacturer for the promotion is not appropriate to the schedule that the small business wants to maintain.
If the manufacturer required the ad to be a minimum size, the cost may be high. In addition, because each manufacturer has a different specific list of requirements and restrictions, it may be difficult and time consuming for the retailer to figure out exactly what is required in each instance.
Early shipments
When you order your merchandise, you specify a delivery/start date and a cancellation/completion date. Usually the delivery date is determined by your cash flow and inventory turnover needs. What do you do if, after all your careful planning, the vendor wants to send your merchandise before the start date? In most cases it will not hurt you to take early delivery of the merchandise as long as the vendor agrees that you do not have to pay the invoice until the date specified on the purchase order.
There are some disadvantages to specifying a specific start date instead of accepting shipment "as ready." One is that your competition may get the merchandise before you do. Another is that some vendors refuse to pack and hold merchandise, which means that you cannot get what you have ordered if you refuse to take delivery on it when it is ready.
Late shipments
Late shipments are the retailer's other big worry. The best defense is to stay on top of your orders. Have a master calendar with all your completion dates on it and review your orders weekly. Two to four weeks before the completion date, call or write the vendor to inquire about the order. You can save time with printed post cards with blanks for the vendor name, date, order number, and due date. It is important that you know how much merchandise, in terms of dollars, is on order at all times.
If merchandise has not been received by the cancellation date, it is still up to you to cancel the order. Send a cancellation form to the vendor and attach a copy of it to your purchase order.
List the order number, description, quantity, style number and purchase price of the items. List as the reason for cancellation "past cancellation date."
When merchandise arrives after the cancellation date, you should refuse it. If you think you can still sell the merchandise, negotiate for a reduced price. If you cannot get a reduced price from the vendor, return the merchandise, freight collect.
Returns
Before placing your order with a new vendor, establish the ground rules for returns. For example, if you do not want substitutions, establish that substitutions will be returned at the vendor's expense. You can have this information printed on the order forms if you use your own.
If any merchandise is defective or otherwise incorrect, send a charge-back invoice immediately, and request a return authorization from the vendor. Most wholesalers require that you have a shipping authorization attached to the returned package. Without this authorization, they will not accept the returned goods or give you credit for them.
If there is a serious or complicated problem, call the sales representative immediately. If possible, get the credit recorded before you have to pay the invoice. This will reduce arguments about whether the discount applies.
When a shipment arrives at your store, the first thing you do is check it
Unless you notify the vendor of a problem right away, you will owe for all the items on the invoice even if some were omitted from the shipment or were incorrect. Check that the date is within the time frame allowed for that order. If the order is incomplete, you may wish to record on your purchase order the styles and colors of the merchandise received. From this record, you will be able to tell right away if anything is duplicated in a later shipment.
Your part of the bargain is to pay invoices on time. Paying within the discount time allowance will save you money and create good relations with your suppliers. When your credit standing is good, you can call a vendor for emergency shipments and expect good service. If your credit is not good, vendors will not ship to you unless you pay in advance.
In some merchandise areas, small vendors pass their invoices on to a factor who holds the credit. The factor pays the vendor and then collects the money from the retailer. If any of your vendors use factors, be sure to keep them informed on all financial transactions that affect them.
If you have trouble with merchandise and must write to the vendor, send a copy of the letter to the factor. If you have a legitimate reason for not paying an invoice on time, be sure the factor understands the situation. If you get a bad reputation with a factor, it may be impossible for you to get credit in the future.
Systematically evaluate your vendors and know how well the merchandise from each one sells in your store. You will then be able to decide which vendors to use and which to drop.
Develop a form or computer program on which you can record, by vendor, all merchandise ordered and how well it sells in your store. List the style, price, description, class, quantity ordered, colors and sizes.
Record the dates of delivery, whether the merchandise came early, on time, late or not at all. Record any merchandise that had to be returned to the vendor. (A sample evaluation form comes with the printed guide.)
As you sell this merchandise, record whether it sold at full price or at markdown. Record any merchandise that is returned to you by the customer. Include a place for comments. Looking at this record will tell you whether the merchandise you order from a specific vendor arrives on time and in good condition and whether your customers like it.
The authors wish to express their appreciation to the many people who contributed their time and expertise to the development of this publication. Among them are:
MP657, reviewed October 1993