Merchandise Procurement/Sourcing: Meaning, Process, Sources for Merchandise

Sourcing may be defined as the process where retailers negotiate with the suppliers to buy quality merchandise at a reasonable price and sell to the customers at a reasonable profit. The following are the steps involved in sourcing

The process of merchandise planning takes the buyer through to the stage of determining the products that he needs to have in the store and the quantities that he needs of the same. A key decision to be taken by a buyer is to determine where he has to buy the merchandise from. Determining the source who would supply the products as required by the retailer, in the quantities needed by the retailer, as per the requirements of the retailer, is an integral part of the buyer’s function. Over the years, the importance of sourcing as a key element of merchandise management has increased. This has been largely due to the shrinking of world borders and the world becoming a global village. Global travel and the spread of mediums of mass communication have also made the consumer more conscious of global trends and products. For a retailer, this means that he has to be far more agile and competitive in his ability to meet consumer demands.

Having determined the sales that need to be generated the first decisions that need to be taken is one the type of merchandise that will be retailed. Typically, these may not be decisions that may be taken by the buyer or merchandiser as it is the retail model that the retailer chooses to operate which determines the merchandise mix. This may comprise of:

1) National / Regional Brands

2) Own label Merchandise popularly known as the Private label.

3) A combination of both.

Sourcing may be national or international, depending upon the decision of the retailer after considering various factors. It is clear that the retailer may go for the national source or international source for procuring the different types of products. While opting for international source for procuring branded products, the retailer must keep in mind some of the factors which affect the sourcing decision. Let us discuss them in brief:

Country of Origin: While sourcing international products, retailers must always keep in mind the reputation of the country of origin as well as the costs involved and expected perception by the consumer. For example, electronic goods sourced from China are considered superior in quality and technology. Swiss watches are very popular among the customers as they are a mark of technology and style.

Foreign Currency Fluctuations: As we know that currency exchange rates change from time to time. Therefore, while making global sourcing decision, a retailer has to be cautious of the foreign currency fluctuations. This is one aspect which makes the product expensive or cost effective depending upon the fluctuations in the market. Moreover, it will be in the interest of the retailer to enter into a deal wherein he is supposed to pay at a fixed rate of currency exchange.

Taxes: The tax policy is one of the important factors for taking the decision for international sourcing of the products. There are a host of taxes levied on export and import which makes the product expensive or reasonable depending upon the laws of the land. With the introduction of VAT there is an effort to prevent double taxation. However, this exists in various forms in different countries depending upon the legal necessities of respective nations.

Process

These steps are explained in detail below:

1. Collecting Information:

This is a very first step of merchandise buying and handling process. Once the firm’s overall merchandise plans are defined, exact information about current market needs and potential vendors is required.

This is essential as a retailer before buying merchandise would like to know:

(i) What consumers are looking for?

(ii) Where the vendors are located and what is their goodwill in the market?

(iii) What their competitors are offering. After understanding these aspects, retailer will be in a position to decide what he wants to buy and from whom.

For collecting information, a retailer/buyer has several possible sources defined as internal and external sources.

Internal and External Sources

It depends on the retailer (buyer) which source he would like to choose. Normally, global retailers rely on both internal and external sources to have the better picture of consumers’ requirements. Undoubtedly, the most valuable source is the ‘study of consumers’. Global retailers like Wall Mart, Spencer and Noodle Ki Doodle have proper consumer study divisions those continuously monitor the consumers’ lifestyles, living habits and their changing demographics in order to study the consumer demand directly.

Vendors (manufacturers and wholesalers), on the other hand, do their own projections about the future sales and market demand, while finalizing the ‘buying deal’ with retailers. Vendors present these projections through pie-charts, bar-diagrams and various two and/ or three dimensional charts.

They also inform the retailers how much promotional support will be provided to them which may have major impact on retailers’ buying decision. But retailers must understand one thing that they are the one who have to interact with the customers and are responsible for satisfying the needs of the target market. Therefore, they should not depend on vendors’ projections only, but may use them for reference.

As retailers are entirely responsible for complete sales projections and merchandise plans in their own category, they should direct their sales’ employees to get a view of customers’ potential demand by visiting suppliers, talking with sales’ experts and observing consumer behavior. Besides this data provided by trade associations, government bodies projects like ASSOCHAM, FICCI bulletins may be consulted. Internet has also become a vital source for collecting information and is also time saving.

Retailers may use collected information for making merchandise decisions about:

(i) Staple merchandise

(ii) Fashion merchandise

The above-mentioned sources are enough to have picture about staple merchandise but for frequently changing fashion merchandise, a mix of internal and external sources may be used.

2. Selecting Vendors:

After collecting the information about consumers’ demands, the next step is to select sources of merchandise and to interact with them to select the potential vendors.

For selecting vendors, the retailers usually have three alternatives:

(i) Company-owned vendors:

As the very name implies, these vendors are owned by the company themselves. Large retailers have their own manufacturing or wholesale operations. They work only for particular retailers and provide as per their requirements.

(ii) External, widely used supplier:

This type of supplier is not owned by the retailer but used frequently by him. The retailer is buying merchandise for long and is aware about the quality and services offered by him.

(iii) External, not used supplier:

This type of retailer has not been used by the retailer as he is either a new entrant or retailer has not purchased anything from him so far. Therefore, what quality he is offering cannot be known in advance. Retailers may use any one type of supplier as per their requirements, budget and area of operations or they can use a combination of them. Big retailers often deal with all types of suppliers. Therefore, after selecting the supplier category, a retailer should interact with them about the buying terms and conditions.

Following points must be considered while selecting the vendors:

(i) Goodwill of the vendor in the market.

(ii) Guarantee and/or warranty offerings.

(iii) Which vendor offers merchandise at the lowest total cost?

(iv) Quality offered by the vendor

(v) Will the vendor provide transport storing and other facilities?

(vi) Is vendor’s merchandise line conservative or innovative?

(vii) Is vendor offering credit purchase?

(viii) What promotional support is provided by the vendor?

(ix) Will markup be sufficient?

(x) Is vendor interested or will be available for long term relations?

(xi) Will vendor fulfil what he has agreed upon?

(xii) Will vendor provide conditional/exclusive selling rights?

(xiii) How quick will orders be delivered?

3. Evaluating Merchandise:

After deciding upon the source of merchandise, next step is to evaluate the vendor’s merchandise quality.

Here, a retailer is encountered with following situations:

(i) Whether the whole lot be examined, or

(ii) Purchasing be made only on vendor’s description.

Retailer after interacting with suppliers should evaluate merchandise under purchase consideration. Should each unit of merchandise be examined? Or items should be bought

only on the basis of description and demonstrations presented by the suppliers.

For evaluating merchandise items, retailer has three choices in hand:

1. Inspection
2. Sampling and
3. Description

Which method should be followed depends on the items’ features, cost and the frequency of purchase? Inspection is a process of examining each item of merchandise thoroughly before the merchandise procurement and also after delivery. Jewelry (diamond, gold, platinum and other precious stones) is one of the examples where retailer inspects all the items of purchase.

Sampling technique is used when retailer is buying items on regular basis in large quantity that is perishable, breakable or costly ones. Therefore, retailer uses Acceptance Sampling method. It is “the middle of the road” approach that exercises control over the incoming inventory without going through 100% inspection. It simply means accepting or rejecting the supplier’s merchandise assortment.

Here decision is taken without going through 100% inspection of the entire lot. It is a compromise between no inspection and 100% inspection. It has two key classifications of acceptance plans: firstly, by attributes (“go, no-go”) and secondly by variables.

Description buying is a process of merchandise purchase where a retailer orders the merchandise items after going through supplier’s pictorial catalogue mentioning the product features, price, size and other relevant details. For instance, a retailer can order food and clothing items from a catalogue or concerned company website. On receipt of items, they are only counted for matching order size.

4. Negotiation:

Once the retailer has evaluated the merchandise quality and other features, he negotiates with the vendor for its price and consequent terms and conditions. Both parties listen to each other carefully and ask questions wherever doubt arises. Terms and conditions are then decided and contract is made involving total amount to be paid by the retailer, delivery date, delivery conditions and other legal aspects. A retailer while negotiating also talk about the conditions for the re-order.

Under Negotiation stage, retailer bargains with the supplier for available discounts and conditions of purchase. A retailer would like to know what will be the additional discount if he goes for bulk buying. What is cash discount? What is trading discount etc? Is there some off-season discount? Once the merchandise is negotiated for its quality, quantity and price, retailer places the order and concludes the buying exercise by paying the amount due. The retailer takes the title of items immediately after the purchase.

5. Buying Merchandise:

After negotiating the terms and conditions and agreed upon price, a retailer after placing the size of the order (quantity and quality of each merchandise category), pays the initial money as per the agreement. Big retailers usually place the order and pay the bills online through electronic data interchange (EDI) and quick response (QR) Inventory planning, small retailers due to limited sources, conclude purchase manually.

They fill up the order form and deposit it personally or through postage. With the technological advancement and easy access to internet facility, retailers place their orders online. The small retailers who are associated with big vendors also pay their bills and process orders through EDI and QR systems as per policy matters.

6. Acquiring Merchandise:

It means after paying for the invoices, retailer should receive the merchandise and stock it properly. While acquiring the merchandise, retailer physically receive the items, counts the supplies, pays the invoices, marks the items, displays the items and stock in godowns/warehouses to avoid any pilferage and damage. In case of centralized buying, goods are received by regional office/central warehouse and then transferred to chain stores as per their requirements and order received from them.

After paying the suppliers’ bills, retailer makes provision how and where the items should be received and stocked. Items should directly supplied to store or warehouse, is mentioned at the time of negotiation and merchandise payments.

Once the items are received, retailer next step is to make ensure that the items are stocked properly. Sometimes it may take long time to reach from warehouse to store, therefore, when orders are received, they must be checked for its quantity and quality. Invoices must be carefully checked for its description and amount printed to avoid any confusion with supplier later on.

When the merchandise has been procured and stocked, it will be issued to store/s whenever demand pertains. Therefore, retailer should have an eye on merchandise issued and the items left in the stock. Whenever the level of inventory comes close to reorder level, goods are ordered for fresh supplies.

Once a merchandise plan is implemented, it should be re-evaluated at regular interval of time by close monitoring of implementation plan with the objective of satisfying consumers.

In case of central buying, distribution management is the key to store performance. Buyers/concerned staff should take care while shifting merchandise to chain stores or warehouses.

Following precautions must be taken under this stage:

(i) Inspect the invoices physically for its accuracy. Once the invoices are signed and paid, vendor will not be responsible for any loss in transit or in case of missing items. Therefore, when orders are received, they must be thoroughly checked for size of order placed and any breakage/pilferage during transit.

(ii) While unloading merchandise, take precautions that their packing should not spoil. Further, keep the items at distance and at proper place as unloading generally causes breakage and mixing of items with one another.

Sources for Merchandise

Work directly with manufacturers

For many retailers, working directly with the manufacturers (like factories) is ideal because it eliminates middlemen like wholesalers. However, establishing that working relationship isn’t always easy.

Make your own products

It’s rare for medium to large businesses to make their own products, as it’s hard to keep up with demand. But it’s totally doable if you’re in the right niche and have a small team behind you who can meet demand while producing high-quality products.

Work with wholesalers

A wholesaler is a firm (or sometimes an individual) who purchases large quantities of goods from manufacturers. They store those items and then sell them to retailers just like you.

Wholesalers can take care of all the stress that comes with importing and warehousing the items. You don’t need to travel anywhere, and there are no shipping customs to deal with. All you need to do is place your orders.

Product Source

Events

Expos, buying shows, and other industry events offer numerous opportunities to learn about upcoming trends in your industry. More importantly, they enable you to get essential face time with manufacturers, wholesalers, suppliers and their merchandise, so you can see and touch materials or products firsthand.

Online Directories

SaleHoo, ThomasNet.com and Alibaba.com are a some of the online directories you can head to when looking for products and suppliers. (There are many others, of course, but we suggest you start with these because you don’t want to overwhelm yourself by browsing too many marketplaces.)

Both of these sites give you access to thousands of supplier profiles and offer search and browsing features so you can easily zero in on the products or vendors you need. The main difference is that ThomasNet focuses on suppliers in the US and in Canada, while Alibaba can direct you to suppliers in other countries.

Industry Associations

Most trade associations provide networking and directory services to help you connect with vendors. And in some cases, you don’t even have to be a member of an organization to take advantage of certain benefits.

Trade Publications

Don’t have the time or budget to attend events? Try specialty or trade magazines instead. Like trade shows, industry publications are great sources for product ideas and supplier information.

Their content could give you insights on the products others are selling and who’s supplying them. What’s more, a lot of vendors advertise on trade publications, so perusing them could put some noteworthy suppliers in your radar.