IGNOU Study Notes | BBARL-001 CH-4 (SOURCE AND MERCHANDISING)

Unit-4 :-

Structure

4.0 Object
4.1 Introduction
4.2 Sourcing-Process
4.3 Factors Affecting the Global Sourcing Decisions
4.4 Comparative Evaluation and Selection of teh Suppliers/ Sources
4.5 Merchandising
4.6 Merchandising Management
4.7 Vendor-retailer Relation and Supply Chain Management
4.8 Allocation of Merchandise to Stores
4.9 Shrinkage
4.10 Retail Pricing - Objectives and Approaches
4.11 Methods for setting Retail Prices
4.12 Let and Sum Up
4.13 Keywords
4.14 Activites
4.15 Terminal Questions

4.0 OBJECTIVES

After studying this unit, you should be able to:

• explain the sourcing process of retailing;
• identify factors affecting international sourcing and factors involved in its negotiation;
• outline housing/ stocking of merchandise and concept of shrinkage;
• meaning and scope of merchandising;
• describe various factors affecting the merchandise mix; and
• label the pricing approaches and methods for setting retail prices.

4.1 Introduction :-

Whenever we go to any retail store for buying a certain commodity we see different brands and non-different brands of the same commodity/ item.
It directly indicates that the retailers nagatiate with the vendors for selling their items.
It increase the sale of retailer because a customer have choice for buying any product of any brand ( According to their taste ).

4.2 Sourcing Process :-

Sourcing:-
The sourcing may is defined as the process where retailers to buy good quality goods at resonable price.
So that they sell to the customers at reasonable profit.

• Steps Involved in Sourcing :-

(1). Determining the Categories :-
The retailers should determine the categories in his store.
Each categories have different features like in garment store we see Mens wear, Ladies wear, Kids wear etc.
Diverse categories of a supermarket or departmental stores need many vendors to supply the required products.

(2). Use of Internet of Gather Data Regarding Categories in Demand :-
Internet is he biggest platform for collecting data and and information.
Retailer post information about the product on the various search engies like google, yahoo etc, and check the number of enquiries by web surfaces.
They also collect data from the customers as a feedback.
After that a retailer can take a decision.

(3). Identify the Vendor or Sources of Supply :-
Retailers take good from the dealers according to their need.
Small retailers can depend on the dealers.
But the large retailers (like big bazaar/ chain retailers) can directly contract with manufacturer and take commodities through their own supply chain.
The big advantage of large retailers is they cut the commission of the dealers and save money.
And then give discounts for the customers.
For the lower prices of goods customers can easily attracted and buying their commodities.
Eq- Big Bazaar and Subhiksha Operates such technique of sourcing and merchandising.

4.3 Factors Affecting the Global Sourcing Decisions :-

Sourcing may be national or international, depending upon the decision of the retailers.
The retailers keep in mind some of the factors which alfect the sourcing decision.

• These Factors are :-

(1). Country of Origin :-
While sourcing international products, the retailers should understand the reputation of the products of that country.
If customers does not like such country, then they don't want to buy such countries products.
Eq- Electronic goods of china.

(2). Foreign Currency Fluctuations :-
As we know that the currency exchange rates changes from time to time.
The retailers should know about the functions of the currency.
If the currency rates is high then they should not buy and if low then should not buy the products in large quantity.
So, that they sales that products and take good profit.

• (3). Taxes :-
Different countries has different type of tax.
It depends upon the laws of the land.
While import and export the retailers give tax.
They should understand that which countries import and export has how much tax.
After VAT( value-added tax) the double taxation is reduced.
However, double taxation is exist in some countries.

4.4 Comparative Evaluation and Selection of teh Suppliers/ Sources :-

A retailer have many question when finding a good supplier/ vendor/ source.
Once the retailer selects the supplier (source) for procuring a particular product through comparative evaluation fo selecting of supplier, the process to execute the purchase of the product :-

(1). Examination of Merchandise :-
While selecting a supplier for the product the retailer must be cautious.
Because of bad item/ bad quality goes to the customer and is detected by him than he may face a big loss.
The customer tells his family members, his neighbours as well his friends about the store and tells that, that store gives bad quality.
So, they find a good supplier that gives good quality goods.

(2). Price Negatiation :-
In any business, money saved is money earned.
A retailer want goods in lowest prices os that they got large amount of profit.

A retailer want discounts like :-
(i). Trade Discounts :-
Trade discount is given by a manufacturer.
If you are a regular and loyal customer so they give you discount so that you buy every commodity form that merchandise.

(ii). Valume Discounts :-
These discounts given when you buy large amount of goods.
The manufacturer gives these discount.
For increasing their sales.

(iii). Cash Discounts :-
Cash discount given by manufacturer if the retailer clear all the balance in a time period given by manufacturer.

(iv). Off-Season Discounts :-
To increase the sales of new products launch in market the retailers give discounts on offers.
For supporting the manufacturer it is given as incentive to the retailers.

(v). Promotional Discounts :-
Given by manufacturer to retailers for buyimg their commodities and then advertise them in market.

• Warehousing of Merchandise :-
In warehouse all the tasks like receving the products, checking the invoice, verifying the goods, recording, adding them to stock, making payment and planning its entry in the stores.
In warehouse the retailers should check the damaged goods.

4.5 Merchandising :-

• Merchandising :- A retailer buying products from some sources and keep it avaiable to the customer at convenient prices. This process in termed as merchandising.

• Cross Merchandising :-
Maintaining the stocks of complimentary good along the main line is known as cross merchandising.

• Objectives of Merchandising are :-
(1). Changes in merchandise for fullfilling the requirements of the customers.
(2). According to market trends and fashion the merchandise should be varied / different.
(3). Suppliers capacity to supply in time.
(4). To meet the competitors merchandising strategy.
(5). Ware house capacity and cost incurred in holding the inventories in the ware house.

4.6 Merchandising Management :-

Merchandise Management is a offers the right quantity of the and at right product at right place and at right time and at right price.
These five rights is the key to success of merchandising.

• Merchandise budget :-
Merchandise budget can be defined as how much a retailer can invest in product inventories.
How many goods it plans to purchase.
Four important components of merchandise budget plans are:- (a) Projected sales
(b) Inventory plan
(c) Estimated reduction
(d) Estimated purchases

• Constaining Factors :-
The four Constraint that should be considered by the retailer are :-
(1). Budgetary Constraint :-
Budgetary Constraint tells that a retailer should make a proper budget before purchasing any product.
If retailer buy less item then it affects their business.

(2). Selling Space Constraints :-
A retailer should show their products in a proper shelves.
It a retailer buy large quantity of product and they have not much space then it affects his business.
Because customers can't see all the items.

(3). Turn Over Constraint :-
More turn over means more profits and it is beneficial for business.
A retailer should purchase and sale those products which fulfill customer's needs & wants.
Those products which are highly demanded in market gives more profit as well good turn over.
Formula :- Effective sales income - Purchase cost = Turn over

(4). Market Environment Constraints :-
A retailer should located their store in rush as well good area.
Because is rush area their are maximum chances of customers coming and purchasing any product.
And if retailer store is very for from the customers range then they avoid that store a buying goods in near by shops.

4.7 Vendor-retailer Relation and Supply Chain Management :-

Each retailer is depending upon the supplier/ vendors.
Their are different types of suppliers like:-

Allocation of Merchandise to Stores :-

(1). Agents :-
Their are mellions of agents who gives products to retailer by going store to store.

(2). Manufacturer :-
After manufacturing of product their are many big retail store that directly purchase goods from manufactures.
EX- Big Bazaar etc.

(3). Wholesellers :-
Wholesellers purchase goods in large quantity and then sale that good in convenient price including profit.

(4) Government bodies :-
Government is also a supplier for retailer.
When government gives electricity and water to the retailer then they work as supplier.

(5) Other Retailer :-
Small shops retailers are also called other retailer.
Because in rush area their are maximum chances of customers coming and purchasing any product.
And if retailers store is very for from the customers range then they avoid that store a buying goods in near by shops.

• Supply Chain Management :-
An efficient Coordination within the supply chain of an organization is known as supply chain management.
The basic functions in supply chain management are:-
1. Planning :-
Before taking a big decision for merchandise a manager make plans.
Planning include all the future expected profitd profit and past limitation.

2. Organizing :-
After Planning a retailer organise that plans.
From which agent he purchase goods and is which area he sales that goods including profits.
Retailer purchase their goods according to his budget.

(3) Directing :-
According to his plan the director directing all the task including purchase and sales.
If any worker does not work good than it is a role of director to direct him that how to talk with customers and how to make sales etc.

(4) Coordinating :-
Also called essence of management.
The manager has to co-ordinate with all the possible person that increase their business as well profit.
Like co-ordinate with agent if there is lack of goods.
co-ordinate with customers.
co-ordinate with CA etc.

(5) Controlling ;-
All teh possibilites we plans for merchandise is done it we control all the task.
It there is any factor that affect the business then manager make a sudden plan and then control them to maintain the business profit as well as goodwill.

4.9 Shrinkage :-

Shrinkage means there is a reduction in the inventories after comparing.
This shrinkage may be done by :-
1. employees
2. customers
3. vendors
4. Transports
5. Shoplifting
6. Fire and other natural disaster etc.

This shrinkage decrease the profit of retailers and sometimes retailers take big loss.
To avoid such shrinkage retailers must go for redibte transport agencies.
Before dealing with vendor told them that all transportation responsibilites can be done by vendor.
And also make a proper contract papers before purchasing merchandise.

4.10 Retail Pricing - Objectives and Approaches :-

Every retailer have right to set the price of th4e product.
There are some points to remembered by retailer before pricing strategy:-
(i) Needs to know what quality a customer expect ( branded or unbranded ).
(ii) A price range before bargaining of customers.
(iii) According to location, service etc. A retailer's demand is may be high.

• Pricing Techniques :-
There are two factors that helps to influenced a retai business:-
(i) Profit margin on the offerings that are sold.
(ii) Cost involved in the selling of merchandise.

• External Factors Influercing the Pricing Strategy :-

(1). Customers :-
Customers plays an important role for Influercing pricing strategy of a retailer.
Via it is personal, social or geographical factors.

Consumer segments can be futher sub divided as under:-
(a) Economic :-
These customers want products in low price.
Doesn't think it is branded or unbranded.

(b) Convenience Oriented :-
These type of customers prefer near by locations.
And spend minimum time in shopping.

(c) Image Oriented :-
These customers want branded products that increase their image.

(d) Variety Oriented :-
These customers want different - different types of same product.
They prefer those shop who have wide range of quantity.
Want fair prices of products.

(1). Loyalty Oriented :-
These customers are best and loyal.
Th think that, that retailer is familiar as well gives discounts on purchasing of products.

(2). Suppliers:-
According to supplier's (image & service) want price of products.
Some supplier to the retailer are be this employees, landlords etc.

(3) Competitors :-
A retailer set their price according to competitor.
If competitor sale their price in less amount their retailer should also minimize their product amount so that people/ consumer can buy their product.

(4) Government :-
When there is new taz approved by government than it changes retailers prices.
And there is legal issues affecting the retail environment can be broadly divided into two :-

Affects the buying of merchandise
i. Price discrimination
ii. Vertical price fixing

Affects the customer
i. Horizontal pricing
ii. Predatory pricing
have wide range fo quantity
Want fair prices of products.

(1). Price Discrimination :-
In this, the vendor sell their products to two or more retailer/ customers in different-different prices.
According to retailers bargaining capacity and sources they sell their products.

(2). Vertical Price Fixing :-
This involves agreement of fixed prices at different-different levels.
Eq- A manufacturer has fixed prices for selling his products to retailers.
Some a wholeseller has fixed price for selling their products to customers/ retailers.

(3). Horizontal Pricing:-
Firstly, it is illegal.
In which all the retailers set a range of price selling to the customers.
Eq- Generally, we see in subji mandies.

(4). Predatory Pricing :-
Firstly, it is illegal.
In which establishing merchandise price to drive competiton away from the market place.

4.11 Methods for setting Retail Prices :-

(1). Every Day Low Pricing (EDLP) :-
Gives every day low product price to the Customers.
The retail prices in below MRP mentioned on the goods.

• Benefits of EDLP :-

(1). Less reliance an price reduction to complete :-
Provides fair price of the products to the customers. Satisfy customers because the price is low. Ex- big bazaar etc.

(2). Reduced Advertising :-
The price is low so they don't think to advertise.
If the retailer drops the price so they think to advertise.

(3). Improved Customer Service :-
Customer got their favourite products in low prices so they become a loyal customers.
And it is the duty of retailer to fulfill their needs for improving customer service.

(4). Better Inventory Management :-
If more and more customers is come to buy products then the retailer products is reduced.
And then they call vendor/ supplier for more products.
So, their inventory management is balanced. Eq- big bazaar etc.

[ High - Low Pricing :- ]
In this, firstly retailer sale new launched product in market at very high price.
After that when the trend of such product decreases then they turns into low price.

• Benefits of High-Low Pricing :-

(1). Some merchandise can be used to target different segment customers :-
Retailers sells products in high price at the beginning.
And, at the end they sells some product at low price.
And it the trend is over then they sells the product in customer range.

(2). Enthusiasm is created among customers :-
Whenever new products launched in market the customers becomes very excited to see the trend to consume and sale etc.

(3). Image of quality is created :-
Generally, retailers sale the products in beginning at high prices.
So customer think that if the product price is high than the quality is also good or branded.

Loss Leader Pricing :-
In this, Retailers sells fast moving products (like sugar, rice, etc) at very low price to attract the customers.
And, when the rush of customers is high then they show their that products for sale that gives high profit (after seles).
Sometimes it is very good for business.
But if the customers does not buy that product that gives high profit to retailers then they face huge loss.
so this concept is called loss-leader.

Skimming Pricing :-
This strategy is similar to High-low Pricing.
In this retailers sells their product to high price at first, lower the price over time.

Penetrating Pricing :-
In this, retailers sells their products in very low price during initial time.
After that when the retailers have loyal and big rush of customers then they try to increase the product range.

Price Lining :-
In this, retailers try to offers their merchandise in odd prices like Rs59.50, Rs79.50 etc.
Because we know that customers don't have 59.50 Rs then they give Rs60 and the retailers got 50 profit more.

Psychological Pricing :-
It is a method of setting prices intended to have a special appeal to consumer these are:-

(i). Prestige price :-
Prestige pricing uses high price for selling their product.
It helps to divert the mind of customer they think that these product are well quality based.
Makes the image of the product Eq- oneplus.

(ii). Reference Pricing :-
It uses customers average budget price for selling their products.
Like, if a customer want to buy a apporel then they already think that these brand of apparel have this range of product (under 1000 - 700 etc).
So the prices is already under customers range.

(iii). Odd-Even Pricing :-
Retailers use odd price like Rs 99.50, Rs 50.50 etc for selling their products.
These odd prices helps the retailers to get big profit (in long time).
Even number like Rs 1000.00, Rs 500.00 to implify higher quality.
Ex- Bata uses this technique.

(iv). Bundled Pricing :-
In this retailers gives choice to the customers if they buy two or more product then they give another fixed choice.
Some retailers also used to move slow selling products by bundling them with popular products.
Ex- Buy 1 liter coca cola and get Rs 50 glass free.

(v). Pre-emptive Pricing :-
In this strategy retailers uses very low prices for selling merchandise.

(vi). Extenction Pricing :-
The main objective is to eliminate the competitors and set very low prices in short term to undercut competiton.
Once the retailer have loyal customers then have time-time increase the cost.
Ex- The best example in JIO firstly it dominate all the competitors by their free services.
Then increase the price.

(vii). Perceived-Value Pricing :-
In this method the retailer in asked form customer tha which range they want product.
Then customer tells him their range then they gives the product to customers.

(viii). Demand Oriented Pricing :-
In this seller alltempts to set the price at the level that the intended buy are willing to pay.
Also called value in use pricing or value oriented pricing.

(ix). Fixed and Variable Pricing :-
In Fixed Pricing the terms detemine the fixed price and such price runs in all over year.
In Variable Pricing firms has fixed price but according to situation like customers wants bargnining then the price is less reduced.