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PURCHASING AND MANAGING YOUR VENDORS
The responsibility of the buyer in a retail store is very important and complicated, because the
goods you purchase are the heart of your business, if you cannot sell what you purchase at a
profit you will be out of business. The following are some important considerations when
performing the purchasing:
- You have to see the products through the
eyes of your customers, you have to know what they want and give
it to them in the most efficient way. Your personal likes or
dislikes are not important.
- Learn from past lessons like dead stock
items and markdown items.
- Do not buy items just because the vendor
offered you a good bargain, your customer needs should be the
driving force for the purchase. If the bargain offered by the
vendor is in line with your customer needs take it, otherwise look
elsewhere.
- Try and do the buying process in your
store, you will have the convenience of being on your home ground
where you can look-up information and ask your staff for
information, for example.
- Never purchase an item when you first see
it, take a picture of it and think about it for a while before
making a decision.
- Try and build long-term personal
relationships with your vendors and their representatives, always
be honest and ethical. Having long term and personal relationships
with your vendors will help you to overcome some of the challenges
in not being able to buy in bulk, vendors might give you good
prices and terms if you do that.
- Always have more than one vendor for the
same item, this will give you negotiating power.
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Negotiating with your vendors
When negotiating with your vendors, you can negotiate the price and the terms of the
sale remember that, negotiating the terms of the sale is as important as negotiating the price. Terms of
the sale include:
- Shipping terms, FOB or delivered.
- Payment terms.
- Payment methods.
- Rebates, allowances and discounts.
- Returns.
- Sales representative visits.
- Promotional materials and goods.
- Samples.
- Advertising material.
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Shipping Terms (Incoterms)
Shipping terms describe certain aspects of the sale such as the point where
ownership of goods transfers from the vendor to you and who pays the freight. The two most
common used shipping terms are:
- FOB (Free on Board)
- DLV (Delivered)
FOB (free on board) means the ownership title of the goods transfers at the
vendor’s site, i.e. you take ownership of goods at the vendor’s site. If something happens to goods
while they are on their way to you it is your responsibility. Typically you are responsible for
the freight cost and insurance cost of the goods while being shipped to you. Your vendor might
bill you separately for the freight and insurance.
DLV (Delivered) means the ownership title of the goods transfers at your store,
ie you take ownership of the goods at your store. If something happens to goods while they are on their
way to you it is your vendor’s responsibility. Typically the cost of the freight and insurance will be
implied in your vendors selling price, some vendors might state the freight on the invoice separately
because in some states the freight is not subject to sales tax. You should check with your state to
see whether or not the freight is subject to sales tax.
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Payment Terms
Payment terms describes when you should pay the vendor for goods and services
you purchased, the following are examples of payment terms:
- COD (Cash on Delivery)
- 3 % 20 days net 40 days
- 4 % 10 days 2% 20 days net 30 days
COD (cash on delivery) are typically used when you are starting to deal with
vendors and you do not have a credit history with them In this case the vendor would require
that you have the money in cash immediately upon delivery of the goods.
3 % 20 days net 40 days, after you establish credit history with your vendors
you will start getting some time to pay your bills. In this example you will get a discount of 3 %
if you pay the invoice within 20 days and the amount has to be paid in full within 40 days no discount
is offered in this case.
4 % 10 days, 2% 20 days net 40 days, offers you a discount of 4 % if the invoice
is paid within 10 days and a discount of 2 % if paid within 20 days. The invoice must be paid in full
in 30 days, at which point no discount is offered.
The type of discount you receive when you pay early is called (Prompt Payment Discount).
You need to look for the Base Line Date, this is the day on which the clock starts ticking for the payment.
Different vendors have different definitions of the Base Line Date, some of them think of it as the day the
goods left their warehouse, others think of it as the day when they send you the invoice.
When your vendor offers you payment terms such as 2 % 20 days net 40 days, you have the
option of paying the invoice within 20 days and getting 2 % discount on the amount, this is a good option,
however the other option is to pay it after 40 days and get no discount. If you can sell the goods within
40 days and pay your vendor you would not have committed any money towards this business, this also a good
strategy. In realty it is hard to turnover your inventory before you pay your vendor, the point is that both
options are worth considering, of course the option you take depends on your unique business and cash
flow situation.
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Rebates
Rebates are a form of paybacks from the vendor
to you the store operator. For example, you could set-up a rebate
agreement with your vendor in which you get $ 0.01 for every gallon
of gas you buy. This means every time you purchase gas, the vendor
should accrue you an amount of money equaling (gallons purchased *
0.01). You do not get this money every time you purchase, however
every time you do a purchase of gas the amount is accrued for you
with the vendor until such time comes when the rebate agreement is
settled, at that time the vendor writes you a check.
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Price Classification
It is important in a retail
store to give your customers the best variety, for that reason it is
good to carry different grades of the same products at different
prices, so you can offer your customer for example the finest shirt,
a very good shirt, a good shirt and a Ok shirt.
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Typical Purchase Cycle
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Typically in purchase cycles, the following steps are carried out:
1. Identify what you need to purchase.
2. Identify the vendor who will supply the item.
3. Issue a purchase order to the vendor with all of the necessary details about the purchase.
4. Receive the items into your stock.
5. Verify that the items received agree to the purchase order issued to the vendor.
6. Receive the invoice from the vendor.
7. Verify that the invoice price agrees with the purchase order price (only if you know the price at the time of purchase order).
8. Evaluate the vendor.
9. Pay invoice.
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Maintaining Vendor Master Record
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Purchase Orders
A purchase order (PO) is the way you communicate your needs for inventory to a vendor. A purchase order will contain
information such as vendors name, required items and quantities, see below:
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