Retail Book Chap14

CHAPTER 14: BUYING MERCHANDISE ANNOTATED OUTLINE

INSTRUCTOR NOTES

I. Introduction •

After creating an assortment plan for the category, forecasting sales, and developing a plan outlining the flow of merchandise, the next step in the merchandise management process is to buy the merchandise.

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The first strategic decision that needs to be made is the type of merchandise to buy for the category: well-known brands or private-label brands that are exclusively available from the retailer.

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Although buyers meet and negotiate with vendors and manufacturers each season concerning new merchandise, there is a trend toward developing long-term strategic relationships with key suppliers (as discussed in Chapter 10).

I. Brand Alternatives •

See PPT 14-4 Retailers and their buyers face a strategic decision about the mix of national and private-label brands to offer in a product category. A. Types of Brands 1. National Brands See PPT 14-10 and PPT 14-11

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National brands, also known as manufacturer brands, are products designed, produced, and marketed by a vendor and sold to many different retailers. The vendor is responsible for developing the merchandise and establishing an image for the brand.

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Some retailers their buying activities around national brands that cut across merchandise categories. Managing a category by national brand, rather than a more traditional classification scheme,

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gives the retailer more clout in dealing with the vendor. 2. Private-Label Brands •

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Private-label brands (also called store brands, house brands or own brands) are products developed and marketed by a retailer and available for sale only from that retailer.

See PPT 14-5 and PPT 14-12 through PPT 1415

Ask students why a manufacturer of national Typically, retail buyers or category managers brands would want to produce private-label products for grocery stores. (Excess production develop specifications for the merchandise capacity) and then contract with a vendor to manufacture it. The retailer is responsible for promoting the brand. Retailers' use of private labels was relatively small in the past for several reasons. First, national brands had been heavily advertised on TV and other media for decades, creating a strong consumer franchise. Second, it had been hard for retailers to gain the economies of scale in design and production necessary to compete against manufacturer brands. Third, many retailers weren't sophisticated enough to aggressively compete against manufacturer brands. Finally, private labels had a reputation of being inferior to manufacturer brands.

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In recent years, private labels have assumed a new level of significance by establishing distinctive identity among retailers.

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Private branded products now account for an average of 25 percent of the purchases in the United States and roughly 45 percent in Europe.

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Private-label dollar volume in supermarkets, drug chains, and mass merchandisers is increasing twice as fast as national brands.

Ask students about the brand reputation and quality of various private labels vis-à-vis manufacturer brands in some items, e.g., jeans (Gap versus Levi's), shoes (Nike versus Payless), and cheese (Kraft versus local supermarket brand). What are the reasons behind these differences in perceived brand reputations and quality? When does it not matter if the brand was a manufacturer brand or a private label brand?

3. Licensed Brands •

A special type of manufacturer brand is a

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Have students pick a licensed brand and decide if, as a retailer, they would want to purchase it

licensed brand, in which the owner of a well-known brand name (licensor) enters a contract with a licensee to develop, produce, and sell the branded merchandise. •

The licensee may be either (1) the retailer that contracts with a manufacturer to produce the licensed product or (2) a third party that contracts to have the merchandise produced and then sells it to the retailer.

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Licensed brands' market share has grown increasingly large in recent years. Owners of trade names not typically associated with manufacturing have also gotten into the licensing business.

for their store. Try to find out how much your University makes on licensed brands. No matter what it is, it will probably shock you and your students.

See PPT 14-6, 14-7, and 14-8

B. National or Private-Label Brands? •

Buying from vendors of national brands can help retailers build their image and traffic flow and reduce their selling/promotional expenses. Retailers need to spend relatively less money selling and promoting national brands.

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However, since vendors of national brands assume the expenses of designing, manufacturing, distributing and promoting the brand, retailers typically realize lower gross margins for them compared with those for their own private-label brands. Also, since national brands are sold by other retailers, competition can be intense. Customers compare prices for these brands across stores.

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To encourage retailer support, some national brand vendors make variations of their branded merchandise for specific retailers. Retailers are less likely to compete on price when selling these unique brand variations, so their margins will be higher and the will be more motivated to devote resources to selling these products.

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Stocking national brands may increase or decrease store loyalty. If the brand is available only at a limited number of

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retailers, customers loyal to the brand will also be loyal to that limited set of retailers. Alternatively, if the brand is available from many retailers in a market, customer loyalty to a specific retailer may decrease. •

Another problem with national brands is that they limit the retailer’s flexibility. Vendors of strong brands can dictate how their products are displayed, advertised and priced.

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Offering private-label brands has several advantages: (1) exclusivity boosts store loyalty, (2) well known, highly desirable private-labels enhance the retailer’s image and draw in customers, (3) relatively lower prices for consumers, (4) fewer restrictions on merchandise display, promotion or pricing, and (5) potentially greater gross margin opportunities.

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There are draw-backs to private-label brands as well. Retailers must make significant investments to design merchandise, manage global manufacturers, create customer awareness, and develop a favorable image for the brand. In addition, if the private-label merchandise doesn’t sell well, the merchandise can’t be returned to a vendor or sold at an off-price retailer. See PPT 14-9

II. Buying National-Brand Merchandise •

Buyers of fashion apparel and accessory categories typically make major merchandise buying decisions five or six times a year, six months before the beginning of a season, and then make minor adjustments to these decisions during the season.

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Buyers of staple merchandise categories make decisions about buying new merchandise items less frequently, but they replenish the merchandise on a continuous basis, sometimes daily. See PPT 14-16 and 14-17

A. Meeting with Vendors

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Buyers “go to market” to see the variety of available merchandise and make buying decisions.

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A wholesale market for retail buyers is a concentration of vendors within a specific geographic location, perhaps even under one roof or over the Internet.

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These markets may be permanent wholesale market centers or annual trade shows or trade fairs.

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1. Wholesale Market Centers •

For many types of merchandise, particularly fashion apparel and accessories, buyers regularly visit with vendors in established market centers.

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At specific times during the year, these wholesale centers host market weeks during which buyers make appointments to visit the various vendor showrooms. Vendors that do not have permanent showrooms at the market center lease temporary space to participate in market weeks.

2. Trade Shows •

Trade shows provide an opportunity for buyers to see the latest products and styles and to interact with vendors.

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Trade shows are typically staged at convention centers not associated with wholesale market centers. Vendors display their merchandise in designated areas and have sales representatives, company executives, and sometimes celebrities available to talk with buyers as they walk around the exhibit area. See PPT 14-18, 14-19 and 14-20

B. Negotiating with Vendors

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1. Knowledge is Power •

The more the buyer knows about both her own situation and the vendor’s, the more effective she will be during negotiations.

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Merchandise returns are often a topic of conversation. Perhaps the vendor has historically refused merchandise returns but rather offers markdown money, funds to cover the retailer’s lost gross margin dollars due to markdowns needed to sell unpopular merchandise.

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As vendors and their representatives are excellent sources of market information, particularly what is and isn’t selling, some part of the meeting should be sent discussing market trends.

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The buyer will likely have market and product information of value to the vendor in return.

2. Issues •

Buyers should be prepared to cover a variety of issues in their meeting with the vendor including: (1) price and gross margin, (2) additional markup opportunities, (3) terms of purchase, (4) delivery and exclusivity, (5) advertising allowances, and (6) transportation.

Ask students to consider the positions of both the buyer and the vendor on each of these six issues. What position will each of them bring to the negotiation?

C. Tips for Effective Negotiations1 1. Have at Least as Many Negotiators as the Vendor •

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Retailers have a psychological advantage at the negotiating table if the vendor is outnumbered. At the very least, the negotiating teams should be of equal number.

These tips are based on Roger Fisher and William Ury, Getting to Yes (New York: Penguin, 1981).

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2. Choose a Good Place to Negotiate •

From a psychological perspective, people generally feel more comfortable and confident in familiar surroundings.

3. Be Aware of Deadlines •

Recognizing important deadlines will help the parties come to closure in a timely manner.

4. Separate People from the Problem •

Personal relationships, favors and threats have no place in the negotiation meeting.

5. Insist on Objective Information •

The best way to separate people from business information is to rely on objective information.

6. Invent Options for Mutual Gain •

Inventing multiple options is part of the planning process, but knowing when and how much to give, or give up, requires quick thinking at the bargaining table.

7. Let Them Do the Talking •

There’s a natural tendency for one person to continue to talk if the other person involved in the conversation doesn’t respond. If used properly, this can work to the negotiator’s advantage.

8. Know How Far to Go •

Recognize the fine line between negotiating too hard and walking away from the table with less than necessary.

9. Don’t Burn Bridges •

The world of retailing is relatively small. Neither buyer nor vendor can afford to be known in the trade as unfair, rude, or worse.

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Ask students to suggest some locations for the negotiation that would be comfortable for the buyer and for the vendor.

10. Don’t Assume •

To be certain there are no misunderstandings, participants should orally review the outcomes as the end of the negotiating session. Both parties should also summarize the session in writing as soon as possible after it ends. Legal Issues are summarized in PPT 14-43

D. Legal and Ethical Issues •

Given the large number of negotiations and interactions between retail buyers and vendors, ethical and legal issues are bound to arise.

1. Terms and Conditions of Purchase •

The Robinson-Patman Act, passed by the U.S. Congress in 1936, potentially restricts the prices and terms that vendors can offer to retailers. The Act forbids vendors from offering different terms and conditions to different retailers for the same merchandise and quantity. The Act was passed to protect independent retailers from chain store competition.

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Vendors can offer different terms to retailers for the same merchandise and quantities if the cost of manufacturing, selling or delivery are different.

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Different prices can also be offered if the retailers are providing different functions.

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Ask students to suggest situations where offering a different price to different retailers may be acceptable.

2. Resale Price Maintenance •

Resale price maintenance (RPM) is a requirement imposed by a vendor that a retailer cannot sell an item for less than a specific price – the manufacturer’s suggested retail price (MSRP). Vendors place this restriction on retail prices so that retailers will have adequate margin to provide the services needed to sell the vendor’s products.

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RPM is an approach for reducing free riding, the practice of one retailer taking more than its fair share of benefits but not incurring its fair share of costs to sell or service the vendor’s product.

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Although RPM has been viewed as a restraint of competition, and thus illegal, in the past, it is now legal.

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Some retailers do not appreciate RPM. Their position is that they own the merchandise, they should be able to sell it for whatever they like, even if it is at very low prices. See PPT 14-44

3. Commercial Bribery •

Commercial bribery occurs when a vendor or its agent offers to privately give or pay a retail buyer "something of value" to influence purchasing decisions.

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Gifts could be construed as bribes or kickbacks, which are illegal.

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Many companies forbid employees to accept gifts of any kind from vendors.

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When the gift or favor is perceived to be large enough to influence a buyer’s purchasing behavior, it is considered to be commercial bribery, and therefore illegal.

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See PPT 14-45

4. Chargebacks •

A chargeback is a practice used by retailers in which they deduct money from the amount they owe a vendor.

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The retailer may deduct money from an invoice because merchandise isn’t selling.

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The second reason is vendor mistakes such as shoddy labeling, lost billings, wrongsize boxes or hangers, missing items, and late shipments.

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Although often legitimate, chargebacks are often viewed as being unjustified by vendors.

5. Slotting Allowances See PPT 14-46 and 14-47

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Slotting allowances (also called slotting fees) are fees paid by a vendor for space in a retail store. Although generally considered to be a legal for of competition among vendors for shelf space, slotting allowances may be illegal under antitrust laws in certain circumstances.

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Products whose brand names command relatively low customer loyalty pay the highest slotting allowances. Also, large grocery chains can demand higher slotting allowances than small mom-and-pop stores can.

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As part of a program to develop strategic partnerships, some manufacturers avoid slotting allowances by working closely with retail stores and sharing the financial risk of new products.

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Antitrust concerns with slotting allowances arise when a dominant firm uses them to exclude rivals.

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Choose two students. One is a grocery store buyer. The other is a sales manager for a consumer packaged goods manufacturer. Have the students justify why a slotting allowance is or is not justified.

6. Buybacks See PPT 14-48

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The buyback (also known as stocklift or lift-out) is a strategy vendors and retailers use to get products into retail stores.

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A buyback can occur under two scenarios. First, and most ethically troubling is when a retailer allows a vendor to create space for its goods by “buying back” a competitor’s inventory and removing it from a retailer’s system. Second, the retailer forces a vendor to buy back slowmoving merchandise.

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Technically, a company with market power may violate federal antitrust laws if it stocklifts from a competitor so often as to shut it out of a market. But such cases are difficult to prove.

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Ask students “how bad” an ethical situation this practice seems to them.

7. Exclusives •

Vendors often grant exclusive arrangements to retailers, so that no other retailer in the territory can sell a particular brand.

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These territorial arrangements can benefit vendors by assuring them that "quality" retailers represent their products.

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In cases of limited supply, providing an exclusive territory to one retailer helps ensure that enough inventory can be carried to make a good presentation and offer customers an adequate selection.

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By granting exclusive territories, a firm gives its dealers a monopoly for its products. The dealers know there will be no competing retailers to cut prices, so their profit margins are protected. The retailer with an exclusive territory has the incentive to carry more inventory; use extra advertising, personal selling, and sales promotions; provide special displays and display areas; and develop special services for customers.

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This practice is legal so long as consumers have alternative sources for similar products.

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It is important to point out that in all of these antitrust issues, small vendors or retailers can usually get away with the activity because to do so will not restrict trade or tend to create a monopoly. Thus, a small vendor could grant an exclusive territory, while a large vendor could not.

8. Counterfeit Merchandise See PPT 14-49 and 14-50

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Counterfeit merchandise includes goods that are made and sold without permission of the owner of a trademark, a copyright, or a patented invention that is legally protected in the country where it is marketed.

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Trademarks, copyrights, and patents are all under the general umbrella of intellectual property.

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Intellectual property is intangible and is created by intellectual (mental) effort as opposed to physical effort. A trademark is any mark, word, picture, device, or nonfunctional design associated with certain merchandise. A copyright protects original work of authors, painters, sculptors, musicians, and others who produce works of artistic or intellectual merit.

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Ask students what products they have seen that they think are counterfeit.

9. Gray Markets and Diverted Merchandise •

A gray-market good possesses a valid U.S. registered trademark and is made by a foreign manufacturer, but is imported into the United States without permission of the U.S. trademark owner.

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Diverted merchandise is similar to graymarket merchandise except there need not be distribution across international boundaries.

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This term applies to merchandise that is diverted from its legitimate channel of distribution. The diversion often involves a wholesaler (the diverter) and a discount store operator.

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Some discount store operators argue that customers benefit from the lack of restriction on gray-market and diverted goods because it lowers prices.

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Traditional retailers claim gray-market and diverted merchandise has a negative impact on the public. After sale service will be unavailable and trademark images may be hurt.

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Vendors wishing to avoid the gray-market problem have several remedies.

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First, they can require all of their retail and wholesale customers to sign a contract stipulating that they will not engage in gray marketing.

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Another strategy is to produce different versions of products for different markets.

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It is important to note that gray market merchandise is not counterfeit! It is imported and sold to the retailer without the knowledge of (or profit to) the U.S. trademark owner.

See PPT 14-51 and 14-52 Ask students to discuss the difference between gray market and diverted merchandise.

See PPT 14-55

10. Exclusive Dealing Agreements •

Exclusive dealing agreements occur when a manufacturer or wholesaler restricts a retailer into carrying only its products and nothing from competing vendors.

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The effect on competition determines the legality of these contracts.

11. Tying Contracts See PPT 14-56

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A tying contract exists when a vendor and a retailer enter into an agreement that requires the retailer to take a product it does not necessarily desire (the "tied product") to ensure it can buy a product it does desire (the "tying product").

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Tying contracts are illegal if the effect may be to substantially lessen competition or tend to create a monopoly, but the complaining party has the burden of proof.

Ask students to give an example of a product that could be legitimately used in a tying contract (e.g. McDonald's ground beef) and one that would not (napkins at McDonald's).

12. Refusal to Deal See PPT 14-57

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Generally, both a supplier and a retailer have the right to deal or refuse to deal with anyone they choose. There are exceptions to this general rule when there is evidence of anti-competitive conduct by one or more firms wielding market power.

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A manufacturer may refuse to sell to a particular retailer, but it cannot do so for the sole purpose of benefiting a competing retailer.

III. Buying Private-Label Merchandise •

Buying and selling private-label merchandise is a strategic decision that can involve a significant investment.

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Retailers that offer a significant amount of private-label merchandise, like Macy’s and The GAP, have large departments dedicated to managing their private-label merchandise all the way from design, to

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The issue again is whether the vendor is large enough to restrict trade or create a monopoly. See exclusive territories.

manufacture. •

Most retailers do not own and operate manufacturing facilities.

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Small retail chains can offer private-label merchandise without making a significant investment in the supporting infrastructure. Many national brands will modify their national brand merchandise and put the store’s label on the products.

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Also, firms specializing in producing private labels can provide private-label merchandise just as national brand vendors do.

A. Reverse Auctions •

Rather than negotiating with manufacturers to produce their private-label merchandise, many retailers are now using reverse auctions to get quality private-label merchandise at low prices.

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Auctions conducted by retailer buyers of private-label merchandise are called reverse auctions because there is one buyer, the retailer, and many potential sellers, the manufacturing firms.

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In reverse auctions, retail buyers provide specifications for what they want a group of potential vendors to bid on. The competing vendors then bid on the price at which they are willing to sell until the auction is over.

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Reverse auctions have not been very popular with vendors who prefer not to be anonymous contestants in bidding wars where price alone, without consideration of service or quality is the sole basis for winning business.

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Ask students to consider the costs and benefits of the reverse auction from both retailer’s and vendor’s sides. See PPT 14-30, 14-31, and 14-32

B. Global Sourcing •

An important issue facing large retailers that design and contract for the production of private-label merchandise is to select a manufacturer.

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Barriers to international trade are diminishing which means that retailers can consider sources of production from across the globe. 1. Costs Associated with Global Sourcing Decisions

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Retailers use production facilities located in developing economies for much of their private-label merchandise because of the very low labor costs in these countries.

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To counterbalance the lower acquisition costs, however, there are other more subtle expenses that increase the costs of sourcing private-label merchandise from other countries including foreign currency fluctuations, tariffs, longer lead times, and increased transportation costs.

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Fluctuations in currency exchange rates can increase costs.

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A tariff , also known as a duty, is a tax placed by a government upon imports.

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Import tariffs have been used to shield domestic manufacturers from foreign competition and to raise money for the government.

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In general, since tariffs raise the cost of imported merchandise, retailers have always had a strong incentive to reduce them.

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It is also more difficult to predict exactly how long lead time will be when sourcing globally.

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Transportation costs are significantly higher when merchandise is produced in

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Have students give examples of products that they believe has a higher/lower image than it deserves just because of the country in which it is made.

foreign countries. B. Managerial Issues Associated with Global Sourcing Decisions •

The managerial issues discussed in this section are quality control and building strategic partnerships.

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When sourcing globally, it is more difficult to maintain and measure quality standards than when sourcing domestically.

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Typically, these problems are more pronounced in countries that are far away and underdeveloped.

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There are both direct and indirect ramifications if merchandise is delayed because it has to be remade due to poor quality.

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A more serious problem occurs if the merchandise is delivered to the stores without the problem having been detected. Customers can become irritated and question merchandise quality.

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In addition, the collaborative supply chain management approaches described in Chapter 10 are more difficult to implement when sourcing globally. Collaborative systems are based on short and consistent lead times, and trust and the sharing of information. These systems are more difficult to develop globally than domestically.

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Ask students to discuss barrier to the development of global collaborative supply chain relationships.

A final issue with global sourcing is the policing of potential violations of human rights and child labor laws.

IV. Support Services for the Buying Process •

See PPT 14-29 Two services are available that can help buyers more effectively acquire merchandise.

A. Resident Buying Offices

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Resident buying offices are organizations located in major market centers that provide services to help retailers buy merchandise.

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As retailers have become larger and more sophisticated, the third-party resident buying offices have become less important. Retailers simply perform the services formerly provided by these buying offices themselves.

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B. Internet Exchanges •

Retailers use the Internet for doing research for and buying merchandise or services.

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Retail exchanges are electronic marketplaces operated by organizations that facilitate the buying and selling of merchandise using the Internet. They provide an opportunity for vendors and retailers to interact electronically rather than meet face to face in a physical market.

V. Strategic Relationships •

Maintaining strong vendor relationships is an important method of developing a sustainable competitive advantage.

A. Defining Strategic Partnerships See PPT 14-34, 14-35, and 14-36

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Relationships between retailers and vendors are often based on arguing over splitting up a profit pie. This is basically a win-lose relationship because when one party gets a larger portion of the pie, the other party gets a smaller portion. Both parties are interested exclusively in their own profits and are unconcerned about the other party’s welfare.

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A strategic relationship, also called a partnering relationship, is when a retailer and a vendor are committed to maintaining the relationship over the long term and investing in opportunities that are mutually beneficial to the parties.

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A strategic relationship is a win-win relationship. Both parties benefit because the size of the pie has increased – both the retailer and vendor increase their sales and profits. Strategic relationships are created explicitly to uncover and exploit joint opportunities.

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Members in strategic partnerships depend on and trust each other heavily; they share goals and agree on how to accomplish those goals; and they’re willing to take

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Ask students to identify the benefits of entering into strategic relationships. One way to tease out the various issues is to compare relationships that are not of the partnering type with partnering relationships. The costs of transactions, negotiations, as well as some obvious costs of dealing with partners who have only their own interests at heart can be uncovered. By contrast, the partnering relationship admits mutual goals, a commitment to preserving the relationship and may forsake short-term gains for a long-term mutually profitable relationship.

risks, share confidential information, and make significant investments for the sake of the relationship. •

A strategic relationship is like a marriage. When businesses form strategic relationships, they are wedded to their partners for better or worse.

B. Maintaining Strategic Relationships •

See PPT 14-37 The four foundations of successful strategic relationships are mutual trust, open communication, common goals, and credible commitments. 1. Mutual Trust See PPT 14-38

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The glue in strategic relationships is trust.

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Trust is a belief that a partner is honest (reliable, stands by its word, sincere, fulfills obligations) and is benevolent (concerned about the other party's welfare).

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When vendors and buyers trust each other, they’re more willing to share relevant ideas, clarify goals and problems, and communicate efficiently.

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Information shared between the parties becomes increasingly comprehensive, accurate, and timely.

If the retailer doesn’t trust their vendors, they won’t be willing to share information necessary for strategic partnerships to succeed.

2. Open Communication •

Buyers and vendors in a relationship need to understand what’s driving each other’s business, their roles in the relationship, each firm’s strategies, and any problems that arise over the course of the relationship. 3. Common Goals

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Retailer and Vendor must have same goals, such as maintaining high product image, limiting distribution outlets, and maintaining suggested retail prices.

Shared goals give both members of the relationship incentive to pool their strengths and abilities, and to exploit potential opportunities between them.

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Common goals also help to sustain the partnership when expected benefit flows aren’t realized. 4. Credible Commitments Some vendors help retailers by investing in store displays, coop advertising, and/or inventory management systems

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Credible commitments are tangible investments in the relationship.

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Credible commitments involve spending money to improve the supplier’s products or services provided to the customer.

B. Building Partnering Relationships •

The development of strategic partnerships tends to go through a series of phases characterized by increasing levels of commitment: (1) awareness, (2) exploration, (3) expansion, and (4) commitment.

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In the awareness stage, no transactions have taken place. Reputation and image of the vendor can play an important role in determining if the buyer moves to the next stage.

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During the exploration phase, the buyer and vendor begin to explore the potential benefits and costs.

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Once the buyer has collected enough information about the vendor to consider developing a longer-term relationship, the buyer and the vendor determine that there may be potential for a win-win relationship.

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If both parties continue to find the relationship mutually beneficial, it moves to the commitment stage and becomes a strategic relationship. The buyer and vendor make significant investments in the relationship and develop a long-term perspective toward it.

VI. Summary

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See PPT 14-39 Ask students for examples of manufacturers who sell direct over the Internet. (Hewlett-Packard) Ask them whether they think the increased sales they get by selling over the Internet is worth alienating their traditional retail customers.

ANSWERS TO DISCUSSION QUESTIONS AND PROBLEMS 1.

Assume you have been hired to consult with The Gap on sourcing decisions for sportswear. What issues would you consider when deciding whether you should buy from Mexico or China, or find a source in the United States? I would consider these issues when consulting The Gap on sourcing decisions: Country of Origin Effect, Foreign Currency Fluctuations, Tariffs, Foreign Trade Zones, Cost of Carrying Inventory, Transportation Costs, Quality Control, Collaborative supply chain management, and International Human Rights and Child Labor Violations. Given the choice between sourcing in Mexico, China, and the United States, various combinations of these issues will influence the advice I will give pertaining to sourcing in any one of these various countries. For example: China might be a problematic choice because of its history of human rights abuse, but is also a good choice because labor is comparatively inexpensive. Similarly, Mexico might be problematic because of instability of its currency, but a positive choice on the issue of tariffs due to the passage of NAFTA and less costly expenses than might be incurred by being close to the United States. The United States might be the best choice when accounting for every one of the aforementioned issues and other issues, but labor is expensive and unions may be difficult to deal with. The corporate priorities of The Gap would also have to be accounted for given the relative advantages and disadvantages that exist for sourcing in any country.

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What kinds of social courtesies or gifts (lunches, theater tickets, etc.) are appropriate and acceptable for buyers to accept from vendors? Students will have various opinions as to what is appropriate and acceptable and what is not. The purpose of this question is not to address it with a clear answer, but to make students think about what their own moral/ethical positions are in relation to “social courtesies”. Some stores have policies that forbid their buyers to accept gifts of any kind (including lunch); others leave this decision up to the discretion of the individual buyers. The point needs to be emphasized that students need to develop their own sense of how they will handle decisions of this type, given the opportunity.

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What are the advantages and disadvantages of national brands versus private-label brands? Does your favorite clothing store have a strong private-label brand strategy? Should it? National brands are products designed, produced, and marketed by a vendor and sold to many different retailers. The vendor is responsible for developing the merchandise and establishing an image for the brand. Retailers carrying national brands receive a number of advantages. These brands help to build both the retailer’s image and its traffic flow. They also reduce expenses as the vendor is responsible for promoting the merchandise. Private-label brands are products developed and marketed by a retailer. These include labels like Craftsman belonging to Sears, Arizona in JCPenney, and Kmart’s Martha Stewart or stores that sell their own labels like The Gap. In recent years, private-labels have assumed a new level of significance by establishing distinctive identities among retailers.

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In discussing the strategies of their favorite clothing stores, students should identify several advantages that would lead the retailers to carry private-label merchandise. Private-label products now account for an average of 20% of the purchases in grocery stores and as much as 50% in some product categories in drug stores. Offering privatelabels provides a number of benefits to retailers. First, the exclusivity of store brands boosts store loyalty. Second, they can enhance store image if the brands are high quality and fashionable. Third they can draw customers to the store. Fourth, there are no restrictions on display and finally, gross margin opportunities may be greater. 4.

What is the potential benefit of retail exchanges and what has prevented them from providing these benefits? Retail exchanges are electronic marketplaces operated by organizations that facilitate the buying and selling of merchandise using the Internet. The software and services provided by exchanges help retailers; vendors and their supply chain partners reduce costs and improve efficiency by automating many supply chain processes. Despite the benefits offered by retail exchanges, they are not without limitations including the high levels of technical complexity required to implement the exchange, and the highly competitive nature of the retail industry making retailers reluctant to openly share information on the exchanges.

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What are the advantages and disadvantages of developing partnering relationships with vendors? From the retailer’s perspective, partnering relationships with vendors are often “winwin” situations. A partnering relationship will likely increase both the retailer’s sales and its profits as a result of collaboration with the vendor. The partnering relationship will improve flows of both information and merchandise, allowing the retailer to provide excellent offerings to its customers while reducing its costs of doing business.

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Describe the growth of private-label store brands. How can retailers capitalize on this growing trend? What conditions in the external environment have made it possible for private-label brands to thrive? In recent years, private-label brands have become increasingly prominent in the marketplace. Before this upswing in popularity, private-label brands were viewed as representing lower quality merchandise from the consumer’s perspective. More recently, national brand manufacturers have entered exclusive relationships to provide privatelabel merchandise for specific retailers at the same level of quality as the vendor’s own brands. This trend toward national brand vendors producing exclusive private-label merchandise for its strategic partners allows a retailer to use its private-label to create or enhance a distinctive retail image and to generate customer loyalty for its own store brand. The intense level of competition within the retail industry, as well as economic pressures on consumer spending make the creation of private-label merchandise targeted at enhancing the retailer’s image and fostering increased loyalty from its customer base.

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7.

What merchandise categories are important for private-label brands, and where do you expect expansion in the future? Clothing (The GAP and Banana Republic), tools (Sears’ Craftsman), and appliances (Sears’ Kenmore) are among the largest categories of private-label brand spending. Drugstores, supermarkets, and mass merchandisers all report significant sales growth for their private-label brands. In fact these retailers report sales growth for private-labels at nearly double the sales growth rate for national brands. This growth will likely fuel more private-label expansion into food products, health and beauty products, and household items. With the market presences of category killers like Best Buy, perhaps consumer electronics will be another area for private-label expansion.

8.

What are national brand manufacturers and suppliers doing to respond to the growth of private-label brands? In response to the trend toward private-label merchandise, some manufacturers are encouraging retailer support by making variations of their branded merchandise exclusively for a retail partner. This exclusivity protects retailers from the intense level of price competition generated by national brands available from numerous retailers.

9.

Select three retailers that each have a different brand strategy – one that sells only store brands, one that sells a mixture of store brands and national brands, and one that sells only national brands – and compare their retail mixes and target audience. A possible answer here might include the GAP, a department store like Macy’s and your local, independent pet store. The GAP offers only private brands in its assortment of clothing and accessories targeted primarily at women. Macy’s offers nearly an evenly split mix of national brands and private-label brands, in its broad variety and deep assortment of merchandise. This high number of merchandise options allows Macy’s to reach a broad spectrum of consumers. As a small, independent retailer, your local pet store likely carries only national brands. Given its size and local target market, developing and managing private-label brands would be feasible for this retailer.

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ANCILLARY LECTURES AND EXERCISES LECTURE # 14-1: NEGOTIATING WITH THE VENDOR ------------------------------------------------Instructor’s Note: PowerPoint slides 14-18 to 14-28 can be used with this lecture. ------------------------------------------------Introduction What is negotiation? See PPT 14-18. Negotiation is a two-way communication designed to reach an agreement when parties have both shared and conflicting interests. Three key points: 1.

Two-way communication - to have a negotiation there has to be communication being sent and received.

2.

Agreement - that our goal to get mutual agreement among the parties..

3.

Shared or conflicting interests - both parties can have the same or very different interests. For instance, a buyer and seller can start off with very different goals, but at the end they must be in agreement for the negotiation to be successful.

If we agree that negotiating is simply getting what you want from others, then it stands to reason that people are involved in the negotiating activity everyday. Ask students: whom do you negotiate with and for what results? Responses might include: 1.

Spouse - Where to go for dinner.

2.

Shopkeeper - Dickering price on antiques.

3.

Children - What time they should go to bed.

4.

Boss - Due date on project.

5.

Stranger - Seat on subway/bus.

Everyone negotiates everyday. Though we all have lots of practice, negotiating is still not easy to do well. As buyers, the success, i.e., profitability of the business would be greatly affected by how well they negotiate. In talking about negotiating we want to direct our attention to results. What is it we want to achieve? What are the benefits and effects of a successful negotiation? At the same time, what are the negotiating results we want to avoid? Potential results Today, planning and execution is the method through which obstacles are overcome.

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When involved in negotiating, the results you achieve can be any of the following: 1.

WIN - WIN (Buyer wins, vendor wins)

2.

WIN - LOSE (Buyer wins, vendor loses)

3.

LOSE - LOSE (Buyer loses, vendor loses)

WIN - WIN See PPT 14-24. This is the best situation. Based on cooperation and collaboration. Enhances vendor trust in buyer as a professional. Produces long-term, best deals for buyer and the company. Unless you are involved in used car sales, an important goal of negotiations is to develop long-term relationships. The only way this can be done is if both parties win. Does not mean “giving-in or being soft.”

WIN - LOSE See PPT 14-22. There are some instances where win/lose can be positive -- if buyer doesn’t want to develop a long term relationship. It is generally negative because if the vendor feels like a loser, then there is little possibility of going back to the vendor again. Win/lose can turn into lose/lose. For instance, if a buyer gets the lowest price in the market, the vendor might just conveniently not ship. Vendor in business to make money, cannot “lose” all the time. For instance, an appliance distributor decided not to sell to a department store in Denver because the distributor was unable to make money because the negotiations were always so unfavorable to the distributor.

LOSE - LOSE See PPT 14-23. Wastes time and energy. No relationship established. Objectives not met. How can you determine what negotiating result you are going to achieve? Your style will play an important role. Let‘s take a look at a video and see if these buyers are getting the results they want. Principled Negotiations The concept of principled negotiating is based on four basic points:

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1.

People

2.

Interests

3.

Options

4.

Criteria

See PPT 14-25. Let’s talk about them individually. Separate the people from the problem Negotiators are people first -- all have human aspects. Relationships between negotiators tend to become entangled with the problem. There is a need to separate the relationship from the problem and see ourselves as working side by side. Attack the problem, not each other. Focus on interests, not positions Position is something you have decided on. Interests are what caused you to decide (desires, concerns) Put yourself in the other person’s shoes and examine each position taken; look for understanding of their interests. Ask yourself why they have taken that position? Communicate your interests firmly and openly. Invent options for mutual gains Think of a wide range of possible solutions that will benefit both parties. Consider all options -- all sides. Get over the obstacles that inhibit you from inventing an abundance of options. Don't make premature judgment, i.e., jumping to conclusions. There is no one best single answer. There are many possibilities. Don't assume there is a “fixed pie”, “either I get it or you do”. There are possibilities to make the pie bigger for both parties. Thinking that a solution to their problem is their problem. A good negotiator always thinks of many solutions to their problem. Get the options out in the open. Look for mutual gain and shared interests. Insist on using objective criteria Use fair standards, i.e., market value, cost. Once agreement is reached, what standards will be used to make sure the deal is carried out? Be reasonable and be open to reason. Reach solutions based on principle not pressure.

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For greater clarification, let’s contrast the three style of negotiating and the characteristics of the negotiator using each specific style. Which style do you feel will get the desired result of Win/Win? Why? We said earlier that success is based on negotiating style. Planning In addition to style and probably even more important is one simple word/action -PLANNING. To be effective in the market, to get the success you want, you must plan effectively. Being prepared -- ready to anticipate and answer questions gives the buyer confidence. Confidence breeds success! What are the areas that we must look at in order to plan? 1.

History - To go forward, you must understand what has happened in the past. Know the merchandise and its sales history. What is the customer telling you? What is the future potential?

2.

Buyer Objectives -- optimum and realistic - Know what you want and what you will settle for to achieve it. Set optimum goals and realistic goals. Determine what you could give up in your optimum goal to reach your realistic goal.

3.

Concessions. Concessions are those we can afford to give up. Only use your concessions after you have explored every option available.

4.

Vendor objectives - An important point in preplanning is anticipating what the vendor wants and what he will settle for. Vendors, like buyers, will have concessions ready, but will keep them hidden.

Setting objectives Keep in mind that to set goals you must: 1.

Know the market: What are the current trends? How is business generally? How are each of your vendors performing against the overall market?

2.

Know the vendor: How is his/her business? What inventory position is he/she in? (Did they make too much this season? Is he/she a manufacturer or an importer? This will determine the delivery dates, and amount of control you and the vendor have over the order. Has he/she been hit with major cancellations from another retailer? If so, you may be able to get a very good price. Who can you replace his/her goods with? At what price?

3.

Know the numbers: What is a realistic sales plan for this vendor? What is a realistic margin projection for this vendor? Are you accurately anticipating markdowns? What is the amount of inventory on hand? What should it be? What is the amount of inventory on order? Do you need to cancel or buy goods? How much of the merchandise will be sold on sale? Are you being realistic in the current business environment? If business is tough, how deep do you need to cut prices to generate sales? Know what you need!

4.

Know the competition: Who are they? Other department stores, chains, specialty stores? What financial condition are they in? What is their inventory position? How much of the same type of merchandise do they carry? Are they canceling

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orders or buying merchandise at lower than normal prices? How will you protect your margin if you are forced to meet competitive prices? 5.

Know yourself: Know your personal strengths and limits. Are you a morning or afternoon person? Set up your meetings for when you are at your best. Can you pull this off by yourself or do you need help? If so, get it!

Negotiating tips See PPT 14-26 and 14-27. There are several tips that one can use while negotiating: 1.

Beware of time pressures. Almost everything happens at or just before the deadline. Think of the last major labor strike. Give and get appropriate deadlines.

2.

Keep the numbers of negotiators even, or even try to have more people on your side. In some countries in the Orient they will get people to come in from the factory who don't even speak English just to keep the numbers at least equal.

3.

Let the other guy talk. Be patient and listen. The more he/she talks, the more you learn from him/her about his/her business. The person who breaks the silence first, usually loses.

4.

Let the other guy mention a figure first. It might be better than you would ask for. In any case, it tells you where you are starting.

5.

Know when to use your boss as a partner and source of extra power. The bigger your deal, the higher you go.

6.

Don‘t be afraid to say no to an offer that doesn’t help you get what you need.

7.

Don‘t be greedy -- don‘t over-negotiate. Know when you‘ve reached the limit and don’t go beyond it, or you could sour your deal. If you ask for too much, even if they initially agree, you may never get the merchandise.

8.

Don‘t assume -- recap everything and, if appropriate send a letter to follow.

9.

Go into the meeting knowing exactly where you will come out on profit margin, using several different scenarios. Remember to invent options for mutual gain.

10.

Before you go into the negotiation, use a technique that Olympic athletes use: envision how the meeting will go, and picture yourself being very successful -- it will build your self-confidence.

11.

Make sure that you plan to meet when you are at your best. Plan your schedule thoroughly -- the amount of time the meeting will take (don’t arrange two tough meetings back-toback); see your most important vendors or biggest problems early in the week. You might have to go back.

12.

Make every effort to reduce stress for yourself. Just being in New York City can be stressful, so do things that make you feel better -- whether it‘s exercise, staying in touch with family at home, seeing friends outside the business -- whatever is a harmless escape. Don‘t burn the candle at both ends; get a decent amount of sleep and don‘t overindulge in bad habits like drinking and overeating. Keep yourself in top condition.

13.

Always leave the door open for the future. Finally, here are some key points to remember when negotiating:

See PPT 14-28. 1. Planning is critical

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2. Knowledge is power! 3. The secret in any negotiation is that the other person will only do what is right for him!

EXERCISE # 14-2: ROLE PLAYING NEGOTIATIONS ------------------------------------------------Instructor’s Note: This exercise should be used in conjunction with Chapter 14, but only after the class has had Lecture 14-1. ------------------------------------------------Directions Get two groups of students to volunteer for this exercise. One group will represent Drip-Dry; while the other will represent Burdines. Each group should have three to four people. Provide the entire class with the following handouts: 1.

Dealer letter from Drip-Dry

2.

Burdines Fact Sheet

3.

Observers' Notes Sheet

Give the two groups 15 minutes to prepare or give them the assignment one class period in advance. The two groups will role play the negotiation for about 15 minutes. The rest of the class should be encouraged to fill out the Observers' Notes. Then, the relative successes of the two teams should be discussed in class.

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DRIP-DRY APPLIANCE P.O. BOX 999 NEW YORK, N.Y. 10038 October 12, 1992 DEAR MR DEALER DRIP-DRY is proud to announce a SUPER MARKET SPECIAL on all orders placed in our showroom the week of June 10. • INTRODUCTORY SALE ON ALL NEW MODEL WASHERS @ 15% off regular prices! • $5.00/unit ADVERTISING ALLOWANCE included! • PREPAID FREIGHT! • Regular CASH DISCOUNT of 2% (our normal teens) stD1 applies! These SPECIAL MARKET WEEK SALE PRICES, along with all the EXTRAS, will apply to any orders placed DURING MARKET WEEK, June 10 through June 17, under the conditions listed below: • Minimum quantity purchase of 25 units or more. • Delivery must be taken by July 1st • Factory selected color mix with NO LESS THAN 40% WHITE. Here’s how the promotion actually works. On any purchase of 25 units or more, we will invoice you as follows: Regular Wholesale Price $175.00 ea. Less 15% Sale Discount 26.25 Promotia1On “sale. Price $148.75 ea.

In addition, you may bill us back $5.00/unit advertising allowance, all freight costs, as well as your regular 2% Cash Discount: Promotion “sale”. Price $148.75 ea. – 5.00 (Adv. Allow) – 7.19 (Freight Chg.) – 2.73 (2% Cash Disc.)

JUST SEND YOUR CHECK FOR: $133.83 ea. COME IN TODAY!!. REMEMBER THIS SPECIAL OFFER IS GOOD ONLY DURING MARKET WEEK. HOPE TO SEE YOU IN SPACE 1075, SHOWROOM BUILDING. SINCERELY, ROBERT SNOGRASS PRESIDENT

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BURDINES vs. DRIP-DRY APPLLANCE CORP. BUYER’S FACTS AND GOALS

General information: The appliance business has been good this season. It is Market Week, and you. received a brochure from Drip-Dry outlining their market Special in the new model washers. You are shopping for a mayor promotion for Labor Day Weekend Sale. A PREVIOUS PURCHASE YOU HAD MADE FOR THIS EVENT HAS FALLEN THROUGH, AND THAT VENDOR HAS REFUSED TO SHIP TO YOU DUE TO PROBLEMS WITH THE ACCOUNTS PAYABLE. YOU MUST COMPLETE A DEAL IN THE NEXT FIFTEEN MINUTES OR BE CLOSED OUT OF THE LABOR DAY PROMOTION ALTOGETHER, KILLING YOUR MOMENTUM FOR SEPTEMBER. Drip-Dry is the sixth largest appliance manufacturer in the United States, and you are his second largest account nationally. Specifics: You are looking for a LABOR DAY PROMOTION, and you need between 200 and 250 washers. Your goal is to run a Preseason Introductory Sale on new model washers @ 25% off the regular prices. Regular Retail Price $250 ea. Proposed Retail: $187.50 ea. Regular Cost Price: $175 ea. Previous statistics show that at least 50% of the assortment should be WHITE with the balance made up of Copper, Harvest Gold, Avocado, and Blue. You have $1 000 budgeted for the Ad. Your normal department Markup is 30%. Your open-to-buy is $25,000 until August 1st. No problem for August deliveries. Regular terms with Drip-Dry are _10 EOM.3 (Freight usually runs 5% of cost). YOU MUST COMPLETE THIS DEAL IN THE NEXT FIFTEEN MINUTES OR BE CLOSED OUT OF ALL LABOR DAY ADVERTISING. IF NEEDED, YOU WILL SETTLE FOR 25% MARK-UP ON THIS PURCHASE

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OBSERVER’S NOTE During the negotiation: What did the buyer attempt to get? What did the vendor agree to? BUYER’S ATTEMPT VENDOR AGREEMENT

Indicate •

What talked most often?

•

Who cited first number?

•

Was vendor self-esteem maintained?

•

Were concessions made? By whom?

•

How profitable was the deal for the other?

•

How did the participants feel after the negotiating visit?

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ANCILLARY LECTURE 14-3 INTERNATIONAL SOURCING DECISIONS -----------------------------------------------------Instructor’s Note: The purpose of this lecture is to supplement material in the text. A good portion of this material is already in the book. Therefore, instructors should use either this version or the shorter version in the book. ----------------------------------------------------Refact: Over the last 20 years, importing has gone from a small segment of the production strategy for apparel to a dominant force, now accounting for about 67 percent of all goods sold at retail.i Take a look at what you are wearing to see if anything is made in the US. Chances are your shirt or blouse is made in Hong Kong. Your jeans are made in Italy. Those beautiful new shoes are Brazilian, while those old sweat socks are from China. Your undergarments are from Honduras. To top it off, your watch is probably from either Japan or Switzerland. A decision that is closely associated with branding decisions, which we discussed in the previous section, is to determine where the merchandise is made. A product’s country of origin is often used as a signal of quality. Certain items are strongly associated with specific countries, and products from those countries, such as chocolate from Switzerland or cars from Japan, often benefit from those linkages.ii But there is more to global sourcing decisions that simply buying from those countries with reputations for high quality merchandise. In this section we will first examine the cost implications of international sourcing decisions. On the surface, it often looks like retailers can get merchandise from foreign suppliers cheaper than from domestic sources. Unfortunately, there are a lot of “hidden” costs, including managerial issues, associated with sourcing globally that make this decision more complicated. The influence of Collaborative supply chain management inventory systems on Global sourcing decisions is then examined. Clearly it takes longer to source globally than it does to buy from a vendor close to home. Since Collaborative supply chain management inventory systems have become such an important facet of merchandise management, we will examine ways that retailers can derive benefits from Collaborative supply chain management while still sourcing globally. This section concludes with an examination the ethical issues associated with retailers who buy from vendors engaged in human rights and child labor violations. We discuss what some retailers are doing to eliminate the problem. Costs Associated with Global Sourcing Decisions A demonstrable reason for sourcing globally rather than domestically is to save money. Retailers must examine several cost issues when making these decisions. The cost issues discussed in this chapter are: Country of origin effects, foreign currency fluctuations, tariffs, free trade zones, inventory carrying costs, and transportation costs. Country of Origin Effects The next time you are buying a shirt that is made in Western Europe -- Italy, France, or Germany -- notice that it is probably more expensive than a comparable shirt made in a developing country like Hungary, Ecuador, or Taiwan. These European countries have a reputation for high fashion and quality. Unfortunately for the US consumer, however, the amount of goods and services that can be purchased in those countries with US dollars is significantly less than in the developing countries. When making international sourcing decisions, therefore, retailers must weigh the

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savings associated with buying from developing countries with the panache associated with buying merchandise from a country that has a reputation for fashion and quality. Jeans from Italy, for example, can retail for over $100; whereas those made in Ecuador or even in the United States are much less. Other countries, such as Japan for instance, might have a technological advantage in the production of certain types of merchandise and can therefore provide their products to the world market at a relatively lower price than other countries. For example, Japan has always been a leader in the development of consumer electronics. Although these products often enter the market at a high (penetration) price, the price soon drop as manufacturers learn to produce the merchandise more efficiently. Foreign Currency Fluctuations An important consideration when making global sourcing decisions is fluctuations in the currency of the exporting firm. Unless currencies are closely linked, for example, between the US and Canada, changes in the exchange rate will increase or reduce the cost of the merchandise. Suppose that Service Merchandise is purchasing watches from Swatch in Switzerland for $100,000, which is equivalent to 120,000 Swiss Francs (SFr) since the exchange rate is 1.2 Sfr for each US dollar. If Service Merchandise believes the value of the dollar will fall to, say 1.1 SFr, before they have to pay for the watches, they should negotiate payment for the watches in US dollars. In this case, Service Merchandise would pay $100,000 and the risk of devaluation of the dollar lies with Swatch. If, however, Swatch demands payment is Swiss Francs, Service Merchandise assumes the currency fluctuation risk. In this case, Service Merchandise would end up paying $109090 (120,000 SFr ÷ 1.1). To lessen the risk of a falling currency exchange, i.e., the US dollar becoming less valuable compared to the currency of the vendor, Service Merchandise could engage in the foreign exchange market. Suppose that Service Merchandise believes that the value of the dollar will fall in relation to the Swiss Franc before payment is due, as in our example. Service Merchandise can get a bank to agree to guarantee the Swiss Francs at the $1.20 rate for an additional fee to be used to pay for the watches at the time that payment is due. There is still a risk involved with this strategy, however. Service Merchandise could miss an opportunity to get the watches at a lower price by locking in the $1.20 rate if the value of the US dollar goes up instead of down. Tariffs A tariff, also known as a duty, is a list of taxes placed by a government upon imports or exports. Import tariffs have been used to shield domestic manufacturers from foreign competition and to raise money for the government. Although more common in less developed countries, export taxes are only used to generate additional revenue. For instance, the Argentinean government may impose an export tariff on wool that is exported. An export tariff actually lowers the competitive ability of domestic manufacturers, rather than protecting them, as is the case with import tariffs. In general, since tariffs raise the cost of imported merchandise, retailers have always had a strong incentive to reduce them. In this section we will discuss several mechanisms used for reducing tariffs: the General Agreement on Tariffs and Trade (GATT), the North American Free Trade Agreement (NAFTA), and Foreign Trade Zones. The General Agreement on Tariffs and Trade (GATT) and the World Trade Organization (WTO). In 1946, the average US tariff rate was 26 percent, compared to approximately five percent in 1987.iii The General Agreement on Tariffs and Trade (GATT) is partially responsible for this reduction. Started in 1947, GATT has evolved into a group of 125 member countries that sponsors international trade negotiations.

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In 1993, a GATT accord was reached that has far-reaching effects on the reduction of tariffs and other trade barriers. Importantly, in January 1995, the World Trade Organization (WTO) was formed to supervise and arbitrate GATT agreements and encourage future negotiations. North American Free Trade Agreement (NAFTA). The ratification of NAFTA on January 1, 1994 created a tariff free market with 364 million consumers and a total output of $6 trillion.iv NAFTA members are currently the US, Canada, and Mexico, but other Latin American countries are expected to join in the next few years. US retailers stand to gain from NAFTA on several fronts. First, Mexican labor is relatively lowcost and abundant. Thus, retailers can either search for lower-cost suppliers in Mexico or begin manufacturing merchandise there themselves. Maquiladoras -- plants in Mexico that make goods and parts or process food for export to the United States -- are plentiful, have lower costs than their US counterparts, and are located throughout Mexico, but particularly in border towns such as Nogales and Tijuana. Second, with the growing importance of Collaborative supply chain management inventory systems, the time it takes to get merchandise into stores has become even more critical than in the past. Transit times are shorter and managerial control problems are reduced when sourcing from Mexico, compared to the Far East or Europe. Finally, many US retailers view Mexico as an attractive market for expansion (See Chapter 5 (Strategy chapter).) NAFTA was not passed without opponents, however. There are segments of the US economy that will suffer. Since US employers will be able to buy or manufacturer merchandise cheaper in Mexico, the wages and employment of US unskilled workers may decrease. Further, some labor intensive industries such as furniture, and clothing are likely to suffer. Finally, those involved in the production of sugar, peanuts, citrus, vegetables and seafood may loose business to Mexican competition. Foreign Trade Zones Retailers involved in foreign sourcing of merchandise can avoid import tariffs completely by using foreign trade zones. A foreign trade zone is a special area within a country that can be used for warehousing, packaging, inspection, labeling, exhibition, assembly, fabrication or transshipment of imports without being subject to that country’s tariffs. To illustrate how a foreign trade zone can benefit retailers, consider how German cars are imported to a foreign trade zone in Guatemala for distribution throughout Central America. The duty for passenger vehicles is 100 percent of the landed cost of the vehicle. The duty for commercial vehicles, however, is only 10 percent. The German manufacturer imported commercial vans with no seats or carpeting, and with panels instead of windows. After paying the 10% import duty, they converted the vans to passenger station wagons in the foreign trade zone in Guatamala and sold them throughout Latin America.

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Cost of Carrying Inventory The cost of carrying inventory is likely to be higher when purchasing from suppliers outside the US than from domestic suppliers. Recall from Chapter 6 that: Cost of carrying inventory = Average inventory value (at cost) X Opportunity cost of capital. The opportunity cost of capital is the rate available on the next best use of the capital invested in the project at hand. There are several reasons for the higher inventory carrying costs. Consider The Spoke bicycle store in Aspen, Colorado that is buying Moots bicycles manufactured in Steamboat Springs, Colorado. They know that the lead time -- the amount of time between recognition that an order needs to be placed and the point at which the merchandise arrives in the store and is ready for sale -- is usually two weeks plus or minus three days. But if The Spoke is ordering their bikes from Italy, the lead time might be three months, plus or minus three weeks. Why is the lead time typically longer when sourcing globally? The lead time tends to be longer because order transmission, order filling, packing and preparation for shipment, and transportation tends to be longer and more complicated for global transactions. Order transmission time -- the time it takes for the order to get from the retailer to the supplier -depends on whether electronic data interchange (EDI), telephone, fax, or mail is used in communicating. The order filling time may also increase because of a lack of familiarity of customs and procedures between the retailer and their foreign supplier. Packing and shipment preparation require more attention. Finally, and probably most important, transportation time increases with the distances involved. v Since lead times are longer, retailers must maintain larger inventories to insure that merchandise is available when the customer wants it. Larger inventories mean larger inventory carrying costs. It is also more difficult to predict exactly how long the lead time will be when sourcing globally. When the bicycle goes from Steamboat Springs to Colorado, the worst that could happen is that it gets caught in a snow storm for a day or two. On the other hand, the bicycle from Italy might be significantly delayed because of multiple handlings at sea or airports, customs, strikes of carriers, poor weather, or other bureaucratic problems. Similar to longer lead times, inconsistent lead time require the retailer to maintain higher levels of safety stock. Transportation Costs: In the previous section, we described how the cost of carrying inventory is higher when sourcing globally than when sourcing domestically. Part of this cost is due to longer shipping distances -the longer the distance, the higher the transportation cost for any particular mode of transportation. For instance, the cost of shipping a container of merchandise by ship from China to New York is significantly higher than from Panama to New York. The introduction of different modes into the transportation cost equation complicates the sourcing decision. Suppose The Spoke in Aspen decides to have the bicycles from Italy shipped by airfreight instead of by ship and then train. The shipping cost per bicycle skyrockets. In essence they are adapting a Collaborative supply chain management inventory system with all the associated benefits. The inventory carrying cost is significantly reduced because the lead time and fluctuations in lead time go down for all of the reasons detailed above. Also, sales might also increase because The Spoke is better able to provide their customers with exactly what they want.

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It is easier to stay in stock with the bicycles that are most popular, and they can promote special orders. Retailers can use the following rule of thumb to determine which transportation mode is best. First, relatively high weight/high density/low cost staple merchandise such as furniture is more likely to be shipped via lower cost modes such as water, truck, or train. Alternatively, relatively low weight/low density/high value fashion merchandise such as jewelry is more likely to be shipped by air. What do retailers that are in the middle of this weight/density/cost spectrum do? Some of the best have chosen airfreight. The Limited, for example, leases Boeing 747s to airfreight merchandise from the Orient to its distribution centers in the United States. Managerial Issues Associated with Global Sourcing Decisions In the previous section we examined the specific costs associated with global sourcing decisions. In most cases, retailers can obtain hard cost information that will help them make their global sourcing decisions. The managerial issues discussed in this section -- quality control and developing strategic alliances -- are not as easily evaluated. Quality Control When sourcing globally, it is more difficult to maintain and measure quality standards than when sourcing domestically. Typically these problems are more pronounced in countries that are further away and that are less developed. For instance, it is easier to address a quality problem if it occurs on a shipment of dresses from Costa Rica to the US than if the dresses were shipped from Singapore. In the same way, since Germany is known for its high engineering standards and since Volkswagen’s corporate offices are in Germany, one might expect fewer defects on Volkswagens made in Germany than those made in Mexico. There are both direct and indirect ramifications for retailers if merchandise is delayed because it has to be remade due to poor quality. Suppose Banana Republic is having pants made in Haiti. Before leaving the factory, Banana Republic representatives find that the workmanship is so poor that the pants need to be remade. This delay reverberates throughout the system. Banana Republic could carry extra safety stock to carry them through until the pants can be remade. More likely, however, they won’t have advance warning of the problem, so the stores will be outof-stock. A more serious problem occurs if the pants are delivered to the stores without detecting the problem. This could happen if the defect is subtle, such as inaccurate sizing. In this case, customers must try on multiple pants, and special orders and transfers from other stores are useless since there is no size integrity. In the end, customers can become irritated and question merchandise quality. Also, markdowns ensue because inventories become unbalanced and shopworn. Building Strategic Alliances The importance of building strategic alliances is examined later in this chapter. It is typically harder to build these alliances when sourcing globally, particularly when the suppliers are further away and are from less developed countries. Communications are more difficult. There is often a language barrier, and there are almost always cultural differences. Business practices -everything from terms of payment to the mores of trade practices such as commercial bribery -are different in a global setting. The most important element in building a strategic alliance -maintaining the supplier’s trust -- is more arduous in an international environment.

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The Influence of Collaborative supply chain management on Global Sourcing Decisions Sourcing globally and collaborative supply chain management inventory systems are inherently incompatible. Yet both are important and growing trends in retailing. Collaborative supply chain management systems are based on short and consistent lead times (See Chapter X -- systems). Vendors provide frequent deliveries with smaller quantities. There is no room for defective merchandise. For a Collaborative supply chain management system to work properly, there needs to be a strong alliance between vendor and retailer that is based on trust and a sharing of information through electronic data interchange (EDI). In the preceding section we argued that each of these activities are more difficult to perform globally than domestically. Further, each of these activities is more difficult to perform globally than domestically. Further, the level of difficulty increases with distance and the vendor’s sophistication.vi What can a retailer do to lessen the impact of these seemingly incompatible trends? Retailers can use third party logistics companies and source closer to home. In the next section, we examine how third party logistics companies can help retailers and why so many retailers are choosing suppliers that are located closer to their stores. Third Party Logistics Companies Third party logistics companies are companies that facilitate the movement of merchandise from manufacturer to retailer, but are independently owned. These companies provide transportation, warehousing, consolidation of orders, and documentation, or a combination of several of these services. Increasingly, third party logistics companies provide information services called Value Added Networks (VANs) that facilitate the electronic data interchange that is such an integral part of collaborative supply chain management systems. Transportation. Retailers must choose their shippers carefully and demand reliable, customized services. After all, to a large extent, the retailer’s lead time and the variation in lead time is determined by the chosen transportation company. Also, many retailers are finding that airfreight is worth the added costs. Some retailers mix modes of transportation in order to reduce overall cost and time delays. For example, many Japanese shippers send Europe-bound cargo by ship to the U.S. West Coast. From there, the cargo is flown to its final destination in Europe. By combining the two modes of transport, sea-air, the entire trip takes about two weeks, as opposed to four or five weeks with an all-water route, and the cost is about half of an all-air route.vii Warehousing. To lessen the chance of being out-of-stock as a result of long and inconsistent lead times on overseas shipments, retailers are insisting that their vendors maintain inventories in warehouses in the US. Rather than owning these warehouses themselves, the vendors typically use public warehouses which are owned and operated by a third party. By using public warehouses, vendors can provide their retailers with the same level of service as domestic suppliers can. International freight forwarder. Although there are several types of organizations that help in the management of global shipments, the most comprehensive is the international freight forwarder.viii International freight forwarders are companies that purchase transport services. They then consolidate small shipments from a number of shippers into large shipments that move at a lower freight rate. These companies offer shippers lower rates than the shippers could obtain directly from transportation companies because small shipments generally cost more per pound to transport than large shipments.ix One of the most daunting tasks for a retailer involved in importing merchandise to the US is government bureaucracy. The international freight forwarder

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helps retailers by preparing and expediting all documentation such as government-required export declarations, consular and shipping documents.x Value Added Networks (VANs). Value Added Networks are a relatively new type of third party logistics company that that was spawned by the use of Collaborative supply chain management systems. Value Added Networks are companies that facilitate EDI by making computer systems between suppliers and retailers compatible. Suppose Wal-Mart has contracted with a manufacturer in Mexico to supply them with toys. Since Wal-Mart insists that their vendors utilize an EDI system, and their computer systems are incompatible, they might contract with a VAN like General Electric Information Services to provide the communications link. Computer files would be sent to the VAN via EDI, translated to Wal-Mart’s format, and sent on to WalMart’s computer. Integrated third party logistics services. Traditional definitions between transportation, warehousing, freight forwarding, and VANs have become blurred in recent years. Some of the best transportation firms, for example, now provide public warehousing, freight forwarding and VANs. The same diversification strategy is being used by the other types of third party logistics providers. Retailers are finding this “one stop shopping” useful when implementing Global sourcing. Business Logistics Services, a division of Federal Express, for example, performs multiple logistics functions well beyond transportation for Laura Ashley. Refact: In 1995, the volume of imports from Mexico, propelled by NAFTA, grew 61 percent, and the country was the third-largest foreign apparel supplier to the US Right behind Mexico was the Dominican Republic. Nevertheless, China remains the number one apparel supplier, followed by Hong Kong.xi Source Closer to Home (or Stay Home). Some US retailers are shifting suppliers from Asia to nearby Central American and Caribbean countries to improve quality control and shipping times. Others are attempting to “Buy American.” (See following section.) For example, although China is still an important source for apparel, the North American Free Trade Agreement (NAFTA) and similar initiatives with other Latin American Countries such as the Caribbean Basin Initiatives and the Enterprise for the Americas Initiative (EAI) make Mexico, Guatemala, Costa Rica, Haiti, Honduras and the Dominican Republic likely sources for US retailers. Also, the standard of living in traditional import powerhouses like Japan, South Korea, Hong Kong, and Singapore have become so high that cheap labor is not as readily available as it one was. Thus, the less developed countries in the Western Hemisphere have become more viable sources of suppliers.xii Made in America Controversy Refact: In a national survey, 84% indicated a preference for buying American-made products; 64% said they would spend 10% more for domestically-produced goods over foreign-made items.xiii During the 1980s and into the 1990s, America has seen much of its dominance in manufacturing move offshore. More recently, however, the tide appears to be turning back to the US, at least in certain industries. There are two reasons for this shift. First, a national survey of consumers indicates that Americans purchase goods based first on quality, then features, followed by price, warranty, and country of origin. Importantly, American-made products are perceived as being superior in quality to foreign-made goods, especially for tools, clothing, candy or confections, and toys.xiv Retailers are simply reacting to the quality perceptions of their customers.

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The second reason that retailers are attempting to buy more products that are “Made in America” it is simply more profitable. They don’t have to worry about foreign currency fluctuations or tariffs. Also, it is easier to implement Collaborative supply chain management inventory systems with suppliers that are located close to their retailers. Since lead time and fluctuations in lead time are shorter when buying domestically, retailers don’t have to carry as much inventory. Transportation costs and the problems associated with global transportation issues are also less when “Buying American.” Finally, it is typically easier to manager quality and develop and maintain strategic alliances when sourcing domestically. The apparel industry in New York City has initiated a Made in New York program to promote domestic production. Participants stress, however, that patriotism has little to do with their sourcing decisions. For instance, after Federated Department Stores placed a $1 million order for sportswear with a New York Chinatown contractor through the Made in New York Program, the vice president of better sportswear for the retailer said that quality price and delivery, but not politics contributed to the decision.xv Ethical Issues -- Violation of Human Rights and Child Labor in a Global Setting Wal-Mart, The Gap, J.C. Penney, Dayton Hudson, Columbia Sportswear, Liz Claiborne, Eddie Bauer and Phillips Van Heusen, among many others, have had to publicly deflect allegations about human rights, child labor or other abuses involving factories and countries where their goods are made.xvi These days, companies faced with such accusations are likely to respond with promises of an inquiry. They point to strict codes of conduct that their contractors must now sign, which threaten withdrawal of business if labor abuses occur. Many companies are asking their quality control people to look out for worker abuses while also watching that zippers are sewn on straight. Nevertheless, in the eyes of activists pressing the cause of factory workers abroad, manufacturers and retailers alike largely fall short of their ethical obligation as importers. How companies view their role in the business of socially responsible importing varies. Some have embraced the idea pushed by human rights groups of establishing independent monitoring programs to keep tabs on contractors. Others say periodic, announced inspections of contractors and reports by quality control employees are the most they will require. With thousands of products and commercial relationships to keep track of, stores say they would be unable -- and ill-equipped -- to police workplace conditions around the globe. But one point on which most importers and retailers involved in this debate do agree is that they can encourage Third World contractors and governments to improve conditions. Sometimes this can be accomplished with the assistance of industry supported nonprofit organizations. One such group is Business for Social Responsibility (BSR), a San Francisco-based nonprofit organization started three years ago and designed to help member companies address the question of rights in factories abroad. Some prominent BSR members include Liz Claiborne Levi Strauss, Patagonia, Reebok and Timberland. Another effort at improving worker standards at foreign factories is a handbook on how to prevent child labor, prepared by the Council on Economic Priorities (CEP), a New York-based think tank that analyzes national issues. The CEP prepared the handbook for the International Labor Organization with a $25,000 grant and the help of several leading apparel importers,

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including Levi’s, Claiborne, L.L. Bean, Nordstrom, Sears and The Limited. The handbook is directed at the four industries that employ children under 14: apparel, footwear, toys and carpets. David Zwiebel, vice president of the CEP, said he would ask importers to establish a set of internationally accepted compliance standards, much like what is being done by the television industry to curb violent programming. This would be particularly helpful for small to mediumsize importers that don’t have the wherewithal of a Levi’s to embark on a company-wide endeavor. i

Arthur Friedman, “Sourcing Now: The Proximity Factor, Imports: A Change of Venue,” Women’s Wear Daily, Mary 26, 1996, p. 6, citing the Commerce Department. ii See Gary M. Erickson, Johny K. Johansson, and Paul Chao, “Image Variables in MultiAttribute Information on Product Evaluation: An Information Processing Perspective,” Journal of Consumer Research 16 (September 1989), pp. 175-87; Sung-Tai Hong and Robert S. Wyer, Jr., “Effects of Country-Of-Origin and Product-Attribute Information on Product Evaluation: An Information Processing Perspective,” Journal of Consumer Research 16 (September 1989), pp. 175-87; Michael R. Solomon, Consumer Behavior, Boston: Allyn and Bacon, 1992, p. 262. iii Thomas R. Graham, “Global Trade: Ware and Peace,” Foreign Policy (Spring 1983), pp. 124137, taken from Michael R. Czinkota and Ilkka A. Ronkainen, Global Marketing, Harcourt Brace & Company, 1996, p. 85. iv The Likely Impact on the United States of a Free Trade Agreement with Mexico (Washington, DC: United States International Trade Commission, 1991). v Michael R. Czinkota and Ilkka A. Ronkainen, Global Marketing, Harcourt Brace & Company, 1996, p. 488. vi Stanley E. Fawcett and Laura M. Birou, “Exploring the Logistics Interface between Global and JIT Sourcing,” International Journal of Physical Distribution & Logistics Management, 22, No. 1, 1992, pp. 3-14. vii “Sea-Air: Cheap and Fast,” Global Trade, February 1992, pp. 16-18, taken from Michael R. Czinkota and Ilkka A. Ronkainen, Global Marketing, Harcourt Brace & Company, 1996, p. 486. viii Other third part providers are: Export distributor, customs-house broker, and trading company. For a discussion see: Douglas M. Lambert and James R. Stock, Strategic Logistics Management, 3rd ed., Irwin, 1993, pp. 696-699. ix Douglas M. Lambert and James R. Stock, Strategic Logistics Management, 3rd ed., Irwin, 1993, pp. 181. x Douglas M. Lambert and James R. Stock, Strategic Logistics Management, 3rd ed., Irwin, 1993, pp. 698. xi “Asia’s Fertile Fields,” Women’s Wear Daily, May 1, 1996, p. 8, 9. xii Arthur Friedman, “Sourcing Now: The Proximity Factor, Imports: A Change of Venue,” Women’s Wear Daily, Mary 26, 1996, p. 6. xiii “‘Buy American’ Emotional Appeal No Match for Bargains,” Discount Store News, June 20, 1994, p. 23. xiv Ibid. xv Dianne M. Pogoda, “Sourcing Now: The Proximity Factor, Patriot Games: Strictly Business,” Women’s Wear Daily, Mary 26, 1996, p. 7. xvi This section adapted from: Joanna Ramey, “Apparel’s Ethics Dilemma.” Women’s Wear Daily, March 18, 1996, pp. 10-12; and Susan Chandler, “Look Who’s Sweating Now,” Business Week, October 16, 1995, pp. 96, 97.

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