Chapter 12 – Buying Merchandise
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
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
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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?
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ANCILLARY LECTURE 12-2- 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.1
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.2
But there is more to global sourcing decisions that simply buying from those countries with reputations
for high quality merchandise.
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Costs Associated with Global Sourcing Decisions
A demonstrable reason for sourcing globally rather than domestically is to save money. Retailers must
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.
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.
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
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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
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 1987.3 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.
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.4 NAFTA members are
currently the US, Canada, and Mexico, but other Latin American countries are expected to join in the
next few years.
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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
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:
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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
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.
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Managerial Issues Associated with Global Sourcing Decisions
In the previous section we examined the specific costs associated with global sourcing decisions. In
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
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
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
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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,
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.7
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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.9 One of the most daunting tasks for a retailer involved in importing merchandise to the
US is government bureaucracy. The international freight forwarder helps retailers by preparing and
expediting all documentation such as government-required export declarations, consular and shipping
documents.10
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
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
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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.13
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
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.15
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
Chapter 12 – Buying Merchandise
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.
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, 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.