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Chapter 13 - Buying Merchandise
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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
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.
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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 142- 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.2
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
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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
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.
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.
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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 1987.4 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.5 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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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
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.
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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.
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
6 Michael R. Czinkota and Ilkka A. Ronkainen, Global Marketing, Harcourt Brace & Company, 1996, p. 488.
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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 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
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 shop-worn.
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,
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.
7 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.
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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.10 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.11
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.
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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.14
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.16
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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.
