The most successful retailers are those who are embracing change by continuously offering customers a more compelling shopping experience through new store types, new products and better value. To effectively deliver this enhanced value, retailers must implement strategies that increase efficiency and reduce costs in the sourcing of products.

2. firm infrastructure
Support human resource management M
ar
activities gi
technology development n
procurement
inbound operations outbound marketing service
logistics logistics & sales
M
a rg
in
Primary activities
Drawn from Porter, 1985

3. Primary activities can be divided in five generic
categories:
 Inbound Logistics
The procurement function should be able to meet
 Operations the material requirements related to inbound
and outbound logistics, and to operations.
 Outbound logistics
 Marketing and sales
 Services

4. Support activities can be divided in four generic
categories:
 Procurement
 Technology development
 Human resources management
 Firm infrastructure
Procurement activities may be also related to supplying
products and services for the other support functions.

5. Aspects Buying for primary Buying for support
activities activities
Product assortment Limited to large Very large
Number of suppliers Limited, transparent Very large
Purchasing turnover Very large, considerable Limited
Number of Purchase orders Considerable Very Large
Average order size High Small
Control Depends on type of production Limited, forecast-related or
Decision-making unit planning project-related planning
Engineering, manufacturing Fragmented, varies with
specialists dominant product or service

6. Different definitions...
 Ordering…
 Buying… Operational, short
Operational, short
term, deal and
term, deal and
 Purchasing… margin
margin
oriented
oriented
 Procurement…
 Sourcing…
Strategic, long
 Supply Chain Management… Strategic, long
term, performance and
term, performance and
value
value
 Value chain management…. oriented
oriented
Purchasing: relates to every activity the company receives an invoice for…

7. purchasing function
tactical / initial ordering/ operational
Expediting Follow
Internal Speci-
Selecting Contracting Ordering and up/ Supplier
customer fication
evaluation evaluation
Sourcing Supply
Buying
Procurement

8. Purchasing:
All activities for which the company receives an invoice from outside parties.
Differentiation between:
 Purchasing function
 Purchasing department
Definition:
“Managing the company’s external resources in such a way that the supply
of all goods, services, capabilities and knowledge which are necessary
for running, maintaining and managing the company’s primary and
support activities is secured at the most favorable conditions”.
Procurement:
All activities that are required in order to get the product from the supplier to its
final destination.

9. Sourcing:
Finding sources of supply, guaranteeing continuity in supply, ensuring alternative
sources of supply and gathering knowledge of procurable resources.
Purchasing Management:
All activities that are required to manage supplier relationships.
Supply Chain Management:
The management of all activities, information, knowledge and financial resources
associated with the flow and transformation of goods and services up from the raw
materials suppliers, component suppliers and other suppliers in such a way that the
expectations of the end users of the company are being met or surpassed
Value Chain Management:
Challenging suppliers to improve the value proposition to the end-customers of the value
chain. Usually the supplier works closely together with the customer’s technical and
marketing staff to reduce the product’s overall costs and add new designs or features to
the product which increase the value for the end-customer.

10. 5 Admin.
12 Services
18 Capex
3 Spares
60-85 60-80 50-70 60-80 12 Trade-
items
Produc
25-50 10-40 50 tion
parts
Retailers Computers Consumer Automotive Pharma Service Typical
electronics industry structure
adapted from Kluge, 1996

11. Importance of purchasing to business
Challenge for managers: how to manage our EXTENDED ENTERPRISE ?
Sales: Profit 1,5 %
100%
Value added: 20 %
Question: what should
managers do?
Purchased materials
And services: 78,5 %
Purchased materials and
services have a large impact
on company profitability…

12. Definition of concepts
Challenge: how to manage our EXTENDED ENTERPRISE ?
Sales: Profit 1,5 %
100%
Value added: 20 %
Question: what should
managers do?
Purchased materials
And services: 78,5 %
Suppliers determine 78,5%
of total cost, innovation,
carbon footprint and
customer value…

14. What to Buy? How much to When to From whom
buy? buy? to buy?
Store Image
Satisfy Cust. Suppliers
Financial Obj. Open-to-buy
Wants
The Market
Type of Merchandise Negotiations
Mdse.
Budget Estimated
Control Systems Unit
Sales Sales Price
Reductions Terms
Merchandise Beginning Inv.
Inventories
Policies
Purchases Ending Inv.
Shortages

15.  Lead time: length of time between order
placement and receipt of goods
 Importance of safety or cushion stock:
protection against strikes, delays
 Base or cycle stock: amount sufficient to
accomodate regular sales
 Lead time + Safety stock + Basic stock =
Inventory Level

16.  Al’s Grocery Supermarket wants to maintain
a 3-week supply of domestic biscuits in
inventory and average sales of MLite biscuits
are 500 6-packs per week. The order point is
1500 (500 X 3 weeks). When inventory drops
below 1500, more biscuits should be ordered.

17.  Suppose the order interval is 2 weeks. We
must consider to include stock to maintain
during the order interval and add to our order
point -- in order to determine our order
ceiling. Order ceiling=Order point+Order
interval sales.
 1500 + (500 X 2) = 2500

18.  We can then determine our order quantity by
subtracting stock on hand from order ceiling.
 Order Quantity = Order ceiling - stock on hand

19.  Turnover @ retail
 Retail sales/Avg. inv. in retail $
 Turnover @ cost
 Cost of goods sold/avg. inv. at cost
▪ Total $ Available for Sale= BI + Purchases
▪ COGS=Total $ available for sale - Ending inventory
 Turnover based in units
 # of units sold/Avg. inv. in units

20.  Divide the turnover figure into 12 (months in
year) to determine the number of times of
merchandise needed to support the desired
sales based on turnover
 Examples:
▪ Turnover = 4; Stock-to-sales = 3.0
▪ Turnover = 2.8; Stock-to-sales = 4.28
▪ Turnover = 10; Stock-to-sales = 1.2
 Lower the turnover, the higher the stock-to-sales ratio

21.  Step 1: Calculate sales-to-stock ratio
 GMROI=gross margin% * sales-to-stock ratio
 Step 2: Convert sales-to-stock ratio to inventory
turnover
 Inventory turnover = sales-to-stock ratio * (100% - Gross
margin %, expressed as decimal)
 Calculate average stock-to-sales ratio
 Average stock-to-sales ratio = # months/inventory
turnover
 Calculate monthly stock-to-sales ratios

22.  Don’t confuse stock-to-sales ratio with the sales-to-
stock ratio
 Sales are the same in both ratios
 Stock in the sales-to-stock ratio is the average
inventory at cost over all days in the period
 Stock in the average stock-to-sales ratio is the
average BOM inventory at retail
 BOM stock-to-sales ratio is an average for all
months

23.  BOM stock = monthly sales * BOM stock-to-
sales ratio
 EOM stock (BOM stock for current period is
the same as the end-of-month for the
previous period)
 Monthly Additions to stock = Sales +
Reductions + EOM inventory - BOM inventory

24.  GMROI = gross margin return on inventory
investment measures how many gross
margin dollars are earned on every dollar of
inventory investment
 Sales-to-stock ratio = net sales/avg. inv.
 GMROI = gross margin/avg. inv.
 GMROI combines the effects of profits and
turnover

25.  Calculate Projected EOM stock
 Actual BOM stock + monthly additions + order
amount - Planned monthly sales - planned
monthly reductions
 Open-to-buy = Planned EOM stock -
Projected EOM stock

26.  Calculate projected EOM stock
 Projected BOM stock + actual order - monthly
sales - planned reductions
 Open-to-buy = Planned EOM stock -
Projected EOM stock

27.  ABC Analysis
 Rank order merchandise categories (SKUs) by
some performance measure
▪ Contribution margin
▪ Sales Dollars/Units
▪ Gross margin
▪ Gross margin return on investment
▪ Sales or gross margin per square foot
 Determine optimal stocking formulas based on
performance measures

28.  Sell-Through Analysis
 Comparison between actual and planned sales to
determine whether early markdowns are required
or whether more merchandise is needed to satisfy
demand
 Multiple-Attribute Method
 Used to evaluate vendors using a weighted
average score for each vendor (current or
proposed).

29. DuPont analysis: Sales
105 Cr.
Capital turn- Total assets
over ratio / 145 Cr
2.1 x Net assets -
50 Cr.
Interest free
liabilities
95 Cr
RONA
9.9 % × Sales
105 Cr.
Income
before tax - Other costs
5 cr 40 cr
Margin / Total costs
4.7 % +
100 cr
Purchased
Sales mat. & serv.
105 cr 60 cr
Amounts in Rs. Crores

30. DuPont analysis: Sales
105 Cr
Capital turn- Total assets
over ratio / 145 Cr
2.1 x Net assets -
50 Cr
Interest free
liabilities
95 Cr
RONA
12.4 ---- %
9.9 × Sales
105 Cr
+ 25 % !! Income
before tax - Other costs
6.2 -- 5 Cr 40 Cr
Margin / Total costs
5.9 --- %
4.7 +
98.8 ----100 Cr
Purchased
Sales mat.& serv.
105 Cr 58.8 --- 60 Cr
Amounts in Rs Cr -2%

32. Amit is a Retail Business Consultant with 11 years of experience with multi retailer format Super Market,
Hypermarkets, Lifestyle and Specialty stores. Experienced in Buying, Merchandising, Category
Management, Vendor Management and Supply Chain Management for multiple product categories.
He is experienced across the retail value chain in conducting business analysis and defining business
requirements, Retail Business Process Reviews, Software Product Development and Analytics for retail
business transformation and IT enhancement programs on retail supply chain, vendor management &
multi-channel commerce.
He holds an MBA in International Business, certification from NIFT, Fashion Retail Management and
trained Certified Business Analyst as per IIBA norms.
Currently, he is Senior Retail Functional Consultant with Leading Retail IT company of analytic solutions
for global retail and CPG organizations in roles such as Functional Consultant and Business Analyst
responsible for creating new solutions to drive innovation and thought leadership across the retail
business unit.