CHAPTER XLVI. Buying and Stock Control

BUYING AND STOCK CONTROL

=Importance of Buying.=—Buying as a major function in a mercantile concern is intimately related to, and dependent on, the other functions of the business. Buying must always have regard to the sales activities. To buy without reference to the ability to sell is suicidal. Both overbuying—buying more than can be disposed of at a profit—and underbuying—buying less than is needed to meet the sales demand—are conditions to be avoided. Underbuying means a loss of sales. Unless their needs are met promptly in accordance with their orders, customers will go elsewhere. Overbuying means the unnecessary tying up of capital in a stock of goods which increases the possibilities of loss resulting from changes in fashions and the level of prices. The relation of the rate of turnover to profits in merchandising was discussed in Chapter VII. Manifestly the ideal situation, so far as the amount of stock carried is concerned, is one in which the least amount of capital is used to provide an adequate stock for meeting the requirements of customers and in which the loss from unsalable stock is reduced to the lowest level.

Many business houses fail to realize the wastes resulting from slow turnovers. The Chamber of Commerce of the United States has called attention to these losses and has analyzed them under the following heads:

1. The unnecessary use of capital in merchandise that could be more profitably employed in other productive sources.

2. The increased cost of borrowed capital, the carrying of larger stocks and their slow turnover, necessitating the borrowing of larger amounts of capital for longer periods.

3. The marking down of the sale price due to the fact that the goods will not move at the higher sale price.

4. An increase in overhead expenses due to the larger storage and display equipment needed for goods and to the costs incident to handling the larger stock, and re-marking the stock when it is necessary to lower sale prices.

5. The loss of prestige and reputation from carrying unstylish and shopworn goods.

=Relation between Buying and Finance.=—From what has already been said, it is evident that there is a very necessary relation between the buying policy of a business and its ability to finance purchases. Even though it may be possible to increase sales, unless the business is in a position to finance not only the additional credits extended to customers but also the additional purchases needed to take care of the increased sales, it will not be feasible to pursue a policy of sales expansion and therefore of increased buying. Hence, buying cannot be considered as a business activity by itself, but as one dependent upon the sales activities and the financial resources of the business.

=Organization for Buying.=—In large merchandising businesses the duties and authority of the buying department are not uniform. In some, this department is organized entirely distinct from the selling department; in others (and this is particularly true of the large department stores), the buyer is head merchandise man with control over the selling activities of the business. It is also quite usual for the buyer to be in charge of a given department and his success or failure to be judged by the profits he makes in that department. A profit quota is sometimes assigned to each department, for which the buyer is responsible. In other words, in the management of the buying and selling activities and therefore in the control of his merchandise stock the buyer is supreme, subject to the general limitations placed by the financial resources at his disposal. Under the control of the buyer, therefore, will be stock clerks, the clerks which mark and re-mark the merchandise, and the sales force. Above and in control of all the departmental buyers is usually an executive or high official of the company whose chief function is to correlate the activities of the buyers with the concern’s general buying, selling, and financial policy.

=Characteristics of the Buyer.=—To perform his functions properly, the buyer must be a man of broad experience, with a keen sense of values and the marketing possibilities of merchandise. On the buying side he must have complete information as to the available sources of the merchandise he desires to secure, both in staple and in novelty lines. On the selling side he must know the demands of his customers and the possibility of creating new demands. The best index of the buying power of his customers is the volume of sales made in previous years. Past performance, considered in connection with general trade conditions and plans for the further development of the business, is the only basis for judging the sales possibilities of the future. He must know the quality of merchandise and the reliability of the people from whom he buys. He must be a keen judge of prices. He must know the financial resources of his own store and strive to secure the best possible credit and discount terms.

=Buying Procedure.=—In Chapter XXII, where the goods invoice was discussed, a typical purchasing procedure was set forth. Here only the chief points in that procedure will be mentioned. In a large establishment the buying requisition should be the basis of all purchase orders. This is particularly true when the buyer does the buying for several departments. The requisition should be made out in triplicate by the department head, two copies going to the buyer and one being retained in the department. Upon the issuance of the buying order, the second copy of the requisition is returned to the department as evidence that the goods have been ordered.

The purchase orders are made in manifold, the original going to the vendor, one copy to the treasurer to notify him of the future need for funds, one to the controller or accounting department, and one being retained by the buyer as a basis for follow-up. Upon receipt of the invoice, which usually precedes the goods, the buyer compares it with the order and if it is found correct, he passes it to the accounting department, where it is held until the receiving slip, showing the receipt of goods, is received from the receiving room. If the three documents now in possession of the accounting department, namely, the copy of the original order, the invoice, and the receiving slip, agree, the invoice is passed for entry on the books and is filed for payment in accordance with the financial policy of the business. After payment, the invoice with its supporting documents is filed. Great care must be exercised to make sure that an invoice is not put through more than once for payment and that every invoice represents goods properly ordered and actually received.

=Requirements of Successful Buying.=—Successful buying rests on a knowledge of two things: (1) when to buy, and (2) what to buy. The timeliness of buying has regard rather to the sales requirements than the market possibilities. Goods are bought for the purpose of satisfying needs of customers. A knowledge of the trend of the market is necessary but buying wholly in accordance with market trends too often leads to speculation in merchandise, due weight not being given to the sales requirements. A knowledge of the specific commodities needed to satisfy the requirements of customers is equally important. The regular use of the “want slips” of customers calling for goods not in stock is one source of information. The records of the paid “shoppers” as to the commodities and prices of competitors is also some indication.

In answering both these questions, when to buy and what to buy, the records of the business itself should furnish the fundamental information needed to secure a proper control of the movement of merchandise. Some system of perpetual inventory is almost indispensable. In a small business where the buyer, usually the owner, is in intimate contact with all departments, a fairly satisfactory control of merchandise can be secured without a perpetual inventory. In a business of some size, however, the perpetual inventory is an almost absolute essential if movement of stock is to be kept under control.

=Control of Merchandise Movement.=—The beginning of merchandise control is the fixing of the sales quota, that is, the making of an estimate of sales for the next period. Without a definite goal to be aimed at control is impossible. Buying and finance are dependent on it. A knowledge of the stock on hand at any time is needed to determine the buying requirements. Even in a small business the inventory can at least be estimated on the basis of past performance as to percentage of gross profit and therefore the percentage of cost of goods sold. The application of this figure of percentage of cost of goods sold to the sales for the period gives the cost of goods sold, which, subtracted from the opening inventory plus goods purchased, gives an estimate of the goods in stock. A perpetual inventory kept by quantities rather than by values serves the purpose in many establishments. What is known as the “retail system,” by means of which the value of the stock on hand can be estimated at any time, is used in many large retail establishments. In addition to, and in conjunction with such a system, the use of commodity control cards, as illustrated in Form 43, gives a sure index of the condition of stock and the movement of merchandise at any time.

=The Retail Method of Inventory.=—The retail system of inventory is based on the carrying of all goods purchased at a retail sale price as well as at cost price. In the financial records purchases are, of course, always booked at cost. A stock record is kept, however, which carries purchases at retail sale price as well as at cost price. The principle of the perpetual inventory under this method is shown by the fundamental formula:

Opening Inventory + Purchases - Cost of Goods Sold = Final Inventory

It is apparent that if all the values on the left side of the equation are retail sale values, the right side of the equation represents the final inventory valued at the retail sale price. Thus, if the opening inventory for use in the stock record is set up at the marked sale price, and purchases are similarly set up, the subtraction of the sales to date from the sum of the opening inventory and purchases gives the amount of stock on hand valued at the sale price.

In order to reduce an inventory, valued at retail sale price, to a cost basis, the per cent of mark-on of the cost price to give the original sale price must be applied. This per cent is based on the sale price and not the cost price, being determined by dividing the difference between sale and cost price (that is, the gross profit figure) by the sale price. Thus, a commodity, costing $60 and marked to sell at $100, will, if sold, yield a gross profit of $40, which, given in terms of the sale price, is a 40% gross profit. This 40% is spoken of as the “mark-on per cent.” The cost is, therefore, the difference between 100% and the per cent of mark-on, in this case 60%. That is, 60% of the sale price gives the cost price.

Accordingly, to reduce the inventory value at selling price to a cost price basis, it must be multiplied by 100% minus the per cent of mark-on.

The use of the retail method is thus seen to require a stock record from which the goods on hand as valued at selling price can be determined almost instantly and from which the per cent of mark-on can also be determined. In principle the method is simple. In practice it must be operated very carefully, else unreliable results will be secured. It seldom happens that merchandise will always move at the marked sale price. Adjustments are necessary. On an upward market, perhaps, a higher price can be secured than the marked price. On a downward market or in order to move certain colors and styles, it is necessary to mark down from the original sale price. The fluctuations arising from mark-ups and mark-downs are treated in Chapter XI of