Purchasing Inventory – Unit 4Introduction

Merchandise inventory is purchased to generate revenue (income) for a business. The purchasing process involves placing the purchase order, transporting the order, receiving the order, and storing the order. Merchandise moves through the supply chain and is received by the retailer. Once received, retailers must plan to store their merchandise and place it in the store. Effective inventory management requires reliable tracking and is necessary for a business to be successful.

Purchasing Inventory

Once a retailer selects a vendor (person or business that sell merchandise to a retailer) that best represents their image, the next step is to view and evaluate the vendor’s merchandise. If the retailer approves of the merchandise, the merchandise is then purchased to resell to customers in the retailer’s store in order to generate revenue. Purchasing inventory involves four steps: placing the purchase order, transporting the order, receiving the order, and storing the merchandise.

Step 1: Placing the Purchase Order

The process of actually purchasing inventory begins with writing a purchase order. A purchase order is a form the retailer sends to a vendor to officially place an order. Purchase orders identify the merchandise quantities, costs, and shipping details.

Purchase orders are considered legal contracts that outline these agreed upon details. Once a purchase order has been signed, both parties must honor the agreement.

A purchase order typically states the following:

Contact Information for both the Buyer and Seller

Shipping Information Item/Style Numbers and Brief Descriptions

of Items Purchased Quantities Purchased Purchase Order Number and Date the

Purchase was Placed Delivery Date Unit Prices and Total Dollars Spent Payment Terms

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Step 2: Transporting the Order

Transporting the order involves the Place function of the Marketing Mix – all the activities involved in getting a product to the end user. After the vendor processes the order, it is shipped to the retailer.

Transportation is the physical movement of product through the channel of distribution.

Faster transportation option often costs more money, while slower transportation may cost less.

Transportation options may include:

Road Rail Air Water Digital

The ownership of the merchandise will also change as it makes its way through the channel of distribution. Each business assumes the responsibility and risk while they are handling the merchandise. For example, when a vendor sends a product on an airplane, the airline takes ownership of the merchandise until it hands off the merchandise to the next business in the supply chain. It is important for the retailer to know who has ownership at each step in the channel of distribution.

Step 3: Receiving the Order

Most retailers have a receiving dock where trucks will unload the merchandise. When the merchandise arrives, each piece must be compared to the packing slip. A packing slip is a form that lists the contents of the box or container received at the unloading dock. The retailer needs to verify that each item on the packing slip has arrived.

As each item is accounted for, it is recorded on the receiving record. A receiving record is the form where all merchandise received is listed as it comes into the business. While the merchandise is being checked in, it is also being evaluated by an employee for damage and quality. If merchandise is incorrect or damaged, it needs to be returned to the vendor.

Once all items are received and verified, merchandise is then marked for resale in the store. Marking is the process of recording the selling price on each item that will be sold to customers. Items are usually marked with Universal Product Codes (UPC), and the merchandise is then placed into stock to be sold.

After the vendor ships the order, an invoice is sent to the retailer. An invoice is the vendor’s bill requesting payment from the retailer for the shipped merchandise. It lists the items shipped, the amount owed and the payment terms. The retailer will compare the invoice to the receiving record to make sure all items have arrived and are correct. The person in charge of paying the invoice (retail owner or manager) will also compare the invoice to the original purchase order for accuracy.

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Step 4: Storing the Inventory

When merchandise is purchased, it must be stored and protected. A business needs to take into consideration elements such as the weather, theft, fire and other hazards when storing inventory.

The type of merchandise dictates the type of storage that is used. For example, fruits and vegetables require refrigeration. Storage for merchandise may be available within the store, such as in the retail store’s back room or basement. However sometimes merchandise is stored at a distribution center. A distribution center is a large warehouse that receives merchandise from multiple vendors, stores the merchandise, and then distributes it to multiple store locations.

To conclude:

Purchasing inventory involves placing the purchase order, transporting the order, receiving the order, and lastly storing the merchandise to then be sold in store.

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Distribution Center

Check Your Knowledge 1. Key Terms – Define the following terms:

Vendor

Purchase order

Packing slip

Receiving record

Marking

Invoice

Distribution center

2. What information is typically stated on a purchase order? Use the purchase order sample on the next page and label the following:

Contact Information for both the Buyer and Seller Shipping Information Item/Style Numbers and Brief Descriptions of Items Purchased Quantities Purchased Purchase Order Number and Date the Purchase was Placed Delivery Date Unit Prices and Total Dollars Spent Payment Terms

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Name:

3. Explain the concept of ownership in merchandise transportation.

4. What does it mean to “mark merchandise”?

5. Describe the steps a retailer must follow when receiving an order.

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