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Unit 11: Wholesale Purchasing and Negotiation with Vendors

guaranteed sales, markdown money, promotional allowances, return privileges, and discounts) Notes
and life is simplest when there are not surprises. Therefore, the smart buyer leaves nothing to
chance and discusses everything with the vendor before purchase orders are signified. The
buyer and seller, together, work out the upcoming merchandising plans using the buyer’s
merchandise budget and planned turnover. Therefore, the buyer and seller should seek to make
negotiations a win-win situation where both sides win and neither feels like a loser, such as P&G
and its retailers are doing today. The essence of negotiation is to trade what is cheap to you but
valuable to the other party, for what is valuable to you but cheap to the other party.
The smart buyer puts all the upcoming areas of negotiations and previous agreements in
letterform and sends it out before going to market. This helps to eliminate any misunderstanding
afterward. Price, of course, is probably the first factor to be negotiated. Buyers should attempt to
purchase the desired merchandise at the lowest possible net cost. However, although the vendor
is the buyer’s partner, the buyer should not expect unreasonable discounts or price concessions.
The buyer can try to bring about a price concession that is legal under the Robinson - Patman
Act.

The buyer must be familiar with the prices and discounts allowed by each vendor. This is why
past records are so important. However, the buyer must remember that his or her bargaining
power is a result of his or her planned purchases from the vendor. As a result, a large retailer
may be able to purchase goods from a vendor at a lower price than a small “mom-and-pop”
retailer. Five types of discounts can be negotiated.
11.3.1 Trade Discount

A trade discount, sometimes referred to as a functional discount, is a form of compensation that
the buyer may receive for performing certain wholesaling or retailing services for the
manufacturer. In as much as this discount is given for the performance of some service, the size
of the discount will vary with that service. Thus variations in trade discounts are legally justifiable
on the basis of the different costs associated with doing business with various buyers.
Trade discounts are often expressed in a chain, or series, such as “list less 40-20-10”. Each figure
in the chain of discounts represents a percentage reduction from the list price of an item. Assume
that the list price of an item is $1,000 and that the chain of discounts is 40-20-10. The buyer who
receives all these discounts would actually pay $432 for this item.

The computation would be as follows:
Last price $1,000
Less 40% –400

600
Less 20% –120
480
Less 10% –48

Purchase price $432
To illustrate how the various chains of discounts permit a vendor to compensate the members of
the distribution channel for their marketing activities. Let’s look at the preceding example.
Assume that the manufacturer sells through a channel system that includes manufacturers’
agent who negotiates a sale between the manufacturer and the service wholesaler. The
manufacturers’ agent then charges the service wholesaler $480 for item, thus realizing $48 for
rendering a number of marketing activities. The service wholesaler, in turn, charges a retailer

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