Inventory in general means goods or services which are bought by the business but have not been sold off to the customer till then. These include all supplies, which are used for running the business.
For a Retailer, Inventory Management is the set of activities, which are conducted to assure the flow of goods from vendors into warehouses and stockrooms and finally, to the selling floor resulting in stock levels that are consistent with the consumer need.
Throughout the Supply Chain of a retail organization, the amount of inventory held at any given point of time is very high. Therefore, a formal inventory control system is in place, which controls the merchandise in hand by accounting and physical methods. Some of the key terms used in Inventory Management are as follows:
Inventory Turnover: The number of times, on an average, inventory is replaced during a given time period, usually annual in case of most of the retailers.
Closing Inventory: The value of merchandise on hand at the end of a particular period. This can be calculated on cost basis or selling price basis. This automatically becomes the beginning inventory for the next accounting period.
Inventory Change: It is the amount of increase or decrease in business inventories during a specific accounting period.
Inventory Audit: A periodic inventory where each piece of merchandise is counted and recorded, usually by unit price within a classification.
Inventory Risk: The entire inventory carried through the supply chain of a Retailer carries a lot of risk owing to product obsolescence and reduced demand than estimated. This risk of the estimated inventory of selling at lower prices or not selling at all is called Inventory Risk.
Inventory Carrying Cost: The cost of carrying inventory is used to help companies determine how much profit can be made on current inventory. The cost is what a business will incur over a certain period of time, to hold and store its inventory. The carrying cost of inventory is often described as a percentage of the inventory value.
Every Retailer has an Inventory system in place to supplement the basic merchandising decisions of buying, stocking and selling. A good Inventory Management system aids in the merchandising decision making process by providing essential information, valuation, and analysis on both the right amount (dollars) and the right quantity to buy, stock and sell. This helps a retailer to:
Prevent stock-outs, which result in lower profits resulting from lost sales and reduced store loyalty because of customer dissatisfaction.
Avoid overstocks, which lower profits because of higher inventory carrying costs and greater risks of markdowns.
A retail organizations’ Inventory system usually consists of three basic components.
Inventory Information system is the set of methods and procedures for collecting and processing merchandise data pertinent to the planning and control of merchandise inventories.
Inventory valuation system consists of the methods by which retailer determines the worth of the merchandise that is in stock.
Inventory analysis system includes methods for evaluating the retailer’s past merchandising performance and decision making tools for controlling future merchandising activities.
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