Controlling Inventories 101

Controlling inventories is not an easy job, and can be what makes or breaks a business. A good inventory control system gives buyers data to make better decisions and helps identify problems. A control system monitors stock levels relative to consumer demand. 

Inventory control systems gives the proper relationship between sales and inventory and increases inventory efficiency. They also give insight into what merchandise needs to be put on sale by identifying slow-selling merchandise. Buyers are able to see the best sellers and identify shortages (or shrinkage). 

Perpetual Control is when retailers record business transactions such as sales, purchases, returns and transfers on a continuous basis. There are two types of perpetual control systems:

  • Manual: where designated employees manually record and update transactions on a daily and/or weekly basis. 
  • Computerized: where information is automatically collected and process at the POS (point-of-sale). This requires unit control, where all merchandise to be coded based on colour, style, size, vendor and merchandise classification. 

It's important to have a blend of both computerized and manual in-store. Sales associates should be recording what customers feedback is on products and then inputing that into the system. It is important to understand SKU (stock-keeping unit) numbers, the UPC (universal price code) is the most commonly used. Computerized systems are not fool proof and can result in error (human error of corse) in recording markdown for example. However, at the end of a season stock levels are check manually, and this gives insight into shrinkage. 

RFID (radio frequency identification) is becoming more and more popular to follow a product through its lifecycle from manufacturing to end customer, and gives retailers instant feedback on where a product is located in inventory.   

What do you buyers need to keep an eye on in their inventory control systems?

  • Purchases
  • Sales
  • Transfers
  • Returns 
  • Beginning Inventory 
  • Ending Inventory 

This information helps buyers prepare for buying trips, anticipate next year sales and gives insight into the accuracy of sales forecasts. 

Inventory calculations are the actual stock records used to control the amount of inventory on hand. There are two types of inventory calculations:

  • Dollar Control Systems: involves comparing the planned value of stock on hand with the value of stock on hand. Values must be placed on the inventory, and inventory valuation is based on the cost and retail methods. 
    • Cost Method of inventory valuation requires that inventory records be maintained using cost figures - (COGS). Costs change all the time (lets just think about what happens to Canadian retailers when products are priced in US$), so retailers need to determine the way they will value their merchandise (LIFO or FIFO method).
      • FIFO: First in, first out assumes that merchandise that was received first is sold first. 
      • LIFO: Last in, first out is the more popular methods that assumes that the merchandise that was received last was sold first. In this method merchandise is valued at lower prices in ending inventory. 
    • Retail Method of inventory is the most commonly used, as many stores are not concerned with changing wholesale prices, due to difficulties in tracking the data. This method values the inventory using the current retail price and will vary depending on the markdowns. 
    • GMROI (gross margin return on inventory) is an inventory calculation that measures the profitability of a retailer's sales. It demonstrates the cast a business is producing and making off of an investment and incorporates gross margin and turnover into the measurement. 
      • GMROI = (Gross margin % * Turnover) / (1 - Markup %) 
      • You want a high GMROI!     

It not just important to keep statistical reference to metrics within a business to make better decisions, but it is important to be able to order inventory quickly and seamlessly from suppliers. This is called quick response, where a computer system determines stock levels and sales and will automatically re-order merchandises, creating a cooperative relationship between buyers and suppliers. To implement a quick response system you need the following:

  • Model Stock numbers
  • Bar coding & scanning
  • Electronic data interchange (EDI)

How do you know your quick response system has been optimized? Gross Margins, a decrease in operation expenses, increased sales a better markdown strategy and administrative efficiency.

Technology is your friend, and it can make a retailers life so much easier, regardless of the size of the business. It has high initial human and financial capital involved, but the return is worth while.  

(Information from Retail Buying from Basics to Fashion, 4th edition - Richard Clodfelter)