Page 174 - DMGT550_RETAIL_MANAGEMENT

Unit 10: Inventory and Product Availability Levels

attaining its sales and gross margin goals. Buyers must rely heavily on historical sales data, Notes
coupled with personal experience and their own intuition about market trends.

10.1 Setting Inventory and Product Availability Levels

Merchandising and manufacturing companies keep an inventory of goods held for sale.
Management is responsible for determining and maintaining the proper level of goods in
inventory. If inventory contains too few items, sales may be missed. If inventory contains too
many items, the business pays unnecessary amounts to warehouse, secure, and insure the items,
and the company’s cash flow becomes one sided-cash flows out to purchase inventory but cash
does not flow in from sales.
Companies take physical inventories to count how many (or measure how much) of each item
the company owns. Inventory is easier to count when sales and deliveries are not occurring, so
many companies take inventory when the business is closed.
Taking a physical inventory involves internal control principles. Examples of these internal
control principles include the following:
1. Segregation of duties: Specific items should be counted by employees who do not have
custody of the items.
2. Proper authorization: Managers are responsible for assigning each employee to a specific
set of inventory tasks. In addition, employees who help take inventory are responsible for
verifying the contents of boxes, barrels, and other containers.
3. Adequate documents and records: Pre-numbered count sheets are provided to all employees
involved in taking inventory. These count sheets provide evidence to support reported
inventory levels and, when signed, show exactly who is responsible for the information
they include.
4. Physical controls: Access to inventory should be limited until the physical inventory is
completed. If the company plans to ship inventory items during a physical inventory,
these items should be placed in a separate area. Similarly, if the company receives inventory
items during a physical inventory, these items should be kept in a designated area and
counted separately.
5. Independent checks on performance: After the employees finish counting, a supervisor
should verify that all items have been counted and that none have been counted twice.
Some companies use a second counter to check the first counter’s results.

6. Consigned merchandise: Consigned merchandise is merchandise sold on behalf of another
company or individual, who retains title to it. Although the seller (consignee) of the
merchandise displays the items, only the owner (consignor) includes the items in inventory.
Therefore, companies that sell goods on consignment must be careful to exclude from
inventory those items provided by consignors.
7. Goods in transit: Goods in transit must be included in either the seller’s or the buyer’s
inventory. When merchandise is shipped FOB (free on board) shipping point, the purchaser
pays the shipping fees and gains title to the merchandise once it is shipped. Therefore, the
merchandise must be included in the purchaser’s inventory even if the purchaser has not
yet received it. When merchandise is shipped FOB (free on board) destination, the seller
pays the shipping fees and maintains title until the merchandise reaches the purchaser’s
place of business. Such merchandise must be included in the seller’s inventory until the
purchaser receives it. In addition to counting merchandise on hand, therefore, someone
must examine the freight terms and shipping and receiving documents on purchases and

LOVELY PROFESSIONAL UNIVERSITY 169