Page 178 - DMGT550_RETAIL_MANAGEMENT

Unit 10: Inventory and Product Availability Levels

(e.g. every week). In sophisticated solutions, inventory levels are compared to an order point Notes
and sales forecasts. This order point reflects the minimum inventory quantity required to maintain
an in stock position between deliveries. It is calculated taking into account sales rate, the
lead-time (the time between recognition that an order needs to be placed and the time the order
arrives in-store) and an element of safety stock to take into account fluctuations in sales and
deliveries. Sufficient merchandise quantities are ordered to achieve the sales forecast and maintain
safety stock levels.
In less complex solutions, on hand inventory quantity is compared to a manually set minimum
or maximum and a replenishment quantity is calculated to bring the stock up to the maximum
level.

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Caution Allocation of merchandise is a complex activity requiring deep insight into
distribution planning and allocation of merchandise to ensure that the right merchandise
gets allocated to the right stores in the right quantity at the right time.

10.4 Analyzing Merchandise Management Performance

Measuring the performance of merchandise is necessary in order to gain an understanding of
the products which have performed well and which have not performed as per the target. The
performance can be as per plan, below the plan or above the plan.
Inventory turnover, which may also be called inventory or merchandise stock turn or just
turnover, is a key to merchandise performance. Inventory turnover measures how long inventory
is on hand before it is sold. Items that are on hand a short time have a high turnover those that
are on hand longer having a low turnover.
Retailers calculate inventory turnover in several ways:

1. Net sales/average inventory at retail
2. Cost of merchandise sold/average inventory at cost
3. Units sold/average units in inventory

4. Net sales = turnover × average inventory at retail.
5. Average inventory at retail = net sales/turnover
Turnover is a key to high performance, which means profits in retailing. However, higher
turnover will not indefinitely increase profits, and the lowest profits, and the lowest turnover
will not necessarily result in the lowest profits.
Rapid turnover enables the retailer to reduce certain expenses. Lower inventories will obviously
require less capital, and thus the retailer’s interest expenses will be lower. Also associated with
lower inventories will be lower levels of insurance coverage required, lower inventory taxes on
year end inventories and lower cost of space to store the inventory. On the other hand, rapid
turnover can increase expense. With similar average inventories on hand, the retailer must
order more frequently and in smaller quantities, resulting in higher clerical costs, lost quantity
discounts and higher transportation rates.
Success in retail can be measured by the amount of profit generated in relation to the working
capital invested i.e. the return on investment. Certain costs in any business are fixed or at least
are not easily flexed. Shop rents and head office costs fall into this category. Merchandise margins
and product mix, however, are variable and their management can either enhance or destroy
profitability.

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