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Unit 10: Purchasing in the Domestic and Foreign Marketplace

shrinkage by taking the difference between (1) the inventory’s recorded value based on Notes
merchandise bought and received and (2) the physical inventory in stores and distribution
centers. (Physical inventories are typically taken semiannually.) Shrinkage varies by department
and season. Typically, shrinkage also varies directly with sales. So if sales of mens tailored suits
rise 10 percent, then the buyer can expect a 10 percent increase in shrinkage.

Task Visit any retail house and collect information on different methods to reduce
shrinkage in inventory

10.3.4 Monthly Reductions (Line 4)

The buyer calculates the monthly reductions in the same way as the monthly sales. The total
reductions are multiplied by each percentage in line 3.
April reductions = $16,500  40% = $6,600

Table 10.6 : Line 4

4. Monthly $16,500 $6,600 $2,310 $2,640 $1,980 $1,650 $1,320

10.3.5 Analyzing Merchandise Performance

Measuring the performance of merchandise is essential in order to achieve an understanding of
the products which have worked well and which have not performed as per the goal. The
performance can be according to 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 basic to merchandise performance. Inventory turnover evaluates how long
inventory is on hand before it is sold. Items that are readily available a short time have a high
turnover those that are around longer having a low turnover.
Turnover is a basic 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.
Many retailers use the performance indicators of gross margin % (after markdown) and weeks
cover to measure performance. These are very commonly available but used in isolation from
each other, they are of limited value. Gross margin % gives us a measure of reactive profitability

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