There is a fine line between over and understocking inventory, and swaying either way can restrict profitability. Holding too many products can tie up cash flow, while stockouts lead to lost sales.
Therefore, businesses must establish a reliable retail inventory management system to automate standardized recurring stock procedures.
What is the Retail Inventory Method?
The retail inventory method estimates the overall value of a store's merchandise by measuring the ending inventory. Aside from calculating sales, the method also uses the cost-to-retail ratio, also known as the cost-to-retail percentage. This measurement determines how much a product's cost makes up the retail price.
For example, if an item is priced at $300 but costs $175 to manufacture, its cost ratio is 58%-
$175 / $300 x 100 = 58%
Once the cost-to-retail ratio is calculated, the ending inventory can be determined by completing the three steps-
1. Calculate the Cost of Available Goods-
Cost of Beginning Inventory + Cost of Purchases
2. Calculate the Cost of Sales During the Accounting Period
Sales x Cost-to-Retail Percentage
3. Calculate the Ending Inventory
Cost of Available Goods - Cost of Sales During the Accounting Period
However, the retail inventory method does not take into account products that may be stolen, damaged, or marked down. Therefore, stores must also perform physical stock checks to ensure that inventory data is up to date and accurate.
Companies should only use the retail inventory method if they purchase and sell products at a set price. Otherwise, the math becomes too complicated and inconsistent, negatively affecting data accuracy.
10 Steps for Retail Inventory Management
Inventory management requires businesses to know the quantity, location, and expiration of products at all times to ensure they can meet customer demand. Without an adequate system, companies may experience stockouts and increased product waste.
Therefore, organizations should carefully implement a comprehensive inventory management system by-
1. Establishing a Centralized Database
To begin, inventory managers need to collect data from each item, including the-
- Product name
- Stock-keeping unit (SKU)
- Variables (size, color, price, category, lot number, location, shelf life)
- Vendor SKU
- Wholesale cost
- Reorder point
- Economic order quantity (EOQ)
- Case quantity
- On-hand inventory
- Lead time
Once all of the information is collected, it should be filed in a centralized location where all employees can access it. Managers should consider adding product images to make locating inventory fast and easy.
By establishing a centralized database, staff can efficiently add and change inventory data without the hassle of navigating through several management systems
2. Identifying Stock Location
For small businesses with limited storage, identifying the stock's location may be simple. However, larger corporations with multiple stores and warehouses must determine the best site for their products.
After deciding how to divide items among the distribution centers and sales channels, each site manager must determine how to organize inventory, whether on shelves or the sales floor. An organizational inventory system should streamline product picking and restocks while reducing the risk of discrepancies.
3. Performing Routine Cycle Counts
Companies need a consistent schedule for cycle counts to pinpoint inventory discrepancies, such as shrinkage and damaged goods. By performing frequent stock checks, businesses can also detect internal and external theft, as well as counting errors.
Automation tools, such as barcodes and scanners, streamline cycle counts by eliminating the need for manual tallies and data entries. This significantly reduces the risk of human error, such as miscounts and miscalculations.
The cycle count frequency depends on the business's inventory range. However, every company should perform at least one physical count each quarter.
4. Integrating Sales and Inventory Data
With management systems, including point-of-sale (POS) and inventory software, businesses can automate data consolidation. By aggregating sales and inventory data, companies can increase their information accuracy and detect-
- Turnover rates
- Lagging systems
- Inaccurate reorder points
5. Establishing a Procurement Process
The procurement process tends to be longwinded, as several departments are required to file, approve, and send off the purchase order. When done manually, this can be extremely time-consuming.
With inventory ordering software, businesses can establish an electronic, standardized procurement process that connects all internal departments, as well as third-party vendors. Automated procurement reduces paper waste, lead times, and downtime when waiting for approval.
Even with refined ordering strategies, every business will experience unexpected dips in sales, forcing them to mark down items to increase turnover. However, discounts should not be assigned at random. Companies must have a set procedure for calculating sales to ensure they still generate some profit.
7. Standardizing a Stock Receiving Procedure
Similar to ordering inventory, companies need a standardized procedure for receiving stock shipments. Many organizations make the mistake of storing items immediately upon arrival. However, this could lead to inventory discrepancies if the physical units do not match records.
Therefore, managers should cross-examine the purchase order, shipment slip, invoice, and physical stock to ensure all items are present and in good condition. If any products are damaged upon arrival, businesses can return units for a refund or credit.
8. Creating a Returns Policy
Customers tend to check a business's return and refund policy before making a purchase to ensure they can exchange items. This is especially true for e-commerce stores, as consumers can't interact with products until they've already purchased them.
To ensure that all parties are on the same page, companies can email or print their policies on the customer's receipt. When performing a return, employees should check the items for damage and wear before submitting them back into the inventory system.
9. Establishing a Dead Stock Procedure
Overstocking products can lead to dead stock, which ties up cash flow and storage space. Deadstock includes-
- Damaged goods
- Incorrect shipments
- Leftover seasonal items
Warehouses should have a designated room that holds dead stock to ensure popular items have the optimal storage areas. Managers can determine when they should review dead stock and whether they can return items to suppliers for credit. If this isn't an option, businesses can donate, discard, or recycle products.
10. Monitoring Inventory Performance
With inventory solutions, companies can gauge the effectiveness of their stock management by monitoring key performance indicators (KPIs). KPIs quantify various performance measurements, such as cost of goods sold (COGS), turnover rates, and profit margins.