Definition
Inventory is the level of physical stock held. It will typically be measured at different points in a pipeline. A retailer may have inventory on order from suppliers, at warehouses, in transit to stores, in the stores’ backrooms, and on store shelves. [1]
Classification control is a form of dollar inventory control in which the dollar value of each classification of goods is smaller than the total stock of the department—e.g., the sporting goods department may be divided into several classifications or dissections, such as golf, fishing, active sport, etc. [2]
Just-In-Time (JIT) inventory—also known as a quick-response (QR) delivery system — is a finished product inventory management system that times replenishment to actual daily sales to reduce the lead time for receiving merchandise, thereby lowering inventory investment, improving customer service levels, and reducing distribution expenses.The retailer maintains lean inventories through frequent store deliveries of small lots. Point-of-sale information is exchanged daily between the retail outlet and distributors or manufacturers in order to time product delivery closer to actual demand.
Note that “just-in-time” is also a term used to describe a manufacturing methodology.
An overage is the amount by which a physical inventory exceeds the book inventory figures, as opposed to shortage. [2]
In supply chains, a push approach refers to pushing inventory through from suppliers to channel members based on demand forecasts so that the channel takes most of the inventory risk. A pull approach refers to the channel member pulling inventory from the supplier with “at-once orders” based on actual demand. [3]
Safety stock is inventory used as a safety cushion for cycle stock so the retailer won’t run out of stock if demand exceeds the sales forecast. As a measurement, it is the average amount of inventory on hand when a new shipment arrives. [2]
Unit control is the control of stock in terms of merchandise units rather than in terms of dollar value.
Visual system of stock control is a method of controlling the amount of stock on hand by systematic observation rather than by records.
Inventory Metrics
Inventory turns refers to the number of times that inventory “turns over” in a year. It is calculated on the basis of the revenues associated with a product and the level of inventory held. [1]
Inventory Turns (#) = Annual Product Revenues ($) / Average Inventory ($)
Inventory days refers to the speed with which inventory moves through the sales process. To calculate it, marketers divide 365 days of the year by the number of inventory turns, yielding the average numbers of days of inventory carried by a firm. [1]
Inventory Days (#) = Days in Year / Inventory Turns
Inventory velocity or inventory turnover is the time period starting with receipt of raw materials or purchased inventory and ending with the sale of the finished goods to the customer (the period over which a business has ownership of inventory). It is measured by dividing the cost of goods sold by the average inventory on hand. [1]
Inventory velocity/turnover = Cost of goods sold ($) / Average inventory on hand ($)
Shrinkage is generally a euphemism for theft. It describes a phenomenon in which the value of actual inventory runs lower than recorded inventory, due to an unexplained reduction in the number of units held. This measure is typically calculated as a monetary figure or as a percentage of total stock value. [1]
See Also
Gross cost of merchandise sold
References
- Farris, Paul W.; Neil T. Bendle; Phillip E. Pfeifer; David J. Reibstein (2010). Marketing Metrics: The Definitive Guide to Measuring Marketing Performance (Second Edition). Upper Saddle River, New Jersey: Pearson Education, Inc.
- American Marketing Association, AMA Dictionary.
- Common Language in Marketing Project, 2019.