Merchandise inventory

Inventories are stocks of goods and materials that are acquired and held for sale, such as goods and other assets such as land and real estate, which are held for resale (real estate investments are not a component of inventories). Inventory also includes items which have been already produced or are in the process of production and that, together with materials and goods, are awaiting to be used in the production process. In production and selling processes, inventories are served as subsidiary element to accommodate the situation that item is being received in one pattern and is used in another. For example, if a person buys 12 egg-packs and eats one egg each day, that would mean that person would buy new container every 12 days and inventory of the eggs that are remained in the refrigerator would decrease as per one egg eaten each day.

Inventory management

Inventory decisions are very often crucial starting points for many other business processes such as warehousing and transportation. Therefore, inventory management is very important pillar of supply-chain management. It refers to the process of following three pillars: ordering, storing and using a company's inventory such as raw materials, intermediate goods and final products. Different companies have different inventory management strategies depending on organization functions. For example, marketing division of a company tend to demand sufficient inventory availability for customer demand to avoid stockout situations. On the other hand, finance division usually demands minimum cost tied to inventory holding. In both examples we see cost related concepts of inventory management, in the first example marketing division wants higher inventory levels and in latter lower inventory levels. As can be seen, the cost is one of the most important concerns about inventory management. It is important to stress that inventory costs, increasing inventory level is not always welcomed. For example, a manufacture may produce goods more than it can sell or it may produce products so that warehouse looks full. In both cases, inventory costs money to the firm.

Inventory classifications

Key classifications of inventory are very crucial because it impacts the way that inventory is managed. There are 4 most frequently used inventory classifications: cycle stock, safety stock, pipeline stock, speculative stock.

• Cycle stock: This type of inventory classification translates into inventory that is needed to fulfill usual demand level during circuit of an order cycle.
• Safety stock: This type of inventory classification translates into inventory that is held on top of the cycle stock in case of uncertainty in demand.
• Pipeline stock: This type of inventory classification translates into inventory that is on the way between different points in the supply-chain like plant, warehouse or store.
• Speculative stock: This type of inventory classification translates into inventory that is held for many reasons like seasonal demand, forecasted price increase and potential deficit of product (Paul R. Murphy. Jr., Donald F. Wood 2004, p. 171).

Inventory management approaches

There are several approaches involved in inventory management. Namely: ABC Analysis, Just-In-Time Approach and Vendor-Managed Inventory.

ABC analysis

This type of approach can be implemented in many different ways. This approach states that inventories do not hold equal value to a company therefor all inventory should not be managed equally. A company might have hundreds or thousands of items in the stock and it is really hard to decide importance of every item. One of the most frequently used methods is 80/20 rule; 80 percent of company sales come from 20 percent of its products. This shows that primary focus must be on the 20 percent of the products that creates 80 percent of sales. Therefore, in terms of product importance ABC can be categorized as follows: A presents items with the highest priority, B presents items with the medium priority and C presents items with the lowest priority (Gudehus T., Kotzob H. 2009, p.119).

• Just-In-Time Approach: This type of approach is one of the most popular approaches among others in managing inventories. This approach is being created by Japanese manufactures but actually started in USA in 1920s by Henry Fort. JIT decreases cost of storage and insurance together with cost of liquidation. This approach considers inventory as waste, whereas Just-In-Case approach needs additional inventory just in case something circumstantially occurs. Therefore, JIT approach is risky; if the demand increases by chance, the manufacturer may not be able to supply the inventory to match the demand.
• Vendor-Managed Inventory Approach: In this type of approach the size and timing of reinforcement of orders are under the manufacturer responsibility. VMI grants manufacturer access to the distributor or retailer inventory (Wild T. 2011, p.74).

Examples of Merchandise inventory

• Raw materials: These are the unprocessed materials that are used in the production of finished goods. Examples include timber, metals, fabrics, and other materials required for manufacturing.
• Work in progress (WIP): These are goods that have been partially completed but are not yet ready for sale. Examples include garments that have been cut but have not been sewn, or furniture that has been assembled but not finished.
• Finished goods: These are goods that have been completed and are ready for sale. Examples include televisions, cars, and clothes.
• Component parts: These are parts that are used to assemble a product. Examples include engines, circuit boards, and screws.
• Supplies: These are materials that are used in the production process but not included in the final product. Examples include glue, lubricants, and cleaning supplies.

Advantages of Merchandise inventory

• Inventories are important in controlling the flow of goods and materials in production and selling processes. Keeping an inventory allows businesses to have a better understanding of their stock levels and to be able to plan ahead for future needs.
• Having an accurate inventory can help businesses manage their finances better. By accurately tracking their stock levels, businesses can better predict their future cash flow and manage their budget accordingly.
• Inventories can also help businesses manage their time more efficiently. By having an accurate inventory, businesses can plan ahead for production and delivery schedules, allowing them to better manage their workload.
• Inventories also provide customers with better service. By having an accurate inventory, businesses can provide customers with more accurate delivery times and better availability of products. This can help to improve customer satisfaction and loyalty.
• Lastly, inventories are an important tool for businesses to manage their risk. By keeping an accurate inventory, businesses can be better prepared for unexpected changes in stock levels or market conditions. This can help to reduce the risk of lost sales.

Limitations of Merchandise inventory

Merchandise inventories have certain limitations that must be taken into consideration when managing them. These include:

• Insufficient capital: Managing merchandise inventory requires a large amount of capital, and businesses may not have enough funds to purchase the necessary goods. This can lead to a shortage of inventory and a decrease in sales.
• Lack of accurate tracking: Without an effective inventory tracking system, it can be difficult to keep track of the amount of goods available, as well as the amount of goods that have been sold. This can lead to excessive inventory or a shortage of goods.
• Difficulty in forecasting: Accurately forecasting the demand for goods is difficult, particularly as markets and consumer preferences can change quickly. This can lead to either too much or too little inventory being held, which can reduce profits.
• Theft and damage: Goods can be stolen or damaged, leading to losses. This can be difficult to prevent, as goods must be stored in a secure location.
• Wastage: Goods that are not sold in time can become obsolete or spoil, leading to losses.

Other approaches related to Merchandise inventory

Inventory Management involves controlling, tracking, accounting and auditing of inventories. The following are some of the other approaches related to Merchandise inventory:

• First-In-First-Out (FIFO): This approach assumes that the oldest items in the inventory are the first to be sold. In other words, the items purchased earlier are sold first before any new items are sold.
• Last-In-First-Out (LIFO): Under this approach, the items that are most recently purchased are the first to be sold. This means that the latest items in the inventory are sold first before any of the earlier purchased items.
• Average Cost Method: This approach assumes that all items in the inventory are sold at an average cost. This means that the cost of each item sold is the average cost of all the items in the inventory.
• Specific Identification Method: This approach requires that each item in the inventory is tracked separately and the cost of each item is identified and recorded.

In summary, Inventory Management is the process of controlling, tracking, accounting, and auditing inventories. The other approaches related to Merchandise inventory are FIFO, LIFO, Average Cost Method and Specific Identification Method.

Merchandise inventory — recommended articles

Buffer inventory — Inventory record — Cycle stock — ABC analysis — Stock register — Overproduction — Maximum stock level — Inventory reserve — Operating cycle

References

• Gudehus, T., Kotzob H. (2009), Comprehesive Logistics, pub. Springer, New York
• Hedrich, F.D., Barnes F.C., Davis E.W., Whybark D.C. (2001), Inventory Management, U.S. Small Business Administration
• Liu, Z., Zhang, Q. (2013), Contemporary Logistics, School of Management, Xiamen University, 361005, P.R.China
• Murphy, P.R., Wood, D.F. (2004), Contemporary Logistics, VIII edition, pub. Pearson Education International, New Jersey
• Wild, T. (2011), Best Practice in Inventory Management, II edition, pub. Routledge, New York

Author: Iryna Vasilieva