MANAGING INVENTORY TURNOVER

Managing Inventory Turnover

Inventory turnover helps assess the buyer’s performance in managing this asset. Retailers want to achieve a high inventory turnover (stock-turn), but just focusing on increasing inventory turnover can actually decrease gross margin and gross margin return on investment (GMROI).

Buyers therefore need to consider the trade-offs associated with managing inventory turnover.

Potential Problems with Approaches for Improving Inventory Turnover

Retailers need to strike a balance in their rate of inventory turnover.

Some approaches for improving inventory turnover can have the opposite effect resulting in lower GMROI by lowering sales volume, increasing the cost of goods sold, and increasing operating expenses.

One approach to increase turnover is to reduce the number of merchandise categories, the number of stock keeping units (SKUs) within a category, or the number of items within an SKU. However, if customers can’t find the size or color they seek-or even worse, if they can’t find the brand or product line at all due to the reduces assortment, patronage and sales can decrease. Retailers have to be careful as customers who are disappointed will most probably take their business elsewhere and possibly urge their friends and family to do the same.

Another approach for increasing inventory turnover is to buy merchandise in smaller quantities and more often, which reduces ones average inventory without reducing sales. But buying in smaller quantities could impact negatively on the gross margin and buyers may not be able to take advantage of quantity discounts and supply chain economies of scale. This process could also increase operating expenses, in that more time and administration is required to manage this process.

For more information on Merchandise Management and much more, consider studying Master Retailing’s Bachelor of Commerce in Retail Management.

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