Written by Olejuru Lanfear, Experienced Senior Merchandise Planning Professional & Author of ‘The Fundamentals of Planning’
September 7, 2021
There are 3 absolute measures we can use when managing inventory, of which retail value is one.
Whilst most retailers I’ve interacted with to date manage inventory in a buying department using cost value, there are quite a few that use retail value instead.
When asked ‘why?’, they have a preference to manage inventory at retail rather than at cost, the answer has been:
…so everyone can see how much can be realised from the inventory on hand.
In other words how much revenue the inventory would create, when it gets sold.
An observation I had from managing inventory at retail is that the inventory margin rate can be compared with the sales margin rate to see if inventory is being sold at the normal price or if there has been any form of discounting that has taken place. This assumes inventory is revalued each time there is a change in the retail price.
The constant revaluation of inventory due to price changes is a disadvantage of valuing inventory at retail. Obviously, the frequency of revaluing inventory can be reduced by deciding to only revalue inventory when there is a permanent price change.
A good practice to have when managing inventory at retail is to also show the cost value. Doing this allows planners to monitor the difference between inventory and sales margin for any larger than expected discrepancies.
Overall, planning when inventory is valued at retail adds an additional layer of complexity to the planning process and as there are a lot of metrics that can be used to assess the efficiency of inventory, one could ask if this additional layer of valuing inventory at retail when planning, brings increased value or insight into a department’s performance.
Added to this, being able to manage inventory at retail would also depend on if the system used by the retailer for planning can handle regular changes to inventory value and what inventory value is shown when pulling off historic inventory value. In other words, would historical inventory be valued at today’s retail price or the retail price for the historical period inventory information is being pulled off the system.
This then leads to the follow-up question of, can the planning system being used by the retailer hold multiple retail prices for each product?
With all this said, managing inventory at retail requires looking at several factors, some of which have been mentioned above. Plus, it adds an additional level of complexity to planning.