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Retail Inventory
Management
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Submitted by:- Supreet Kaur Chabra
Roll No:- 6
Sr. No. 3

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 INVENTORY MANAGEMENT IN RETAIL

The retail industry can be extremely competitive and one of the biggest challenges is
managing a store’s retail inventory. Businesses need to have space to store a wide number of
products along with a wide variety. If a retail store does not carry enough of a product, then
they are losing potential customers who will shop elsewhere.

Retail inventory is different from other forms of inventory because of the quantities needed.
Retail chains need warehouses to keep all of their stock and the means to transport it to their
stores. Keeping up with such large quantities can be difficult for anyone, even with the help
of an automated system. To track a company’s products, a retail inventory management
system needs to be successfully implemented.

What is retail inventory management?

Retail inventory management is the process and methods used to keep track of the stock in a
retail business. These methods control everything from ordering, shipping, receiving,
tracking inventory, retail turn-over, and storage. Retail inventory management can help keep
a business’ profits at a steady margin as well as reducing theft and loss of inventory. Many
retail businesses lose money every year because they do not have a successful inventory
management system in place.

Retail Inventory Management should provide the following functions for a retail business:

• Track and manage the entire inventory for the business

• Keep up with store markdowns
• Evaluate how well some groups of products do in sales
• Provides analysis for comparison shopping with competitors
• Collect data on the sales and inventory of individual stores using SKU
• Allows you to accurately review your inventory

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 Inventory Management Technique

 ABC Analysis

ABC analysis underlines a very important principle “Vital few: trivial many”. A.B.C.
analysis is a selective technique of controlling different items of inventory. In actual practice,
thousands of items are included in business as inventories. But all these items are not equally
important. According to this technique, only those items of inventory are paid more attention
which is significant for business. According to this technique, all items are classified into 3
categories A.B. and C.

1. A-items: - It is usually found the hardly 10-15 % of the total items account for 70-
75% of the total money spent on the materials. These items require detailed and
rigid control and need to be stocked in smaller quantities. These items should be
procured frequently, the quantity per occasion being small.

2. B items:- these items are generally 20-30% % of the total items & represent 15-
20% of the total expenditure on the materials. These are intermediate items. The
control on these items need not be detailed & as rigid as applied to c items.

3. C-items: these items are generally 50-60% of the total items and represent 5-10%
of the total expenditure on the materials. The procurement policy of these items is
exactly the reverse of A items. C items should be procured infrequently and in
sufficient quantities. This enables the buyers to avail price discounts and reduce
work load of the concerned department.

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 Class Number of items % as per their
in terms of their % value

A 15 70

B 30 25

C 55 5

100 100

Advantages of ABC Analysis

1. A Close and strict control is facilitated on the most important items which
constitute a major portion of overall inventory valuation or overall material
consumption & due to this, costs associated with inventories maybe reduced.

2. The investment in inventory can be regulated in proper manner & optimum

utilization of available funds can be assured.

3. A strict control on inventory items in this manner helps in maintaining a high

inventory turnover rates.

4. Also, "ABC" classifications can be used to design cycle counting schemes. Count
"A" items more often than "B" items and "C" items possibly not at all. The
"ABC" concept allows a manager to devote resources where it will have the
biggest positive impact.

 VED Analysis

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VED Analysis can be defined as the classification of inventory in to

V Items – Items of vital importance,

E Items – Items of essential importance,

D Items – Items of desirable importance.

This classification is usually applied for spare parts to be stocked for maintenance of
machines and equipments based on the criticality of the spare parts. The stocking policy is
based on the criticality of the items.

The vital spare parts are known as capital or insurance spares. The inventory policy is to
keep at least one number of the vital spare irrespective of the long lead-time required for
procurement.

Essential spare parts are those whose non-availability may not adversely affect production.
Such spare parts may be available from many sources within the country and the
procurement lead time many not be long. Hence, a low inventory of essential spare parts is
held.

The desirable spare parts are those, which, if not available, can be manufactured by the
maintenance department or may be procured from local suppliers & hence no stock is held
usually.

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  FSN Analysis

F-S-N analysis is based on the consumption figures of the items. The items under this
analysis are classified into three groups: F (fast moving), S (slow moving) and N (non-
moving).

To conduct the analysis, the last date of receipt or the last date of issue whichever is later is
taken into account and the period, usually in terms of number of months, that has elapsed
since the last movement is recorded.

Such an analysis helps to identify:-

• Active items which require to be reviewed regularly.

• Surplus items whose stocks are higher than their rate of consumption.

• Non moving items which are not being consumed.

 XYZ Analysis

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X-Y-Z analysis is based on value of the stocks on hand (i.e. inventory investment). Items
whose inventory values are high are called as X items while those inventory values are low
are called Z items. And Y items are those which have moderate inventory stocks.

Usually X-Y-Z analysis is used in conjunction with either ABC analysis or HML analysis.

XYZ analysis helps to identify a few items, which account for large amount of money in
stock and take steps for their liquidation/retention.

XYZ when combined with FSN analysis helps to classify non-moving items into XN, YN,
and ZN group and thereby identify a handful of non-moving items, which account for bulk of
non-moving stock. These can be studied individually in details to take decision on their
disposal or retention.

 HML Analysis

H-M-L analysis is similar to ABC analysis except for the difference that instead of “usage
value”, “price” criterion is used. The items under this analysis are classified into three groups
that are called “high”, “medium” and “low”.

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To classify, the items are listed in the descending order of their unit price. The management
for deciding three categories then fixes the cut-off-lines.

For example, the management may decide that all items of unit price above Rs. 1000/-will
of ‘H’ category, those with unit price between Rs. 100/- to Rs.1000/- will be of ‘M’ category
and those having unit price below Rs. 100/- will be of ‘L’ category.

HML analysis helps to –

1. Assess storage and security requirements

2. To keep control over consumption at the departmental head level

3. Determine the frequency of stock verification

4. To evolve buying policies to control purchase

5. To delegate authorities to different buyers to make petty cash purchase

 EOQ MODEL

The objective of the economic order quantity (EOQ) model is to minimize the total costs
associated with the carrying and ordering costs as the mount ordered gets larger, average
inventory increases and so do carrying costs. For example, if annual demand for an inventory
item is 26,000 units, and a firm orders 500 each time, the firm will place 52 [26,000/500]
orders per year. This order frequency gives the organizations an average inventory of 250
[ 500/ 2] units. If the order quantity is increased to 2,200 units, fewer orders (13) [26,000 /
2,000] will be placed. However, average inventory on hand will increase to 1,000 [2,000 / 2]
units. Thus, as holding cost go up, ordering costs go down, and vice versa. The optimum

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economic order quantity is reached at the lowest point on the total cost curve. That’s the
point at which ordering costs equal carrying cost – or the economic order quantity.

To compute this optimal order quantity you need the following data: forecasted demand for
the item during the period (D); the cost of placing (OC) the value or purchase price of the
item (V); and the carrying cost (expressed as a percentage) of maintaining the total inventory
(CC). Given these data, the formula for EOQ is as follows:

EOQ = √2 x D x OC / V x CC

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 IMPORTANCE OF TECHNOLOGY IN RETAIL

The importance of technology in retail stems from the importance of data. Data is nothing but
information that aids decision making. The right data, in the right form to the right setoff people
at the right time, is one of the greatest tools in the hands of the retailer.

Efficient Stocking of merchandise

The items purchased provide information on merchandise sold in the store; this is the basis of
sales analysis and decisions on replenishment re-ordering and merchandise planning. If this
information is passed on to the manufacturer; it can help reduce production time. This is
particularly true in case of fashion items, which have a very short life cycle. For example data
gathered in this manner may indicate youngsters buying certain styles in Jeans or colors, in the
tee shirts from the store. To service this section of the audience the retailer may need
replenishments faster. The use of technology aids the collection and transmission of information.
The trends in sales can be analyzed. This helps avoid situations of stock out helps spot
merchandise or products timely markdowns and higher inventory turns.

Collection of Data

The use of technology aids data collection. Data can be collected about consumers, their
purchases the frequency of their buying and the typical basket size. This information helps the
retailer distinguish the customers who shops at his store frequently and also reward them. For
example information gathered about a customer may reveal preferences for certain brands; this
may be used for further communication with the customer regarding promotional offers etc. The
data on purchase made is also passed on to the credit card organization for payment to the
merchant establishment and also for billing the customer.

Efficiency in Operations

The use of information technology serves as a basis for integrating the functioning of various
departments. When a retailer decides to use the power of technology to aid business, the
investment in terms of money is usually high. However the benefits of the use of information
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technology are many. As the process gets automated the time involved in particular task is
reduced. For example, a person manually billing a customer for purchase made will take a longer
time as compared to a person who is needed to scan in the items using the point of sale systems.

Helps Communication

Communication within the organization can be faster with the use of software like Lotus Notes.
Retail stores can also communicate with each other and with the warehouses. This can be done
24 hours a day and seven days a week. Electronic Data Interchange (EDI) can also be used for
communication with suppliers and vendors.

The information needs of the retailer largely depend on the size and the spread of the
organization. In most cases a small boutique operator or a small retailer like the baniya can do
manual billing and gather a fair amount of information by making a phone cal or making a
personal visit to the store.

With an increase in the number of stores and /or an increase in the number of products sold in
the store, gathering of information becomes crucial Technology plays a vital role in gathering
this information and making it available to the right set of persons.

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