Merchandising companies purchase goods from suppliers with the purpose of reselling them to their customers. Specifically, these businesses walk a tightrope between having enough inventory to meet customer demand and not getting stuck with too much unsold stock.
Inventory recording systems
For these businesses, managing inventory is of utmost importance. Usually, inventory is a relatively liquid asset, and for this reason it is classified as Current Asset on the Balance Sheet of a business
There are two important inventory recording systems including:
- Perpetual inventory system. A system of accounting for merchandising transactions in which the inventory and cost of goods sold accounts are kept perpetually up-to-date.
- Periodic inventory system. An accounting system that eliminates the cost of goods sold as sales occur. However, the amounts of inventory and the cost of goods sold are not known until a complete physical inventory is taken at year-end.
Merchandising activities imply that new accounts will be created in order to maintain control of the transactions. The two different inventory systems use different accounts that will have an effect on the format of financial statements as they will be included in these.
Core strategies for inventory management
Here is a deeper dive into how merchandising companies manage this crucial aspect of their business:
- Demand forecasting. This is not just about predicting future sales numbers. It’s a comprehensive analysis that considers historical sales data, market trends, competitor activity, economic factors, and even seasonal fluctuations. Specifically, advanced companies might incorporate machine learning algorithms to identify subtle patterns and anticipate changes in demand. Accurate forecasting is the foundation for determining how much inventory to order to avoid stockouts (running out) or overstocking (having too much).
- Optimizing stock levels. Using data from sales, forecasting, and product lifecycles, companies establish ideal stock levels for each product. This helps minimize storage costs and the risk of obsolescence (products going out of style). For example, a company might keep higher stock levels for popular, fast-selling items compared to seasonal or trend-driven products. They might also implement inventory segmentation strategies, classifying products based on factors like demand predictability, price point, or profit margin. This allows for more tailored inventory management for each category.
- Building strategic supplier relationships. Beyond just price negotiations, fostering trust and communication with suppliers is crucial. Reliable deliveries ensure a smooth flow of inventory, preventing stockouts and production delays. Flexible order quantities allow companies to adjust their orders based on actual sales, reducing the risk of overstock. Strong supplier relationships can also lead to benefits like early access to new products or more favorable payment terms.
- Leveraging technology and automation. Inventory management software goes beyond simple record-keeping. These tools allow companies to track inventory levels in real-time across all their locations. Barcoding systems streamline receiving, picking, and stock movement, improving accuracy and efficiency. Data analytics tools help identify sales trends, predict demand fluctuations, and optimize pricing strategies. Automation can be implemented in tasks like order processing, replenishment triggers, and low-stock alerts, freeing up valuable human resources for more strategic activities.
- Implementing inventory replenishment strategies. Companies develop methods to reorder stock efficiently, ensuring they have enough products to meet demand without unnecessary holding costs. Common strategies include:
– Minimum Order Quantity (MOQ). Agreed-upon minimum order amount with a supplier, which can help with volume discounts but might lead to overstocking if not carefully managed.
– Reorder Point. The minimum stock level at which a new order is placed, factoring in lead time from suppliers to avoid stockouts.
– Just-in-Time (JIT). Receiving products only when needed, minimizing storage costs and obsolescence risks. This strategy is often used for high-value items or products with predictable demand.
- Continuous monitoring and improvement. Physical inventory counts are conducted periodically to ensure record accuracy and identify any discrepancies. Importantly, data analysis goes beyond just stock levels. Companies analyze sales trends by product, location, and customer segment. This helps identify slow-moving items that might need price adjustments or marketing campaigns. It can also reveal opportunities for product bundling or promotions to clear out excess stock. The ultimate goal is to continuously improve inventory management processes based on data and real-world experience.
Balancing act and the importance of optimization
By effectively managing these factors, merchandising companies can strike a crucial balance between:
- Meeting customer demand. Having enough stock to fulfill customer orders and avoid lost sales due to stockouts, which can damage customer satisfaction and brand reputation.
- Minimizing holding costs. Storage fees, insurance, and potential product spoilage (for perishable items) all contribute to holding costs. Excess inventory also ties up capital that could be used for other investments.
- Preventing stockouts. Stockouts lead to unhappy customers and lost sales opportunities. They can also damage customer trust and encourage them to seek out competitors who have the products they need.
- Avoiding overstock. Overstocked inventory ties up capital, reduces profitability, and increases the risk of obsolescence, especially for products with short lifecycles or seasonal trends. Companies might have to resort to clearance sales or discounts to move excess stock, impacting their profit margins.
Effective inventory management is an ongoing process that requires careful planning, data-driven decision making, and continuous optimization. By mastering this aspect of their business, merchandising companies can ensure they have the right products available at the right time, while minimizing costs and maximizing customer satisfaction.
