Have you ever glanced behind the curtains of your preferred store and wondered how they maintain those shelves brimming with goodies? There lies the magic trick of merchandise inventory, a significant component of the entire system that operates in the background.
These are the different types of products that distributors, merchants, and wholesalers are willing to sell you. The chic jackets, the lovely socks, and the handbags are what make you smile more. But, the matter is more complex than it seems. From the first purchase to stock management and storage, it is a well-tuned system that guarantees you never see empty shelves.
Ready to explore this retail magic more? Let’s examine what merchandise inventory is and why it makes your shopping experiences more enjoyable.
Basics of Merchandise Inventory
These are the goods a retailer, distributor, or wholesaler has on hand and intends to sell to their customers. It contains everything, from the cute keychains at the checkout line to the stylish outerwear on the shelves.
The foundation of any retail operation is its merchandise inventory- let’s say you have entered a store and discovered that the shelves are empty. Disappointing right? Not only that, it is also a loss of prospective sales for the store. Acquiring the appropriate quantity of inventory guarantees that companies can satisfy their customer requests, avoid overstocking, and eventually maintain profitability.
Elements of Merchandise Inventory
It includes a number of components that cooperate to keep the company operating efficiently. Now let’s explore the contents of merchandise inventory:
1. Finished Goods
These goods are available for sale Consider the fashionable purse that drew your interest or the newest sneakers that you’ve been eyeing. Because these are the items that customers come to purchase, finished products make up the majority of merchandise inventory.
2. Raw Materials
Although it’s less frequent in retail, raw materials may be carried by certain stores. For instance, a DIY craft store might stock fabric, beads, and other supplies that customers can use to create their own projects.
3. Work-in-Progress
Products may occasionally still be in the process of being finished. For example, furniture stores may have items that need to be completed or assembled before they are placed on the sales floor.
4. Materials
Although they aren’t sold directly to customers, these are goods that are required to support the selling process. Consider the wrapping paper, present boxes, and even the product display stand.
Cost of Merchandise Inventory
Now that we are aware of the items that merchandise inventory consists of, let’s discuss the associated costs. The price you spend to buy the items is not the only expense associated with your inventories, it also consists of a number of additional elements:
1. Cost of Purchase
This represents the exact cost at which you purchase goods from suppliers. It serves as the foundation for figuring out your overall cost of inventory.
2. Shipping and Handling
When products are brought to your stores, this will require shipping and handling charges from the supplier. Such costs are incurred and they fall under some of the expenses that help make the total figure.
3. Storage Expenses
When you get the products, they require some form of storage until the time that they will be consumed. These expenses include renting space for warehousing or maintaining your storage facilities and so on.
4. Insurance
Inventories are one of the most crucial forms of assets for your business and you may take insurance on them just in case they get lost, stolen, or destroyed. Indirect costs include premium paid that forms part of the cost of item inventory.
5. Obsolescence
At times, the products may not move from the shelves in the desired manner or as per the anticipated time. Unsold, outdated, or out-of-fashion products are also likely to go to waste so you should consider these expenses.
6. Labour
Operation of inventory involves staffing and management together with the responsibility of monitoring stocks. Another significant part of the total inventory cost is the salaries of your workers who help you in manufacturing the inventory.
Merchandise Inventory Turnover Formula
Having inventory is excellent, but how can companies determine whether or not they are using it effectively? This is where the formula for goods inventory turnover is useful. It’s a crucial indicator for companies to know how rapidly they are selling their inventory:
The Formula:
Inventory Turnover = Cost of Goods Sold (COGS) / Average Inventory
Let’s this breakdown:
- Cost of Products Sold (COGS): This is the total amount of cost that was ascribed to the goods produced and sold within a given period of time.
- Average Inventory: This is the average position or holding cost for the time period above for the same inventory. There are two versions: firstly, the initial and the final stocks are added and then divided by two.
Why it Matters:
A high inventory turnover ratio is a sign of a swift and effective product sale for the company. This usually suggests that there are customers for such products and this is a good sign. On the other hand, a low turnover ratio indicates overstocking or stuck-up inventory which hinders cash flow and increases costs of storing inventories.
Merchandise Inventory Example
Let’s make this concept more concrete, for instance- Sita owns a stylish boutique named Lure.
Step 1: Purchasing Inventory
A functional buyer such as Sita, purchases summer dresses valued at $10,000 from the supplier. They make her pay $500 as shipping and handling fees, plus $300 for insurance charges. Her total purchase cost is now at $10800.
Step 2: Storing Inventory
She takes a $200 monthly office space and hires a part-time employee to work as the company manager for the stock and other responsibilities for $1,000 monthly. In aggregate, her storage and labor costs are $3,600 and consumed within three months.
Step 3: Determine COGS and Average Inventory
The volume of sales for dresses in the summer season is $8000 as evidenced by Sita. The value of her first replenishment was $5,000, and the last she made was $7,000.
COGS= $8000
Average Inventory= \frac {5000 + 7000} {2}= $6000
Step 4: Calculate the Inventory Turnover Ratio
Using the formula we get,
Inventory Turnover Ratio= 8000/6000= 1.33
This ratio indicates that Sita is turning over her inventory approximately one and a half times during the summer season. Using that information, Lucy will be able to make better choices of what she wants to purchase to better manage her stock in the future.
FAQs: What is Merchandise Inventory? What Does it Include?
How do I manage my merchandise inventory effectively if I have a small business?
When you have a small firm firstly you should ensure they’re not overstocking or running out of popular items by using inventory management software, closely monitoring sales trends, and performing frequent stock audits.
What distinguishes raw materials from merchandise inventory?
Raw materials, more frequently utilized in manufacturing than in retail, are the essential ingredients needed to create the products whereas finished goods that are prepared for sale make up merchandise inventory.
How can merchandise inventory impact my customers’ satisfaction?
If you manage your inventory well this will ensure that your customers will find what they want on their required time, leading to a better shopping experience and increasing loyalty in your business.
Conclusion
There you have it, then! Despite its seeming complexity, merchandise inventory is just about making sure that companies have the correct things on hand at the right times to satisfy consumer demand. Any retail venture has to have efficient merchandise inventory management for it to succeed, and this knowledge includes what it’s all about, and how much costs and turnovers are involved.
Now you will know when you walk into your favourite store the next time and learn how they surprise you by always having what you need. It can be best described as a marvelous coordination of administrative tasks, planning, and inventory mastery. Cheers to your shopping!
