Retailers Reveal What They Learned from the Recession - Report Example

ARTICLE “Retailers Reveal What They Learned From the Recession” by Paul Holewa The recession has broken many store owners of two retail habitsthat went from profit-killers to business-closers when the economy tanked two years ago: carrying too much inventory and poorly managing their cash flow. “I’ve seen jewelers hold on to inventory for three to five years,” says David Peters, director of education for Jewelers of America. “These days, jewelers are more proactive about turning [it].” When the crisis began in the fourth quarter of 2008, the first instinct for many retailers was to begin selling down their inventory to pay off debt and reinvest only in best-sellers and fast-turners. To quickly streamline their stock, retailers discounted, parted out, or scrapped nonperforming finished jewelry. At the same time, store owners started to reevaluate, and perhaps end, their relationships with vendors. Those that were flexible and supportive during the bad times made the cut. Plenty of retailers have made an even more significant change to inventory management by favoring virtual over “live” inventory. During Stuller’s 2010 Solutions Symposium in Lafayette, La., in early August, Shawn Montgomery, the company’s executive director of business development, told retailers: “Twenty linear feet of diamond bridal, diamond fashion, and color fashion would cost a retailer roughly $250,000 in live inventory. With prototypes, to fill that same amount of space with these three product categories would only be about $9,000.” In the realm of cash flow, reducing inventory and accounts receivable has played a key role in managing downward an owner’s capital investment. Retailers are also more aggressively managing the flip side of cash flow, increasing accounts payable—especially paying off higher-interest debts and taking advantage of discount programs for early payments. In step with these changes, jewelers are paying more attention to store traffic. “In the past, retailers were lackadaisical about the customers entering their store, not realizing the value of each opportunity they had to engage them,” says IAS Training president Brad Huisken. “Jewelers now know each and every customer is vital to their business.” The smartest ones have recognized they can’t be all things to all customers. Now, many jewelers have identified their core strengths and are better leveraging their key inventory offerings and strategic services. This back-to-basics catharsis for store owners has had a knock-on effect on staff management, as more owners realize that simply “clerking” today’s better-informed customers just won’t do. REPORT Introduction Holewa writes how retailers took the wrong notion of stocking too much inventory while surmounting on an almost a negative cash flow amidst the worsening recession two years back. Their only thriving instinct was disposing of extraneous inventory, more exactly, those which were no longer adding value to the net income in order to settle debts (Holewa, 2010). Inventory management was an integral mechanism in responding to the economic pressures -- preferring a virtual inventory (with the use of a prototype) over a live inventory. Holewa (2010) specifically concludes that decreasing the inventory levels, improving inventory turnover should keep the capital investment afloat. Inventory Control Control of inventory refers to stocking the appropriate or sufficient quantity of supplies or products necessary to satisfy consumer demands. In principle, it is the manager’s responsibility to presume the inventory levels relative to the degree of services needed to be rendered (Voortman, 2004, p.15). Apart from that however, inventory control also involves updating economic order quantities (EOQs), analysing lead time and keeping safety stock at levels necessary (Gopalakrishnan & Sundaresan, 2004, p.6). Main Objectives of Inventory Control. Managers control the inventory to ensure the safety of the stocks, and also to be able to gather accurate information essential for financial reporting (Duchac et al., 2008, p.264). Purchase orders, sellers’ invoices and receiving reports are essential documents in protecting the inventory. Initially, the purchase order is prepared and recorded while the receiving report holds the proof of the receipt of the inventory after having been approved for purchase (Duchac et al., 2008, p.265). The inventory should then be recorded in the accounting records. The three documents should concur in terms of price, quantity, and description of the item. An inventory count is commonly done towards the reporting period so that the cost of the inventory is accurately accounted for in the financial statements. Optimal Inventory Level Inventory levels are highly associated with costs such as in material handling (i.e. spoilage, damage, and other property accidents), interest on money, space, or storage costs such that high inventory levels entail high inventory costs (“Real,” n.d.). Hence, in reducing the inventory level, a reduction of inventory costs ensues. Moreover, keeping a high level of inventory runs the risk of inventory obsolescence and increases stock keeping units (“Solving,” n.d.). However oftentimes, reducing the inventory level seems impossible to do without hurting the customer service level. Apparently, an unfinished sales activity resulting from a shortage of stock doesn’t increase sales at all. High inventory levels are often an offshoot of a deteriorating supply chain operation that consequently increases variability in the supply chain (Gattorna et al., 2003, p.194). The cycle stock and the buffer stock (safety stock) are considered in arriving at an optimal inventory level. Cycle stock is likewise called the working stock allotted within the certain period relative to the demand. Safety stock is the inventory set aside or reserved in case of shortages in stocks. The following are some measures to keep inventory levels at optimum without affecting service levels. Supplier Collaboration. Establishing and maintaining communication with the partners within the supply chain enables managers to integrate consumer demand in every areas of the supply chain. Inventory and demand will be closely monitored so there will no shortage or surplus in the inventory, hence an optimal inventory level (Gardner & Thurman, 2006, p.1102). Periodic Reconstruction of Inventory Locations. Achieving a consensus inventory system may remain to be challenge for most managers. Nevertheless by keeping track of the demand patterns, they could periodically reconstruct their storage locations through a warehouse management system (Bragg, 2010); performing this labor-intensive task should be done manually by a consultant rather than referring from a computer system (Bragg, 2010). Evaluating Inventory Levels By evaluating the level of inventory, managers will know the efficiency of their inventory system, turnover or replenishment frequencies within the fiscal year (Albrecht et al., 2007, p.303). This comes off in the inventory turnover. The following is the formula for calculating the inventory turnover. Inventory Turnover = Cost of Goods Sold/ Average Inventory where Average Inventory = (Beginning Inventory + Ending Inventory)/2 Though technically referring to the goods available for purchase, the costs (i.e. direct labor, overheads, materials) incurred by the inventory sold and work in-process within a certain period is called the cost of merchandise/goods sold (Albrecht et al., 2007, p.288). These inventories will be contained in the beginning inventory. Categorizing the inventory is critical to the reporting period since the ending inventory casts an impact upon the beginning inventory which consequently affects the statement of the net income and the balance sheet (Albrecht et al., 2007, p.288). Conclusion Controlling the inventory from the supplier to the manufacturer optimizes inventory levels which in turn answers customer’s needs and yields the desired revenues. References Albrecht, S., Stice, J., & Stice, E. (2007). Financial Accounting. Retrieved from http://books.google.com.ph/books?id=Q62w4GPXMcAC&printsec=frontcover&hl= en&source=gbs_ge_summary_r&cad=0#v=onepage&q&f=false Bragg, S. (2010). Accounting best practices. Retrieved from http://books.google.com.ph/books?id=5f7IamH5seMC&printsec=frontcover&hl= en&source=gbs_ge_summary_r&cad=0#v=onepage&q&f=false Duchac, J., Warren, C. & Reeve, J. (2008). Financial and managerial accounting. Retrieved from http://books.google.com.ph/books?id=1pLR1T2N_r4C&printsec= frontcover&hl=en&source=gbs_ge_summary_r&cad=0#v=onepage&q&f=false Gardner, A. & Thurman, C. (2006). Entrepreneurs great big book of business lists: all the things you need to know to run a small business. Retrieved from http://books.google.com.ph/books?id=SzBkDmV7B8IC&printsec=frontcover&hl= en&source=gbs_ge_summary_r&cad=0#v=onepage&q&f=false Gattorna, J., Ogulin, R., & Reynolds, M. (2003). Gower handbook of supply chain management. Retrieved from http://books.google.com.ph/books?id=g2SJ6v3nzRsC&printsec= frontcover&hl=en&source=gbs_ge_summary_r&cad=0#v=onepage&q&f=false Gopalakrishnan, P., & Sundaresan, M. (2004). Materials management: An integrated approach. Retrieved from http://books.google.com.ph/books?id=sX_Uvs7YQYgC&printsec=frontcover&hl=en&source=gbs_ge_summary_r&cad=0#v=onepage&q&f=false Holewa, P. (2010, Oct.). Retailers reveal what they learned from the recession. Retrieved from http://www.jckonline.com/2010/09/28/retailers-reveal-what-they-learned-from-recession Real cost of inventory. (n.d.). Retrieved from http://www.positive-way.com/business/truecost.htm Solving the inventory - Service level tradeoff. (n.d.). Retrieved from http://www.megapractical.com/pdf/dpm_overview.pdf Voortman, C. (2004). Global logistics management. Retrieved from http://books.google.com.ph/books?id=zWzUDK4MgnwC&printsec=frontcover&hl =en&source=gbs_ge_summary_r&cad=0#v=onepage&q&f=false Read More