Retail Accounting

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Retail Accounting 101: Inventory/Stock management models

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Inventory and stock management are interchangeable terms in the context described below.

There are various models which can be used by companies to have greater stock management control. Toyota is credited as the originator of this approach to have a lean and more effective enterprise through reducing muda (Japanese for waste) and muri (Japanese for excess) those familiar with lean manufacturing and enterprise will know these terms well. Although developed in a manufacturing environment the same principles can also be applied to small to medium sized retailing businesses.

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We will briefly look at the three main models of inventory control, Just-in-time Inventory (JIT), Vendor Managed Inventory (VMI) and Customer Managed Inventory (CMI).

JIT’s aim is to allow companies to replenish stock/inventory exactly when required, hence the name “Just-In-Time”. It attempts to remove the probability of holding excess inventory and its associated costs. As a result, companies receive inventory only when the need for more stock is approaching, this has allows better cash utilisation and a high stock turnover. Take for example a retail environment where no stock storage area is available and all items are placed out ready for sale. The retailer needs to have an efficient supplier able to supply small quantities of items on a frequent, preferably daily, basis in order to keep the shelves full and an efficient stock management system which enables daily top up orders to be placed.

VMI and CMI are two models that are derivatives based on the JIT principles. VMI gives the vendor in a vendor/customer relationship the ability to monitor, plan and control inventory for their customers. Customers relinquish the order making responsibilities in exchange for timely inventory replenishment that increases organizational efficiency. In the UK this is common in the news and magazine sector where delivered quantities of titles and the title mix are often automatically adjusted by the wholesaler.

CMI allows the customer to order and control their inventory from their vendors/suppliers. Both VMI and CMI benefit the vendor as well as the customer. Vendors see a significant increase in sales due to increased inventory turns and cost savings realized by their customers, while customers realize similar benefits. This is the principle behind automated ordering from wholesalers and is becoming increasingly common in retailing where EPOS/BOS systems are provided by a wholesaler or symbol group and prepare automatic stock orders which are checked and authorised by the retailer.

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Author: retailaccounting

CounterBooks is an online retail accounting management suite which is used by retailers across the world.

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