Saturday, January 26, 2008

Inventory

I was walking through a mall recently when I saw a sign that used to be quite common but is now rather rare. They were closing the store to take "inventory" overnight, and the store was scheduled to re-open in the morning.

As an accountant, the word "inventory" immediately perks me up. Way back when I started in accounting, computers were in use for a variety of purposes, such as plant accounting and financial reporting, but they hadn't really penetrated inventory at retail. Why? Because computing power was expensive, and they didn't have a solid methodology for tracking individual items (i.e. the bar code sticker and reader).

There are two main ways of tracking inventory: 1) periodic 2) perpetual. Under the periodic inventory methodology, you started with a balance by product (i.e. we have 10 pairs of jeans at this certain size) and when you conducted an inventory and found 6 pairs of jeans in the store, then you'd know that you'd sold 4 pairs. There are a few "classic" inventory methods, being "FIFO" (first in, first out) and "LIFO" (last in, first out) that are used for valuing the items that have been sold.

This perpetual methodology is more of the "stone age" method; in the last decade or so, point of sale (POS) machines are now ubiquitous and do a pretty good job of tracking inventory as you go along; in this case your system might have 5 or 7 pairs listed, and when you found 6 pairs via a physical inventory, the remaining 1 pair difference would be charged to costs of goods sold. The real usage is to true-up the perpetual inventory to what is really on-hand; the difference is often caused by "shrinkage" or theft / shoplifting in the real world.

The perpetual or real-time inventory has pretty much taken over everywhere except where inventory is consumed without passing through a formal "check"; for example, if you have a pile of coal outside your power plant and you burn this coal, there isn't really a formal inventory check as you load up the coal, rather you periodically take inventory of the pile and then apply various valuation methodologies to determine how you determine the cost of what has been burned as well as the cost of what remains.

I remember when I was a budding or basically inexperienced accountant and they sent me to Michigan for an annual inventory at a phone company. I arrived on new years' eve and when I came in, pretty much everyone stopped what they were doing in mid-action like some sort of cartoon when someone said "the auditor is here". I paused for a minute and then just said "go back to what you are doing" since I had no idea of what I should actually be doing there. In general, people assume that just because you have a CPA you know what is going on, but when you first graduate from college as a CPA you don't really know much of anything; most everything is learned on the job. This is particularly true of tax accountants; once you say you are a CPA people ask you tax questions but often the tax information that a CPA knows is too general to be of use to the layman (unless they specialize in taxation, of course).

Inventory control is absolutely critical to running a retail operation; you need to determine what items are sitting idly taking up valuable shelf space and which items are "flying off the shelves". Wal-mart revolutionized the industry by using vast data warehouses to allow the vendors to manage the inventory themselves; they could see what was being sold in which location and then they could re-order the goods themselves to ensure that the shelves were always full.

I don't know if this Calvin Klein outlet store just has a crappy inventory control system, lots of shrinkage, or this is just a periodic check of their systems, but I rarely see signs like this anymore. Ah, memories of being an accountant...

Cross posted at Chicago Boyz

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