Running head: INVENTORY SYSTEMS Inventory Systems Summary Derrick Abrams, Lasonya Jewell-Antoine, Kristin Bachman, Marcia Rhoden-Mccatty University of Phoenix QRB 501 August 1, 2011 Inventory Systems Summary The principal role of inventory management systems is to ensure that stores are adequately stocked. Companies use various methods to track and report inventory. Retail companies are perhaps the best entities to examine when attempting to understand inventory management systems. The type of inventory a company has determines the method they use.
Retail companies use the retail inventory method as a base system. Last-in-First-Out (LIFO) and First-in-First-Out (FIFO) are the two systems that appear to be used more frequently. Other systems used are the Just in Time or JIT method and the Average Cost method. The following paragraphs will describe different companies and the type or types of inventory systems they use. Also the advantages and disadvantages of their systems are discussed. Best Buy CO. Inc. Best Buy Co. Inc. is a multinational retailer of consumer electronics, appliances, entertainment software, home office products, and related services.
The company operates retail stores, calls centers, and conduct online retail operations. Best Buy Co. Inc. uses the retail inventory method as the basis of its inventory management system. This method requires that a record be kept of the total cost and retail value of goods purchased, the total cost and retail value of the goods available for sale, and the sales for the period. There are different versions of the retail inventory method. Specifically, Best Buy Co. Inc. uses the Last-In-First-Out (LIFO) retail method. This method assumes the last unit that comes into inventory is sold first.
An advantage of the LIFO method is the ability to pay lower taxes. Using the LIFO method of inventory means that when you count the cost of goods sold, you use the current price rather than whatever price you paid for the specific inventory in stock according to O’Farrell (2011). Reported profits are lower when using LIFO leading to a reduction in the amount of taxes a company has to pay. Conversely, the LIFO method causes a company to report lower earnings. Depressed earnings can be unfavorable when presenting financial statements to investors and other stakeholders.
Presenting financial statements with low earnings to banks, creditors, and suppliers can lower the chances of acquiring credit and funding. Best Buy Co. Inc. improved its inventory management system by revamping its supply chain. The company uses a customer focused process within the inventory method. Store location is considered when stocking products. The executives noticed that sales differ across markets. The products shipped to stores in specific markets are particular for that demographic. They also instituted higher delivery frequency and smaller shipments.
Distribution centers are located closer to retail outlets to allow for faster shipping of items. The changes made allow better control of inventory, less waste, and the reduced need for markdowns. These factors alone can lead to drastic loss of revenue if not controlled. Tiffany & Company Tiffany & Company is a specialty jewelry store that has quality jewelry as well as the exclusivity of their products. The largest asset of the company is the inventory of goods that consists of unfinished and finished products that haven’t been sold. The company uses the average cost method to value its inventory during a certain time period.
Tiffany & Company use this method for many reasons. This method is convenient to measure the value of a group of like assets without an in-depth appraisal of each individual piece of jewelry. The formula is simple and easy to understand, total costs of all individual assets, divided by the number of units, equals the average cost per unit. This method also takes into consideration that the company sells the inventory simultaneously. There are a few disadvantages to the method such as being at risk of value loss and that inventory may be high at times due to seasonal production such as Valentine’s Day or Christmas.
The high demand in products requires the company to sustain a large inventory; however unsold products are costly to a company. An ideal situation is to market and sell products as quick as possible or at least keep a balance of production and the sale of products as close as possible. Target Corporation Target Corporation is a retail organization that specializes in the sales of goods such as clothing, house wares, small electronics, furniture, music, pharmaceuticals, toys, and groceries. The company also makes many of its products available on their online store.
Target Corporation uses the retail inventory method (RIM) to account for inventory. Target uses last in-first out (LIFO) method under RIM. “Under RIM, the valuation of inventory at cost and the resulting gross margins are calculated by applying a cost-to-retail ratio to the retail value inventory. RIM is an averaging method that has been widely used in the retail industry due to its practicality. The use of RIM will result in inventory being valued at the lower of cost or market since permanent markdowns are currently taken as a reduction of the retail value of inventory” (Target Corporation).
The disadvantages to using this method include: (1) “damaged goods may have less value than what the store paid for them”, (2) “changes in market prices may lower the value of the inventory below cost and some items may be obsolete”. (Target Corporation). The cost method of valuing inventory may mislead the organization into thinking there is more value in the business than what actually exist. COSTCO Wholesale Corporation Costco has a lot of assets in their inventory system that include merchandise, land, buildings, and equipment.
During the period of 2007 to 2010 it states that business has certainly improved for this company and in particular this store in Atlanta. They have moved from thousands of dollars in merchandise inventory to millions in 2010. There are advantages and disadvantages to that much inventory. The advantages are that the company and their investors can see growth and stock prices will be on the rise. It also means that sales are up and more people are coming through the doors of the store. Some disadvantages are that they will have to hire more employees to man the store, ay roll goes up, and employee benefits. Due to the risks of theft and burglary, the company will need to improve their security system to protect a larger inventory. All of these changes cost money and therefore although COSTCO has increased their merchandise they will have to make spending adjustments in other areas. Systems Comparison Best Buy Co. Inc. and Target Corporation both use the retail inventory method (RIM). Specifically, both companies utilize the LIFO method of retail inventory management. Best Buy and Target experience similar advantages and disadvantages of using this system.
Some advantages are tax breaks when reporting profits and the practicality of the retail inventory method. They also experience some of the same disadvantages of using this type of inventory management system. The valuation of damaged goods may be less than what the company paid for them. Another disadvantage is reporting lower earnings which are not favorable when attempting to secure funding or credit. The cost method of valuing inventory may mislead the organization into thinking there is more value in the business than what actually exist (Target Corporation).
Tiffany & Company uses the average cost method. This method is quite clear. It takes the weighted average of all products available to sale during the accounting period and then uses the average cost to determine the value of cost of goods sold and ending inventory. The average cost method works well for a company such as Tiffany & Company because of the type of products it sells. It enables the company to measure the value of a group of products without an in-depth appraisal of each. Conclusion Inventory management systems ensure that stores are adequately stocked.
They enable companies to track and report inventory. It is important for companies to research the advantages and disadvantages of the inventory system to figure out what system will best suit the needs of their business. There are different types of inventory systems such as FIFO, LIFO, and average cost method. The inventory management methods of Best Buy, Tiffany & Company, Target, and COSTCO were examined. Systems of inventory management vary from company to company. It is at the company’s discretion to choose which system works best for it and its stakeholders. References O’Farrell, R. (2011).
The Pros vs. Cons for the “Last in, First Out” Inventory Method. The Houston Chronicle. Retrieved from http://smallbusiness. chron. com/pros-vs-cons-last-in- first-out-inventory-method-10648. html U. S. Securities and Exchange Commission. (2010, February 11). Edgar system company search. Retrieved from http://www. sec. gov/edgar/searchedgar/companysearch. html What Are the Disadvantages of Using the Lower of Cost or Market to Value Inventory? www. ehow. com/info_8511215_disadvantages-cost-market-value-inventory. html Retrieved on July 29, 2011 from www. target. com Table 1
Best Buy Co. Inc. Quarterly Inventory Data |Values in Millions |Q4 |Q3 |Q2 |Q1 | |2010 |5. 90 |10. 06 |6. 35 |6. 34 | |2009 |5. 49 |8. 98 |5. 74 |5. 49 | |2008 |4. 75 |8. 21 |6. 11 |5. 1 | |2007 |4. 71 |7. 45 |4. 65 |4. 30 | Table 2 Tiffany & Company Quarterly Inventory Data |Values in Millions |Q4 |Q3 |Q2 |Q1 | |2010 |1. 63 |1. 65 |1. 55 |1. 47 | |2009 |1. 43 |1. 4 |1. 54 |1. 55 | |2008 |1. 60 |1. 64 |1. 51 |1. 47 | |2007 |1. 37 |1. 47 |1. 37 |1. 34 | Table 3 Target Corporation Quarterly Inventory Data |Values in Millions |Q4 |Q3 |Q2 |Q1 | |2010 |9. 5 |7. 73 |7. 25 |7. 18 | |2009 |9. 38 |7. 53 |6. 99 |6. 71 | |2008 |9. 05 |7. 31 |6. 84 |6. 78 | |2007 |8. 75 |6. 65 |6. 39 |6. 25 |
Table 4 COSTCO Wholesale Corporation Quarterly Inventory Data | Merchandise |9/2/2007 |8/31/2008 |8/30/2009 |8/31/2010 | |inventory | | | | | | |$4,879,465 | $5,039,413 |$5,405 | $5,638 | | | | | | | Graphs Figure 1. Best Buy Co. Inc. Inventory Data [pic]
Best Buys quarterly inventory data shows an increase in the third quarter for each year reported. The company’s fiscal year causes the third quarter to come about around Thanksgiving and Christmas holidays. Items are in demand for gifts, and sales occur more frequently during this time of year. In addition, the data displays a consistent increase of inventory across quarters for each year reported. This can be attributed to many variables; to include consumer spending habits, introduction of new and better products and decreased prices. Figure 2. Tiffany & Company Inventory Data [pic]
Tiffany & Company’s quarterly inventory data shows a slight increase in the third quarter for each year reported. In addition, the fiscal years of 2008 and 2010 show similar trends in inventory numbers across quarters. Figure 3. Target Corporation Inventory Data [pic] Target Corporation’s quarterly inventory data shows a consistent increase in inventory in the fourth quarter for each fiscal year. This can likely be attributed to the fourth quarter occurring during the holiday season. In addition, inventory has increased overall each year from 2007-2010. Figure 3. COSTCO Wholesale Corporation Inventory Data