INVENTORY – an ASSET or a LIABILITYby Udit Jain on June 13, 2007
As discussed above, inventory can be seen as an asset or a liability. Bankers and accountants typically view it as an asset. A merchant, however, may see the same stock as a liability.
Age is the key. As mentioned above, leading retailers have a monthly review process to understand the age of their inventory. Age is typically defined as the length of time in weeks since the retailer last received the merchandise. This definition may vary somewhat by retailer, but the concept remains constant, age is important.
What defines “old” merchandise? This varies widely by retail segment. In ladies fashion areas such as Dresses or Juniors, anything older than six to eight weeks is deemed “transitory”. For these merchants, goods in stock for over 10-12 weeks are considered “old” and are a significant liability. This type of fast paced fashion goods has a short life span for a retailer and has a smaller tolerance for age.
Merchants who sell commodity goods such as bed pillows have a completely different range to describe old age. Styles rarely change and may be continued by a vendor for years. Innovation may add new styles, but rarely displace existing goods. For a merchant in this type of business, the aging issue is not a concern. Goods can be in stock for months with little concern about becoming unsellable to a consumer. The concern for this merchant is not one of the age of the
merchandise, but the amount of money tied up in slow selling goods. Consumers express little reluctance to buy the same pillow style year after year. Their only concern being that the pillow is clean and in good physical shape.
Other areas such as appliances, commodity clothing, household products and other similar businesses see age as a problem at months, not weeks, and tend to take permanent price reductions less frequently on the products.
Understanding these concerns, successful retailers view inventory as an asset or liability as a combination of age and productivity depending on the type of merchandise considered. Different rules should be defined for the needs of each category. Usage of current inventory management systems will enable a retailer to better understand the status of their inventory. Retailers can then anticipate problems and minimize any potential liabilities.