Retail Inventory: Managing the Canary in the Coal Mine!

Retail inventory is a closely watched statistic by retailers as well as their investors, lenders and suppliers. Retailers not only benefit from inventory, but also bear the cost of excess inventory. Investors, lenders and suppliers interpret this statistic for signs of the retailer’s health, future sales prospects, and impending costs. This paper shows that inventory turnover, a commonly used metric, has shortcomings that reduce its utility for all these stakeholders. It presents a new metric, adjusted inventory turnover, which overcomes the drawbacks of inventory turnover and can be uniformly utilized by all stakeholders to assess whether a retailer is carrying too much or too little inventory. We explain applications of the metric with examples, and lay out prescriptions for retailers.