Inventory Systems Comparison

Topics: Inventory, FIFO and LIFO accounting, Retailing Pages: 8 (1893 words) Published: August 20, 2011

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...

References: O’Farrell, R. (2011). The Pros vs. Cons for the “Last in, First Out” Inventory Method. The
Houston Chronicle
Retrieved on July 29, 2011 from
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