Inventory Terms You Should Know

Average Inventory Cost. Average inventory cost is found by adding the beginning-cost inventory for each month plus the ending-cost inventory for the last month in the period. If calculating for a season, divide by seven. If calculating for a year, divide by 13.

Cost of Goods Sold. The price paid for the product, plus any additional costs necessary to get the merchandise into inventory and ready for sale, including shipping and handling.

Distressed Inventory. Also known as distressed or expired stock, distressed inventory’s potential to be sold at a normal cost has or will soon pass. (For example, products that have reached or are nearing their expiration date.)

Gross Margin. Gross margin is the difference between what an item costs and what it sells for.

Gross Margin ROI. A measure of inventory productivity that expresses the relationship between your total sales, the gross profit margin you earn on those sales and the number of dollars you invest in inventory.

Inventory Turnover. The number of times during a given period that the average inventory on hand is sold and replaced.

Loss Leader. Merchandise sold below cost by a retailer in an effort to attract new customers or stimulate other profitable sales.

Minimum Advertised Price. A supplier’s pricing policy that does not permit its resellers to advertise prices below some specified amount. It can also include the reseller’s retail price.

Markup. A percentage added to the cost to equal the retail selling price.

Markdown. Planned reduction in the selling price of an item, usually to take effect either within a certain number of days after seasonal merchandise is received or at a specific date.

Odd-Even Pricing. A form of psychological pricing that suggests buyers are more sensitive to certain ending digits.

Product Life Cycle. The stages that a new product is believed to go through from beginning to end: introduction, growth, maturity and decline.

Sell-Through Rate. The sell-through rate is a calculation, commonly represented as a percentage, comparing the amount of inventory a retailer receives from a manufacturer or supplier against what is actually sold to the consumer.

Shrinkage. Retail shrinkage is a reduction or loss in inventory due to shoplifting, employee theft, paperwork errors and supplier fraud.

SKU. The stock keeping unit (SKU) is a number assigned to a product by a retail store to identify the price, product options and manufacturer.

Source: About.com, “Glossary of Retailing Terminology”

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