MODULE 02 / LESSON 02
Inventory Management & Purchasing
A retail owner's practical system for ordering, receiving, controlling stock, identifying discrepancies, and protecting cash.
- Understand inventory's effect on cash and profitability.
- Calculate reorder points, shrinkage, and basic inventory turnover.
- Apply receiving controls, three-way matching, and purchase approval rules.
- Understand FEFO rotation for expiring merchandise.
- Investigate discrepancies fairly without assuming employee theft.
1. Why inventory is an owner's money
Stock purchased from a supplier uses cash before the goods are sold. Too little inventory leads to out-of-stocks and lost sales; too much creates carrying costs, expiry, damage, and tied-up working capital. A high reported sales number does not prove that purchasing decisions are sound.
You have 100 cases of a slow-selling drink costing $18 per case. That's $1,800 tied up before considering storage and any spoilage. Ordering another 100 cases without reviewing movement increases exposure.
2. Ordering: demand, lead time, and safety stock
Estimate demand using recent sales and account for delivery schedules, holidays, promotions, and seasonal changes. For stable demand, a simple reorder point = average daily unit sales × supplier lead time in days + safety stock.
You sell 12 units daily, a supplier takes 4 days to deliver, and safety stock is 20 units. Reorder point = 12 × 4 + 20 = 68 units. When inventory position reaches roughly 68 units, consider a new order.
This is a simplified model. For real ordering, adjust for units already on order, backorders, demand variation, minimum order quantities, and shelf capacity.
3. Receiving: what the owner should require
Do not mark deliveries received based solely on the vendor invoice. Compare the purchase order (what was approved), delivery or receiving count (what actually arrived), and invoice (what the supplier billed). This is called three-way matching.
| Checkpoint | Practical control |
|---|---|
| Quantity | Count cartons and units; record shortages and overages. |
| Price | Compare invoice unit prices to agreed terms and purchase order. |
| Condition | Check damage, temperature where relevant, tampering and expiration dates. |
| Documentation | Record receiver, date, exceptions, vendor credits and invoice references. |
| Approval | Separate purchasing, receiving and payment authorization when staffing permits; otherwise use independent owner review. |
4. Rotation: FIFO vs. FEFO
FIFO means first in, first out: older stock generally moves before newly delivered stock. FEFO means first expiring, first out: prioritize the earliest expiration date, even if it arrived later. For dated snacks, dairy, and other perishables, FEFO is often the more useful physical-stock practice. Follow applicable product handling rules.
5. Count inventory and calculate shrinkage
A perpetual inventory system tracks expected stock after transactions. A physical count checks what is actually on shelves and in storage. The difference needs investigation.
System quantity: 250 units. Physical count: 238. Shortage: 12 units. Shrinkage rate against expected quantity = 12 ÷ 250 × 100 = 4.8%.
Potential explanations include receiving mistakes, mis-scanned items, incorrect SKU mapping, unrecorded damage, spoilage, count errors, vendor discrepancies, and theft. The count alone does not prove misconduct.
6. Inventory turnover and slow movers
Inventory turnover = cost of goods sold ÷ average inventory at cost for the same period. For example, annual COGS of $240,000 and average inventory of $40,000 produce 6 turns per year. More turnover is not always better: very low on-hand stock can cause lost sales, while high inventory may be justified for certain seasonal items.
7. Controls against mistakes and fraud
- Review negative stock, unusually large adjustments and repeated manual overrides.
- Compare top selling SKUs against supplier receipts and on-hand counts.
- Verify credit memos, returned merchandise, damaged goods and write-offs.
- Check unauthorized vendor changes, duplicate invoices and unexpected price increases.
- Use documented, private and evidence-based investigations; maintain fair access controls and a nonretaliatory complaint process.
Practice scenario: An invoice says 30 cases delivered, receiving log says 28, and inventory shows 30. First preserve the documents and recount stock; confirm delivery and any credits with the vendor. Do not accuse the receiver without verifying the records.
8. Five-question mastery quiz
Each round covers five inventory skills with new figures or scenarios. 5/5 is required to mark this lesson complete. You can try as many new sets as you want.
9. Completion
After a perfect score, mark the lesson complete. Study Center progress uses the existing save key; you can still practice afterward.