Retail has an inventory accuracy problem

Despite the advancements in POS (point-of-sales) systems, retail—or notably certain major retailers—still have an inventory accuracy problem. The issue is not due to theft or shrinkage, but according to an insightful December 16, 2024, article on Retail Dive by Daphne Howland, it is due to their use of a draconian method of accounting.

The article states that Nordstrom and Macy’s are moving away from the problematic “retail inventory method” after decades of use, making the shift to “cost accounting.” But based on annual reports (as per the article), retailers Dillard’s, Target, Walmart, Kohl’s, J.C. Penney and Dollar Tree are still using the retail inventory method. One quarter of the National Retail Federation’s top 100 retailers fully rely on the retail inventory method. Other retailers use a partial or hybrid methodology, sometimes due to mergers and acquisitions. 

Created in the 1920s by Malcom McNair, the retail inventory method calculates inventory based on the retail price without counting the inventory. While this was a real time-saver “back in the day” when retail prices probably didn’t change often and before technologies like barcode scanning, the methodology has realistically lost its effectiveness in modern times where retail prices are in a state of flux.

Using the retail inventory method can be like a dog or a cat chasing its tail: because inventory is determined upon price, discounts distort the inventory balance. And how do retailers get rid of excess inventory? Markdowns and discounts create more distortions in the calculation. And because buyers buy based on inventory count, a distorted inventory count has a knock-on effect on the buy or re-buy quantity, worsening the problem. 

Is the shrink issue that’s been in the news really as tied to theft as it has been made out? It is possible that a notable portion of this shrink is actually due to internal issues including administrative mistakes and process errors. 

If inventory counts are not accurate, wouldn’t this also affect forecasts if the retailer offered these to their vendors? What about the accuracy of product activity (sales) data … could this information be compromised as well? Retailers continually blame vendors for their inventory woes, but if retailers cannot provide accurate forecast and inventory data to their vendors (as well as their own personnel), aren’t the retailers as much or even more to blame for their inventory problems, whether it’s too much or too little or too late? 

It's in everyone’s best interest to ensure that inventory is always available when and where the consumer wants it. That’s part of achieving the perfect order. But if the data isn’t accurate, it’s going to have an affect on execution.        

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