says that merchandise budget planning accounts for inventory shrinkage by indicating deviation between budgeted loses and loses causes by stock theft. Every merchandise budget factors in inventory loses expected as a result of conventional damages during stock handling, losses from discounts and those from general sales activities. In this context, any substantial divergence between the planned loss and actual losses after sales will account for inventory shrinkage.
Sales = $26,000, stock 1 = $100,000 and stock 2 = $88,000. Difference in stock value = $12,000. This value represents inventory shrinkage within a single sales period of $26,000. Additions to stock is given by. (value of stock 1/sales) × (sales – inventory shrinkage). Additions = (100,000/26,000) × 14000 = $53,846.
Based on the formula GMROI = Gross Margin × (Sales/Average Inventory Cost). Gross margin = 46/100. This means 1.3 = 0.46 × sales-to-stock ratio. Therefore, sales to stock ratio = 2.8:1. In this case, the stock-to-sales ratio for 6 months = 2.8 : 1.
In retail marketing, the concept of stock-to-sales ratio shows the relationship between the quantity of inventory in stock and the amount of sales. In August, there will be a high stock-to-sales ratio as compared to that of September. According to Toomey (2010), a high ratio in August means that substantial value of capital is tied up in inventory with little sales. On the contrary, September comes with significant sales. hence the ratio reduces as inventory value melts away due to increasing sales.
This rule helps retail managers to acknowledge the fact that approximately 80% of sales will come from 20% of the entire stock. On the contrary, 20% of the stock levels will cause 80% of the losses incurred during sales. According to Toomey (2010), the Pareto rule helps retail managers to focus on only 20% of the inventory levels.