Disadvantages of Too High an Inventory Turnover:
Retailers should strike a balance in their rate of inventory turnover. An excessively rapid inventory turnover can hurt the firm due to a lower sales volume,, an increase in the cost of goods sold, and an increase in Operating expenses.
1. Lowered Sales Volume : One way to increase turnover is to limit the number of merchandise categories or the number of SKUs within a category. But if customers can’t find the size or color they seek-or even worse, if they can’t find the product line at all-a sale is lost. Customers Who are disappointed on a regular basis will shop elsewhere and will Possibly urge their friends to do the same. In this case, not only is a sale lost, but so are the customers and their friends.
2. Increased Cost of Goods Sold : To achieve rapid turnover, merchandise must be bought more often and in smaller quantities, Which reduces average inventory without reducing sales. But by buying smaller quantities, the buyer can’t take advantage of quantity discounts and transportation economies of scale. It may be possible, for instance, to buy a year’s supply of Levi’s at a quantity discount that offsets the high costs of carrying a large inventory.
Retailers who pay transportation costs must consider that the more merchandise shipped at the slower the mode of transportation, the smaller the per unit transportation expense. For instance, to ship a 10 kg package of jeans from Jalandhar to Delhi, overnight delivery, would cost about ` 500 (` 50 per kg.). If the retailer could order 50 kgs of jeans at the same time and could wait 5 to 10 days for delivery; the cost would be only about ` 300 (` 6 per kg). In this example, it costs over eight times more to ship small packages quickly.
3. Increased Operating Expenses : Economies of scale can also be gained when a retailer purchases large quantities. A buyer spends about the same amount of time meeting with vendors; and writing orders whether the order is large or small. It also, take about the same amount of time, for both large and small order to print invoices, receive merchandise, and pay invoices – all factors that increase merchandise’s cost.
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