The retail inventory method: The third major costing system

The retail system typically is used by department stores to control inventories that consist of 100000 or more items. The retail system recognizes costs and prices, inflation and obsolescence, mistakes and successes. It tracks purchases and sales, deals with discounts and transfers, and controls investment while providing an estimate of ending inventory. This article briefly reviews the retail method and then uses linear programming (LP) and postoptimality analysis to modernize the traditional conceptions-to attempt to make a good system even better. Many constraints are studied including overlapping seasons, sales quotas, target inventories, product life cycles, and spatial and monetary limitations, among others. In the process, one comes to appreciate the size of the inventories being controlled, the human and departmental interactions, and the usefulness of the LP-retail system (‘knotty retail’ is perhaps an appropriate name) not only to generate cash budget estimates and to manage stock levels, but also to select the most satisfying alterations of managerial policy. The article concludes by discussing further constraints and other types of organizations that might benefit from adapting the retail system.