Valuation Jumping

Definition

The average initial inventory at retail price, or AIR, measures the beginning inventory (BOP) valuation at full price.

Full price may be different than the price shown to customers, which is why we refer to the initial valuation as the manufacturer’s suggested retail price, or MSRP. If the retail price and the MSRP are the same, we can refer to the valuation at retail. The distinction between MSRP and Retail is important because the AIR does not take into account markdowns or discounts.

For retailers that use the retail inventory method, RIM, then there is no distinction between MSRP and retail. For retailers that use cost averaging or standard costs valuation, then the difference between the MSRP and the retail price must be maintained separately since markdowns are only measured at point-of-sale (POS).

The AIR is usually measured at the start of a fiscal period or at the start of a fashion season, like spring, fall, or holiday. This price will be used to determine if the assortment for the period or for the season is sufficient to meet the financial objectives in the buy sheets or the merchandise plan.

The AIR is one of several components used in merchandise and assortment planning inventory balance set as shown in the image in the header of this article. This jumper calculation allows us to move to the unit calculation, Units = Inventory at MSRP / AIR. The inventory balance set is quite possibly the most important calculation in the retail industry. Learn all about this important concept in this article.

Calculation

AIR is calculated the following way:
AIR = BOP RTL / BOP UNT, where BOP = beginning of period inventory

In Merchandise Planning, the AIR can alternatively be calculated using the inventory balance set:
AIR = AIC / (1 – IMU%)

Dimensions

The AIR is generally calculated on all the major hierarchies: product, location and time, though it is most useful on product and time. For apparel, the AIR might be calculated on a combination of time and season. Since season is a product attribute, that would be the same as an intersection of product and time.

Time Hierarchy: Can be used on any time dimension such as intra-day, daily, weekly, etc…
Location Hierarchy: Can be used for one location or multiple
Product Hierarchy: Can be used on one product or multiple product but is generally calculated on an entire assortment at a particular time.

Example

The AIR is a straightforward calculation. But with any metric you should always cleanse and understand your data to ensure you’re obtaining the actionable values. More about the nuances are discussed in the analysis section below.

AIR= BOP RTL / BOP UNT

Let’s say we have a new fall season about to begin. We are interested in obtaining this year’s AIR, and we also want to compare it to last year’s (LY) AIR.  Here is the data we’ll need:

For example, the AIR for this year’s fall program is calculated using MSRP because it represents full price. The BOP RTL, the price the customer would pay, is already discounted.

AIR = BOP MSRP / BOP UNT = 1,000 / 100 = $10.00

Analysis

Typically, AIR is combined with all the inventory balance set metrics. The most important ones to consider are:

• BOP MSRP or BOP RTL, whichever represents the full price of the product
• BOP UNT
• IMU
• Discounts

In our example above we are only considering one season’s worth of product, the fall season. In reality, seasons will have carryover product from last season, leftover product from last year, and markdown product, each highlighting the need to evaluate AIR more carefully.

• Floor Sets:  Stores may have different floor set dates, making it difficult to decide when to calculate the IMU. Some retailers will instead use deliveries, and at the beginning there will be a special initial delivery that contains the carryover product.
• Store Assortments:  Not every store sells the entire assortment for various reasons like size of store, climate, and store format. If the AIR analysis is taken to a store or store cluster, then the AIR should be relative to its peers.