Valuation Jumpint

Definition

The average initial inventory at wholesale price, or AIW, measures the beginning inventory (BOP) valuation at the full price for wholesale customers.

Wholesale full price may be different than the price given to wholesale customers, which is why we refer to the initial valuation as the manufacturer’s suggested wholesale price, or MSWP. If the wholesale price and the MSWP are the same, we can refer to the valuation at wholesale. The distinction between MSWP and wholesale is important because the AIW does not take into account markdowns, discounts, credits, marketing funds, or allowances.

AIW is always taken from the perspective of the company selling the merchandise. The party that purchases the merchandise from a retailer or manufacturer would value the same inventory as average initial inventory at retail, or AIR.

The AIW 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 AIW 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 MSWP / AIW. 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

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

In Merchandise Planning, the AIW can alternatively be calculated using the inventory balance set:
AIW = AIC / (1 – IMU%), where the IMU is the difference between the wholesale full price and the cost.

Dimensions

The AIW is generally calculated on all the major hierarchies: product, location and time, though it is most useful on product and time. For apparel, the AIW 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 AIW 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.

AIW= BOP WHSL / BOP UNT

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

For example, the AIW for this year’s fall program is calculated using MSWP (BOP WHSL) because it represents wholesale full price. The BOP WHSL, the price the customer would pay, is assumed to not be discounted in any way.

AIW = BOP MSWP / BOP UNT = 500 / 100 = $5.00

Analysis

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

• BOP MSWP or BOP WHSL, whichever represents the full price of the product
• BOP UNT
• IMU (The difference between wholesale price and cost)
• Discounts, allowances, rebates, marketing funds, etc..

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 AIW more carefully.

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