progreen 2008 inventory control

8/8/2019 ProGreen 2008 Inventory Control

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Dr. Charlie HallDr. Charlie Hall

[email protected]@tamu.edu

ellisonchair.tamu.eduellisonchair.tamu.edu

Inventory Control & Determining ProfitabilityInventory Control & Determining Profitability

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Inventory control is seemingly aparadoxical oxymoron.

• Paradox = a self ‐contradictory and false

proposition. It seems to be easy but its not! It seems to be easy but its not!

• Oxymoron = a rhetorical figure in which

incongruous or contradictory terms are

combined. e.g. deafening silence, cruele.g. deafening silence, cruel

kindness, inventorykindness, inventory controlcontrol , etc. , etc.



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The basic inventory problem…

•• “ “ How many ___ can I get by ____? How many ___ can I get by ____? ” ” • You need information fast!

– To know if you can substitute something else

– Or to know when you will have the item.

• Sounds simple,

but…

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Inventory control is not thesame for all types of firms!

• It is a complex activity unique to each

green industry sector.

– Nursery growers (container, field, PIP)

– Greenhouse growers (bench vs air space)

– Propagation

– Service firms

– Retail firms



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Inventory control is not thesame for all sizes of firms!

• It is a complex activity unique to the size of

the firm in each green industry sector.

– Hobbyists

– Mom & pop businesses (small)

– Medium‐sized non‐corporate firms

– Large corporate

firms

c o m pl exi t y

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Tracking inventory is rarelyan exact science.

• Plants die.

• Some grow too fast & too

large and get cut back.

• Others

grow

too

slow.

• Some simply don’t sell.



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So why worry with it?

• Minimizes over‐ & under‐selling

• Basis for planning labor needs, work

schedules, space requirements, and

supplies needed.

• Calculating COGS and determining prices.

• Analyze impact of cultural practices on

inventory turns.

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DistributionAnd

OutboundLogistics

Production

PurchasedSupplies

andInboundLogistics

Sales andMarketing

ServiceProfit

Margin

Product R&D, Technology, Systems Development

Human Resources Management

General Administration

Support Activities and Costs

Managing inventory is pervasivethroughout the value chain.



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Managing inventory involves...

• Developing an accurate sales forecast. – Consumer trends ‐ Vendor managed inventory

– Pre‐booked sales ‐ Production contracts

– Invasive species ‐ Niche differentiation

• Developing a production plan to make

inventory available when & where

customers want it.

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• Building relationships with quality

suppliers. – JIT vs stockpiling

• Setting realistic inventory turnover

objectives and computing the cost of

carrying inventory.



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• Using the most timely and accurate

information system the business can afford

to provide everyone with vital inventory

information.

• Teaching employees how inventory control

systems work so they can help manage

inventory on

a daily

basis.

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Types of inventory – based on stageof completion

• Raw materials inventory ‐ includes the cost of

materials being held for future use.

• Work in process inventory ‐ includes the cost incurred

for partially completed items, including costs of raw

materials, labor, and other costs

• Finished goods inventory ‐ the accumulated costs of

“goods” that are finished and ready for sale



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Perpetual and periodic physicalinventory systems

• Two main systems for keeping inventory

records:

– Perpetual inventory system ‐ keeps a running,

continuous record of inventories on a day‐to‐

day basis.

– Periodic physical inventory system ‐

computed periodically by relying solely on

physical counts

without

keeping

day

‐to

‐day

records of units sold or on hand.

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Comparing accounting procedures forperiodic and perpetual inventory systems

• Under the perpetual system, inventory

amounts are updated each time an

inventory transaction is processed.

• Under a periodic system, the inventory

account does not change until the end of

the accounting

period.

– At that time, a physical inventory is taken to determine the amount of

inventory on hand, and an adjusting entry is made to inventory.



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Do not underestimate the need foraccurate dumpage records!

• Key resource in possible litigation.

• Crop insurance necessity.

• Accuracy of perpetual inventory depends

on it.

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Methods of valuing inventory

• Cost method

• Lower of cost or market method

• Retail method



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The value placed on inventory can have a

significant effect on the net income of a

company. Because net income is the basis

of calculating federal income tax,

accountants frequently must decide

whether to value inventory to reflect

higher net

profit

to

entice

investors

or

lower net profit to minimize income taxes.

Consider the effectson tax liability

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Cross-docking? A sound theory but still inthe “proving” stage.

• shifts the focus from

"supply chain" to

"demand chain"

• stock coming in has

already been pre‐

allocated against a

replenishment order

generated by a retailer

in the supply chain



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Photo courtesy of Rick Goff, Advanced Grower Solutions

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RFID, bar code and scanner technology



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The “tablet pc” in action

Photos courtesy of Rick Goff, Advanced Grower Solutions

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The ideal software package???

• It used to be a paradoxical oxymoron. But

things have improved – dramatically!

• Off ‐the‐shelf vs. program your own?

• Refer to

hbin.tamu.eduhbin.tamu.edu

Horticultural Business Information Network



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What questions should the ‘ideal’ inventorysoftware be capable of answering?

• What and how many do I have?

• What did I sell and where did I sell them?

• At what price and margin?

• What orders

remain

unfulfilled/committed?

24Screenshot courtesy of Rick Goff, Advanced Grower Solutions



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Making the transition…

• A NEW MODEL: Most vendors will offer

transition services to get you “online.” A

few are offering software as a service on a

“subscription” basis (usually monthly).

• Costs (and capabilities) vary widely, so

doing your

homework

is

essential.

Talk

with

peers, but recognize you are unique.

SAASSAAS

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Remember…

• Many tend to invest in an

inventory control software

package for the wrong reason.

They feel it will do the work for

them!

• Information overload

is

a real

possibility. Pare down the reports

to the ones you will actually use!



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Inventory Profitability Metrics

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Inventory turnover analysis• The most basic and

fundamental tool for controlling your investment in inventory

• Assist you in deciding which

items or categories need

attention.

• Identifies items that take

too long to sale.



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Inventory turnover analysis, cont.

• Requires calculation

of

individual item sales.

• Points to items that have

excessive, low, or the right amount of inventory.

• Carrying costs should be used as

a factor when determining how

much

inventory

you

need

to

fulfill your customer order requirements.

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Inventory turnover calculation

• IT = COGS ÷ Average Inventory

• An indication of the velocity with which

dollars move through the business

• In WGNA

study,

typical

growers

sell

out

the

equivalent of inventory value 0.6 times per year.



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Inventory holding period calculation

• 365 ÷ Inventory turnover

• Shows how long it should take to sell off

existing inventory. Cost of carrying

inventory has to be weighed against lost

profit of not having product ready to sell.

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WNGA Cost of Doing Business Report –

results by nursery type



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Other key financial ratio analyses

Net profit

Net salesx

Net sales

Total assets

Net profit

Total assetsx

Total assets

NetWorth

Net profit

Net worth= =

ProfitProfit

marginmarginAssetAsset

turnoverturnoverROIROI

(ROA)(ROA)x == xx

LeverageLeverage

factorfactor== ROEROE

Strategic Profit ModelStrategic Profit Model

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S ale s G ro ss M ar gin

$1,345,803 35%

less Gross Profit

COGS $467,170

$878,633 lessOperating

ProfitOperating

Expenses$74,246

$392,924 lessAfter-tax

ProfitExpense

percent

Federal

Taxes$74,246

29% $0 dividedNet Profit

Margin

by 5.52%

Sales

$1,345,803Inventory

TurnoverInventory X

Return on

Assets1.61 $833,393 Sales 4.84%

+ $1,345,803

Age of

Accts. Rec.

Accts

Receivable

Current

Assetsdivided

55 $202,085 $1,070,980 byAsset

Turnover

+ + Total Assets 0.88 XReturn on

Equity

CashFixed

Assets $1,535,303 6.19%

$35,50 2 $464,323Total

AssetsT ot al A ss et s $ 1, 53 5,3 03

Current

Liab$ 1, 53 5, 30 3 d iv id ed b y

Financial

Leverage

$69,406 less Net Worth 1.28

+ Total Liab. $1,198,927Long-term

Liab.$336,376

$266,970



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WNGA Cost of Doing Business Report –results by nursery type

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results by size of firm



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WNGA Cost of Doing Business Report –results by size of firm

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results by size of firm



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The bottom line…

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Summary:Keys to an accurate inventory

1. Start with a good physical count. Cut corners here and the whole system falls apart.

2. Make sure that ongoing sales and shipments are

accounted for in this count.

3. Have your order entry system properly interfaced

to your

inventory

control

so

orders

reduce

the

availability in live time.



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Summary:Keys to an accurate inventory

4. Ensure that the invoice or shipping process is

being performed in a timely manner so the “on

hand” counts in the system reflect the reality out in the field.

5. Initiate the proper controls on your fulfillment teams so that inventory is being pulled from the

correct locations.

6. Put measures

in

place

to

account

for

waste,

shrinkage and inventory moves.

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Questions?Questions?

Dr. Charlie HallDr. Charlie Hall

[email protected]@tamu.edu

ellisonchair.tamu.eduellisonchair.tamu.edu

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