Twelve years ago we introduced a key measurement of good inventory control: The turn and earn index. The concept is simple but good inventory control figures are important to make sure your turn and earn ratio is correct. Visiting this concept again, and showing how you can measure it, is a good way to grade your business profitability.

Do you know your turns?

In most Food Distribution/Processing environments the biggest asset is Inventory. The fact is most of us are not aware that the estimated cost of “carrying” inventory is 30 to 40 percent of the value of the inventory. If you have $500,000 dollars of inventory then true cost of that inventory is $150,000 to $200,000, plus the inventory cost itself.  This is a very compelling reason to cut inventory levels while maintaining your current sales level.

Let’s review some basic definitions for our discussion.

Turns = .         Sales         .
.  $4,000,000  .
  = 8 Turns
AVG. INVENTORY
$500,000

   TURN AND EARN INDEX = GP% x Turns  

Ex. 25% GP X 4 Turns = T & E ratio of 1 (one).

*Note*-The higher the T&E the more total profit it contributes to the bottom.

A lot of experts agree that most distributors have a T&E ratio of 100 to 175. A very sustainable number would be 120. No black magic here reduce inventory costs while you increase turns.

Approach inventory this way: increase your turns and reduce your carrying costs by lowering your average inventory. Focus on the items with the best “turn and earn index” and you should be able to get more dollars in your pocket. It is very similar to investing in stocks; we take an asset, money, and invest in a stock that gives us the best return. It is a rather simple principle. One of the key points is that the $1 you invested in inventory, costs you 30 to 40 cents annually to keep it there. This has a profound effect on your profitability.

Here are so simple steps to cut costs (that is increase Turns and “T&E”):

  • Know what your turns are and figure T&E on key items. Remember 80% of your sales are 20% of your items. That’s the 80/20 rule.
  • Keep an orderly warehouse with goods in the right places.
  • Don’t hold inventory with the hopes of prices increasing, the cost of carrying the inventory will erode any future profit.
  • Markdown items to move them for the reasons stated above, purge aggressively.
  • Remember inventory doesn’t generate sales, selling and marketing do.
  • Reduce lead times, from your order to the customer shipping, wherever possible.  “Just in Time” procurement is the best practice if your vendors can comply.
  • Monitor your T&E. Inventory that doesn’t sell means there is too much of that item.
  • Plan sales and inventory. (Our next newsletter will focus on how to do this more effectively).
  • Remember: Buyers Rule. That’s the backbone of the demand economy we operate in today. So develop tools that help you forecast what they will buy.

Commodity food products are interchangeable, you don’t control price only the loaded cost of inventory. Very important for the guys who deal in commodities.

INVENTORY MANAGEMENT AND
KNOWING WHAT YOUR MARGINS ARE
INCREASE BOTTOM LINE




 

 



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