We'll keep following last week's thread about Inventory Management and Profitability.   Food is a very unique industry, so making sure we measure ourselves against our industry cousins is important to understand the standard we are measured against. Got to know the other guy's score to see if you are a winner. Again focusing on inventory value and getting it right is one of the two key elements of our T&E analysis.

 

Setting the Standards

We'll start by getting a baseline from the stats provided by http://www.bizstats.com

In their currently posted statistics:

Industry Turnover Ratio
Meat and seafood processing 10.41
Wholesale trade, nondurable goods 14.66
Grocery and related products 16.97

So, the closer you are to a 'pure' distributor the more often you're expected to turnover your inventory.  This echoes our earlier discussions about the different types of food businesses (distributors, processors and hybrids) where 'pure' distributors often run at lower profit margins and have to move more goods than a processor who gains the profit margin from the value add service.

Now let's look at your inventory turn ratio:

Take your total Cost of Goods Sold for the last 12 months and divide by your current inventory cost. In addition some experts say to get the real Cost of Goods Sold don't rely just on your COGS from your P & L or Sales Reports use the formula (Beginning Inventory + Purchases - Ending Inventory= COGS). This number will reflect real cost because it factors in shrink, damaged goods and anything else that can happen to your Inventory

If you're scoring 17.0+ and you're a 'pure' distributor, good job.  If you're scoring 10.0+ as a processor also good.

But here's the bad news.  Looking back in time to an article written in 2000 in Industry Week we see that inventory turns were increasing by leaps and bounds and expected to keep getting better, but they were at 17.0 inventory turns per year back then!

So what happened? Inventory control measures taken from 1995 to 2010 increased inventory turns by close to 65% and companies starting hitting the balance point between low inventory and high turns versus safety stock and customer service.

And now the good news.  New business tools are shattering the limits on what was possible 10 years ago. These new revenue motivation platforms are creating opportunities for the food industry to expand sales and service offerings.  Web based solutions that provide users instant access to inventory, sales, and purchasing information at all levels of the business will allow for another burst of improvement like programs of the early 90's did.  At the same time virtual warehouse offerings (shown to increase turnover when used in combination with traditional warehousing) are benefiting from similar utilities and becoming more available to lower volume distributors.  Many Companies use cold storage facilities extensively where they get charged by the month & load unload fees. That expense forces good inventory control. Of course the technology used to keep inventory in those facilities is extensive.

So, first make sure you're at least keeping up with the pack (16+ depending on your business type). Then get ready to sprint for the lead, because you only win when you're running faster than everybody else and the whole pack is picking up speed again.

 

Next week we’ll look at some shortcuts to do quick T&E analysis.

 

INCREASED TURNS GENERATES MORE CASH



Issue 602 - Why I won’t cook so much.

While preparing for Thanksgiving and the children, grandchildren, etc. coming over I reviewed with my wife how we can best manage the event. Previous years Mary and I would whip ourselves into a frenzy with list making, shopping, and most importantly cooking the dinner. At the point when we had everybody over and the table was set, exhaustion would settle in and it was time for my nap.  Let’s look at some of the food prep alternatives today and how we have embraced the change.

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