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Right Sizing the Inventory

1. Problems with Inventory
   1. The "too much too little" risk.
      1. If you keep your inventory too large, you waste a lot of money by having money tied up in inventory that is not producing income.
      2. If you keep your inventory too small, you risk loosing sales to customers.
      3. Of the two, it is worse to have too small an inventory because once customers begin to feel that there is a chance you will not have what they want to buy, they will go somewhere else.
   2. The undetected ROI problem.
      1. ROI is the abbreviation for "Return on Investment."
      2. EXAMPLE:
         1. Let's say that you sell $5,000 in Beer one month.
         2. The cost of that beer is $3,500.
         3. The profit then is $1,500 or 30%.
         4. Since the expected gross profit percentage for beer is 25%, we say that 30% is very good.
         5. HOWEVER
         6. Your inventory is $12,000.
         7. So your investment of $12,000 only produced $1,500 or 12.5%.
         8. On an annual basis, that is only 150%.
         9. It should be 400% to 600%.

2. Inventory "Turns"
   1. The number of inventory "turns" is the number of times in a year that the inventory has been completely replaced.
   2. Conventional wisdom is that the number of turns should be fifteen to twenty-five times a year.

3. The formula.
   1. Since we recommend fifteen to twenty-five inventory turns a year, then it follows:
      The average inventory should equal two-thirds of the cost of the monthly sales.

4. How to check this:

   1. Enter gross sales.	1.
   2. Subtract GP Percentage from 100%	2.____________%
   3. Multiply line 1 by the line 2 percentage.	3.
   4. Multiply line 3 by 2/3.	4.
   5. Enter beginning inventory.	5.
   6. Enter ending inventory.	6.
   7. Add lines 5 and 6.	7.
   8. Divide line 7 by two.	8.
   9. Subtract line 4 from line 8.	9.
   If line 9 is a positive figure, it is your excess inventory. If line 9 is negative, it means that your inventory is trim.

   Copyright © - 2005 Dutch Hawkins Mandeville, LA USA - All Rights Reserved

   January 11, 2005