Formulas to Know: Average Inventory Month 1 + Month 2 + Month 3 Number of months

Product Inventory valued at $1,000,000 Product

Sales = $1,000,000 We sell a million dollars worth of product out the door…

Product And replace it with… Sales = $1 MM

Product New inventory valued at $1,000,000 Product And replace it with… Sales = $1 MM

Product Inventory valued at $1,000,000 Product We have turned over our inventory one time. Sales = $1 MM

Product Inventory valued at $1,000,000 Product We have turned over our inventory one time. Net sales_______ = $1,000,000 Average inventory at retail = $1,000,000 = 1 Sales = $1 MM

Product Average inventory valued at $1,000,000 Product Net sales_______ = $1,000,000 Average inventory at retail = $1,000,000 Sales = $1 MM However, it is average inventory.

Product Sales = $2 MM Average inventory valued at $1,000,000 Net sales_______ = $1,000,000 Average inventory at retail = $1,000,000

Product Net sales_______ = $2,000,000 Average inventory at retail = $1,000,000 = 2 inventory turns Product Sales = $2 MM Average inventory valued at $1,000,000

Product Net sales_______ = $2,000,000 Average inventory at retail = $ 500,000 Product Sales = $2 MM Average inventory valued at $500,000

Product Net sales_______ = $2,000,000 Average inventory at retail = $ 500,000 Product Sales = $2 MM Average inventory valued at $500,000

Product Net sales_______ = $2,000,000 Average inventory at retail = $ 500,000 = 4 inventory turns Product Sales = $2 MM Average inventory valued at $500,000

Product Net sales_______ = $2,000,000 Average inventory at retail = $ 500,000 = 4 inventory turns Product Sales = $2 MM Average inventory valued at $500,000 We have kept sales levels up, using less average inventory.

PPT 12-6 Gross Margin %, Inventory Turnover, & GMROI for Selected Department in Discount Stores

Inventory Turnover Part Two Logistics and Supply Chain Management

Advantages of Rapid Turnover Increased sales volume Less risk of obsolescence and markdowns Money for market opportunities Decreased operating expenses Increased asset turnover PPT 12-9

Disadvantages of Rapid Rate of Turnover Lowered sales volume. Increased cost of goods sold. Increase logistics costs: expanded buying and ordering time. PPT 12-10

Inventory Carrying Costs Capital costs on inventory investment. Inventory service costs. Storage space costs. Inventory risk costs.

Capital Costs on Inventory Investment. Opportunity cost of capital: rate of return if money were invested elsewhere. Hurdle rate: minimum rate of return on new investments. --Can we make more money earning interest in marketable securities? --Can we make more money retiring debt, thus eliminating interest charges?

Capital Costs on Inventory Investment -- Cash Value of Inventory Manufacturers: --Direct costs: fixed/variable determined and only variable costs counted. --Absorption (full costing) fixed overhead is calculated in inventory value. Wholesalers and retailers: --Replacement cost (plus freight). --Market price if product phased out.

Inventory Service Costs Taxes --Ad valorem (personal property) taxes. --Vary with size of inventory. Insurance --Somewhat fixed.

Storage Space Costs Plant warehouses. Fixed costs (except for variable throughput costs). Public warehouses. Rented or leased warehouses. Company-owned warehouses.

Inventory Risk Costs Obsolescence costs. Damage costs. Shrinkage costs. Relocations costs (transshipped to another warehouse to avoid obsolescence).

Turnover Affects Inventory Carrying Costs Net sales_______ = $1,000,000 Average inventory at retail = $1,000,000 Turnover = 1

Turnover Affects Inventory Carrying Costs Net sales_______ = $1,000,000 Average inventory at retail = $1,000,000 Turnover = 1 Inventory carrying costs = 30% Inventory carrying costs = $300,000

Turnover Affects Inventory Carrying Costs Net sales_______ = $1,000,000 Average inventory at retail = $ 500,000 Turnover = 2 Inventory carrying costs = 30% Inventory carrying costs = $150,000 Savings = $150,000

Turnover Affects Inventory Carrying Costs Inventory turns Average inventory 30% carry cost Carry cost savings (from $ previous cost) 1$1,000,000$300, $500,000$150,000 3$333,333$100,000 4$250,000$75,000$25,000

Turnover Affects Inventory Carrying Costs Inventory turns Average inventory 30% carry cost Carry cost savings (from $ previous cost) 1$1,000,000$300, $500,000$150,000 3$333,333$100,000 4$250,000$75,000$25,000

Turnover Affects Inventory Carrying Costs Inventory turns Average inventory 30% carry cost Carry cost savings (from $ previous cost) 10$100,000$30,0003,333 11$ 90,909$27,273$2,727 12$83,333$25,000$ $76,923$23,077$1,923