Quantifying the cost of Inventory - Page 2

# Thread: Quantifying the cost of Inventory

1. Diamond
Join Date
Apr 2004
Location
Modesto, CA USA
Posts
6,730
Post Thanks / Like
Likes (Given)
0
1114
I understand a large grocery chain store is happy to make 1% profit on any item they sell. The trick is fast turnover. If the new inventory sells in two weeks, before it goes stale, that is about 25% profit per year.
Bil lD

2. Hot Rolled
Join Date
Oct 2010
Location
Portland, OR
Posts
732
Post Thanks / Like
Likes (Given)
143
249
You have to weight the "savings" that you've calculated against "lost opportunity". Think of this as what else could you do with the labor, raw materials, floor space, etc. instead of using it for parts that sit around for a year or longer. There's also the risk factor to weigh in (theft, obsolescence, damage, design change, etc.).

The reason I quoted "savings" is that you should also factor in what you might be able to do with set-up reduction (likely the largest part of why the unit cost goes down when the qty goes up). The ideal goal is to get the setup time down so that it negates any benefit of stocking inventory. The other factor is the raw material cost, maybe you are factoring in a break on those.

Good luck,
The Dude

3. Diamond
Join Date
Aug 2005
Location
Toronto
Posts
4,749
Post Thanks / Like
Likes (Given)
3152
3577
Originally Posted by Bill D
I understand a large grocery chain store is happy to make 1% profit on any item they sell. The trick is fast turnover. If the new inventory sells in two weeks, before it goes stale, that is about 25% profit per year.
Bil lD
You are right in the sense more turns makes a viable business, but thats not how profit is arrived at. If they sell a whole lot of stuff at 1%, it doesn't matter how many turns they do, profit it is still 1% of revenue, for any given period. What you reduce with more turns is the amount of inventory, hence the amount of working capital....so whatever profit you do make is dividing by a smaller capitalization, producing a bigger ROI hence reason for being in business.

I'd always heard the same 1% thing for food, and kind of wondered, seemed like a bit of BS. So I looked up Loblaw's (a large domestic grocer) statements. The have about 46.5 billion in sales. From their P&L, for each item they sell, they're making 30%. That is, if the selling price of a box of wheaties is \$4, its costs them about \$2.80 and they're making about \$1.20. Net profits before tax (after all overhead) is about 5%.

Loblaws has a lot of very successful private label stuff, so maybe margins are higher. Look another, Kroger. Kroger is bigger, \$120 billion with a gross profit of 27 billion or 22%. Of course net profit after overhead and taxes reduces that to around 5%, but the claim they only make 1% on each thing the sell isn't so, its really 22%

4. Thats the new money maker for grocery stores. Whole foods has the 365 everyday private label, Costco has Kirkland...

They see what is selling good over the years, they know the costs. So if they can make it themselves for cheaper and make even more profit they do it.

5. Originally Posted by fmari --MariTool-
Thats the new money maker for grocery stores. Whole foods has the 365 everyday private label, Costco has Kirkland...

They see what is selling good over the years, they know the costs. So if they can make it themselves for cheaper and make even more profit they do it.
I don't think it is new. I remember as a kid (I am mid 40's) when Kroger had their brand "cost cutter" with the white and yellow labels with a pair of scissors. Hell they even had their own beer, it was simply a white or yellow can (not sure which) that said BEER in bold block letters.

kroger generic beer - Google Search

Here are a couple pics.

6. Diamond
Join Date
Aug 2005
Location
Toronto
Posts
4,749
Post Thanks / Like
Likes (Given)
3152
3577
white label and house brands are not new, but what Loblaw's has done is create premium products, such as the "President Choice" line of food.

7. Diamond
Join Date
Jan 2007
Location
Flushing/Flint, Michigan
Posts
7,580
Post Thanks / Like
Likes (Given)
377
6330
Originally Posted by Bill D
I understand a large grocery chain store is happy to make 1% profit on any item they sell. The trick is fast turnover. If the new inventory sells in two weeks, before it goes stale, that is about 25% profit per year.
Bil lD
I do not understand this math.
Show me how in even a just in time sold that day of delivery with 1% that you make more than 1%.
Take a simple vending machine that fills itself each morning and gets all bought out by night. Super fast turns, almost no stock and still 1% if priced that way.
Where is the extra 24% of cash coming from here?
Yes in retail you have loss leaders so 1% is good if you can sell higher markup items with them.
Some gas stations make very little on the actual gasoline. In fact the bigger chains live off of that candy and stuff inside the store.
Some cutting tool suppliers sell milling cutters at below cost or give them away for free with a trade in. No money made there or maybe???

Setups eat a lot of time in part runs so making more is rather cheap. Inventory is all good if it will sold, once it becomes dead there is the problem.
If you have a quarter million on the shelf and sudllely it becomes dead or obsolete you wish you had held less.
If you hold this same \$250,000 and the customer continues to buy on a regular basis you are happy since you reduced the make cost and sat on some of your own dollars for a bit.

The rule here is do not get burned.
Will the orders ever end? If they do how much do you eat? Will that plus up front make up for the minus down the road?
How loyal are your customers? How long is the market lifetime of the thing you are making?

Inventory is expensive as it eats cash flow but it's not always bad for a machine shop as incremental add ons to part runs have a very low cost.
If you are going to make 5 of something the cost to make 20 is not that much more. The same for 50 and 200.
Bob

8. Diamond
Join Date
Sep 2011
Country
UNITED STATES
State/Province
Virginia
Posts
25,995
Post Thanks / Like
Likes (Given)
7561
8209
Originally Posted by CarbideBob
I do not understand this math.
Show me how in even a just in time sold that day of delivery with 1% that you make more than 1%.
Take a simple vending machine that fills itself each morning and gets all bought out by night. Super fast turns, almost no stock and still 1% if priced that way.
Where is the extra 24% of cash coming from here?
Massive grocery chain I once had it explained to me (by their financial IT guy whilst we ran the numbers...), they were really a BANK.

Sold the goods at an average of 2 weeks on shelf, (1970 numbers) paid the suppliers at 90 days out on average, put the money in the time-gap to work earning returns. Over a BILLION USD in perpetual 90-day float? People will eat, The cash flow was there.

Fast-foward several more years to "captive" credit cards, they earn higher interest yet off the outstanding balances. Kay Jewelers / Black-Starr & Frost model: "It's OK to owe Kay".

See also "dating" of harder goods than groceries in retailing, wherein the goods supplier is financing the retailer by waiting a Helluva lot longer than 90 days to be paid.

Then co-op advertising, wherein another Day Job could sell 35 mm Kodak film below what they paid Kodak because.. it helped them move so MUCH film - AND cameras & accessories .. they got a quarterly co-op advertising payment that more than made it all come good.

PS: "Some think..."

.. that several of the world's larger food & such retailers.. are also where massive amounts of "drug money" go to be laundered.

"We chickn's" are at the SIMPLEST end of all these games. And more.

9. Banned
Join Date
Jul 2019
Country
UNITED STATES
State/Province
New Jersey
Posts
3
Post Thanks / Like
Likes (Given)
0
1
Have you calculated your inventory money? and what does it comes out.

10. Banned
Join Date
Jul 2019
Country
UNITED STATES
State/Province
New Jersey
Posts
3
Post Thanks / Like
Likes (Given)
0
1
If you are confused about what to do next, take the help of the financial from Prestige Capital Corporation who are providing inventory fund for factoring company at a low premium and allows investors to take time to pay their premiums without any worry.

11. I use my gut with what's actually happening on the floor at the moment. Last year we were a little slow and ran a crap load of extra parts. I'm so lucky we did that because this year we're so jammed that if we didn't have that inventory laying around we'd be delivering late. I'm a big fan of having parts in a box ready to ship when the order comes in.

12. Aluminum
Join Date
Oct 2012
Location
SD, USA
Posts
58
Post Thanks / Like
Likes (Given)
1
6
In my line of parts the customer will ask if its in stock or when can I have it. When the other guy is 4 months out, in stock wins most of the time.

13. Aluminum
Join Date
Sep 2011
Country
UNITED STATES
State/Province
Idaho
Posts
151
Post Thanks / Like
Likes (Given)
82
51
I try to keep Inventory to a minimum. I'll look at the history of a part if it's a common repeat part. then decide if putting on a few xtra on the shelf makes sense. machine is already set up so the cost of putting a few on the shelf is really a minimum. It can be a toss up some times, for the most part I can usually come out pretty good. and you look like a hero when the customer calls and they need some now. assuming they don't change the rev. # i've only got a couple that I went way overboard on.. fortunately I was using drops from another job to make them, so my material cost was \$0.

14. Plastic
Join Date
Dec 2009
Location
Australia
Posts
30
Post Thanks / Like
Likes (Given)
0
6
I'm fortunate that the assemblies I make aren't suddenly going to be obsolete. Input costs per unit aren't very expensive, so keeping some inventory isn't an issue. Tool setups on the presses aren't too bad (under 30 mins on average), but it pays for me to run off some extra components to put aside.

For me its important to keep an eye on whats shifting and when. The volume I sell varies with the time of year, so I know from now on until about Nov will be the crazyist time for this side of the business.

With my main racket (canvas) I will email my regulars about once a month during my traditionally quiet time of the year. Seems to help even out my orders a bit so aren't swamped as badly with larger ones in the busy times, not to mention create more work when the shop needs it.

Guess a lot of it comes down to knowing your customers and the market they operate in, especially if they are a bit slack in managing their own inventories. Less of those last minute - man I need it now!!! moments the better if you ask me.

15. Originally Posted by CarbideBob
At some point no-matter what is is this run will end and you will now be holding dead stock.
Maybe two thousand dollars, maybe a quarter million, Is that in the plans for an absorbed loss?
Do you think this is a never ending order stream? That is so rare.
It is a good bet in good times, it has killed many with a small retraction or ending of a product.
Imagine that the 3800 V6 goes away and you are sitting on close to a million dollars in inventory of special tooling to support it's running.
Bob
Maybe off base here, but what about cnmg inserts? 1/2" endmills.... I don't think those things will ever "end". Yes there will be new grinds and coatings and such, but I'd be willing to bet there is also going to be a whole lot of people just using what they know ie "standard" grades and such...

On to something else, we make lots of products just for stock. Now I can't actually comment to the financial side of it, but it makes sense (at least to me) if we are making a part that has 3 setups, and mats are cheap, might as well make 1-3-10 extra because (for us) setup/proveout is the biggest time sink.

16. I ran a part Friday, needed one part, but went ahead and ran two setup pieces and 5 inventory pieces. Tooling took about 20min because I had to use some oddball sized HSS drills, actual setup was two or three minutes, run time first side was 47 minutes, second side 21 minutes. Material was maybe \$1.

I shoveled 2700lbs of #4 gravel while it ran.

Programming probably took 20-30 min because of some goofy deep slots. Did a little optimization while it ran.

I find once I have the programming and tooling run, it’s pretty quick and easy to setup up again on most jobs.

In the future, continuing to reduce setup times is a key priority.

17. I carry lots of inventory.
It REALLY helped this first quarter when a customer came in and ordered a normal 3 yr supply of 6 different part numbers!

But any other day it is nice to be able to go to the shelf and pull down a box and ship it, or part of it out right away.
Then when you need to run more, you run 3x as many or whatnot.

I would love to get a chance to dump all my AR stock one day tho....
China sucks!

------------------------

Think Snow Eh!
Ox

18. Stainless
Join Date
Apr 2004
Location
Milwaukee,WI
Posts
1,275
Post Thanks / Like
Likes (Given)
6885
993
Originally Posted by Ox
I would love to get a chance to dump all my AR stock one day tho....

------------------------

Think Snow Eh!
Ox
With recent events you may be glad you have them.

19. Originally Posted by Ox

I would love to get a chance to dump all my AR stock one day tho....
China sucks!

------------------------

Think Snow Eh!
Ox
But. . . But. . . They swear the kits are US Made?!?!

I do need to come up and visit your shop. Would love to pick your brain and talk to you about how you handle insurance, ITAR and all that BS.