Better stock management
By Ross Turvey
etter stock management means less working capital tied up in stock and more stock being turned into cash.
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In June 2000, I undertook a consultancy with PNG National Forestry Service at Bulolo, Papua New Guinea. If you think maintaining stock control in your store is a task, spare a thought for the forestry workers at Bulolo who manage 8033Ha of pine forestry plantations to include the species Hoop, Klinki and Pinus. These trees are at various stages of growth, offering differing timber yields, subject to loss and variations in growth due to fire, death, disease etc. Inventory management is essential if planned harvest, replanting and new species selection is to be managed within budget and world market expectations. The principles applied here are the same as in your business - however there is some difference in scale of operation.
The bane of so many managers and owners alike is to judge the range and depth of stock to hold and how best to get a regular conversion of stock into cash - the essence of stock management.
Two ratios are commonly used to evaluate a store's efficiency in the management of stock. They are Stockturns and Gross Margin Return on Inventory (GMROI). In this article we will only deal with Stockturns to allow us to demonstrate that this ratio, when used with benchmarked information for similar firms, is a most useful tool. In addition we will offer some targets for the operators of Service Stations to take home and think about. The same tools used here can be applied to supermarkets and corner store operations.
So that there is no confusion we will define Stockturns and use the following examples to work through the concept of Stockturns.
Example Service Station Business 1 Business 2 Business 3 Turnover 1,495,000 2,235,725 3,540,530 Cost of goods Sold 1,302,000 1,995,745 2,989,385 Stock of goods/Materials 41,250 46,550 83,910 Gross profit 193,000 239,980 551,145 Stockturns 31.56 42.8 35.6
Stockturn rate
The stockturn rate indicates the number of times that stock is replaced in the year. This is calculated by taking the Cost of Goods Sold and dividing it by the Stock of Goods or Materials on hand. Higher results are generally better, however too high a result could lead to lost sales due to stock not being available. In our example above, Store 1 at year-end 2001 - the cost of goods was $1,302,000 and the stock on hand was $41,250. Dividing the two we come up with a stockturn rate of 31.56. How do you make sense of this figure?Our benchmarking information for Service Stations shows the average stockturn rate based on the income range for the example businesses.
Stockturns Example Service Station Business 1 Business 2 Business 3 CCH Benchmarked stores average 54 40 44 Our actuals from above table 31.56 42.8 35.6 Armed with this information you are in a better position to judge how well the example businesses are performing relative to firms benchmarked by CCH Benchmarking. So you would recognise that Business 2 is managing stock well but both Business 1 and Business 3 are under performing and will need to have a close look at their stock management practices to correct this problem. No one would be expected to solve a stock problem based on this one figure in isolation, but it now alerts the business operator that the firm is not performing at levels achieved by similar business with similar levels of sales turnover.
Try it yourself:
Set your own target stockturn p.a.
Now divide this into last year's COGS
(get this figure from your Profit and Loss from the accountant)
So the value of stock you should aim for is
Your estimated stock right now is $Are you carrying too much stock? (ie your current stock turnover is slower than the target rate) or have you already achieved your aim?
Bearing this in mind, here are some strategies to consider when your goal is to improve stockturn and reduce stock investment:
- Set up a stock control system;
- Stocktake regularly;
- Ruthlessly eliminate dead stock;
- Look closely at the range of similar stock lines
and the range of product sizes/packages you keep in stock. Reducing
the range allows you to reduce the total invested in that type of stock;
- Monitor monthly sales;
- Monitor monthly purchases - set a monthly purchases
budget which will be below your expected cost of goods sold;
- Compare with budgets and adjust for future months
to avoid overstocking;
- Can stock holdings for individual product lines
be reduced?
- Keep working at this exercise over a number of months - it is unlikely that a stock problem will be fixed in just one or two months.
The key discipline is to set, and work within, a purchases budget. For example if you are overstocked by (say) $60,000, then you might set a target to reduce this by $5,000 per month. Your monthly calculation should look like the following table:
Example Your Calculation Your likely or estimated GP% 15.5% So your estimated COGS % will be 100-GP% Equals 84.5% Times your estimated monthly sales $295,000 Equals your estimated $ COGS $249,275 Less your targetted monthly stock reduction figure say $5000 Equals your purchases budget for the month $244,275
There are some stock items that you cannot afford to run out of as they are the high consumption lines or the necessities that keep customers coming back to the store (these might include Coke, Mars bars, Milk, Bread, fuel, newspapers and the like).Some buying groups expect members to stock a core range of products and may be required to support preferred suppliers and their promotions. You may be torn between the need to meet your need to cut back stock levels and yet meet your commitments to the buying group. Take care and weigh up the benefits of such arrangements which may extend to advice, assistance in modernizing the store image, access to electronic ordering and the benefit of collective buying. In the end it is your business and it needs to perform well and help you prosper.
Better stock management results in less working capital being tied up in stock and ensures that stock is turned into cash more often.
Feedback corner:
Let us know what you would like covered in future issues and we will be pleased to pull together some suitable material.
Call us on 1300555334 and speak to Catherine or Ross.
FMRC Benchmarking Team Pty Ltd was purchased by CCH Australia in July. As part of the transfer of operations, 'FMRC' will no longer be used in the company name. The Team will continue developing benchmarking work, to provide a deeper and wider range of services to Australian Accounting practices and to small business operators. Address, telephone, fax and Post Office details remain the same.
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