The division manager commends you on your successful improvement to inventory turnover by reducing ending inve

Question

The division manager commends you on your successful improvement to inventory turnover by reducing ending inventory by 20%. He noticed, however, that even though sales are up 19% over last year, income was down by 14%. He is very anxious to hear your explanation.

Answer 1

Reducing inventory would incur a greater cost of goods sold resulting in a lower net income.

Answer 2

There's a theory in management: open with a feel-good statement (good job on the inventory turnover) then address the issue (what's the deal? you sold more stuff, but you made less profit?!?!?) and close with a positive statement (he's really psyched to hear you explain why the sales are up but the profits are down).

Here's a true fact: if your sales went up 19%, but your profits dropped 14%, someone is giving away the store. It's cool that you ordered 100 widgets, and that you sold most of them, but it's not cool that you sold them for less than you did last year.

That means that you're not selling - you're just filling orders. And if all you had to do to turn the inventory over was to give the inventory away, you might want to rethink your strategy.

I'm guessing you're in for a severe talking-to, and possibly a reassignment or dismissal.

Answer 3

As a purchasing manager, I run into this quite often. When you buy items in lower quantities, you pay more for it. In my case, the discout I get off list price is not as good as when I buy in bulk. This can mean the difference when it comes to your profit margin. It is much better to buy in bulk, or issue annual-usage PO's (purchase orders) which allow you to get the bulk-discount, but you only keep your on-hand inventory to what you would use, say, in a month, or a three-month period of time, depending on what your min-max levels are set at. Also, make sure you do physical inventory counts, or a damn good regimen of cycle-counts, that will help you to keep your profit-margin in line, as you have accurate records and won't have to do much "last minute" purchasing.

Answer 4

my consulting fee is $50/hour plus expenses.
this will only take a minute so I'll work pro-bono.
without knowing your industry, location, etc, I'll keep it in general terms.
are we looking at GP or Net income?
do a year over year analysis of the following expenses
GP-
materials/COGS-anything petroleum based have gone up in cost the past few years. if you build or import anything, you were affected. also, steels and other commodities would have increased as well.
shipping/trucking-as gas prices increase, delivery costs do as well.
SG&A
insurance-has increased annually & dramatically since 9/11
salaries-along with increased sales, commissions should have gone up in proportion. also, if any slaray escalators kicked in, that could be a disproportionate expense.
without knowing more about your company/industry that's about all I can tell you

Answer 5

If ending inventory is down wrt last year, and volume of sales ($ or revenue) has increased, the only possible reason for reduced income is increased costs.

One or more of the following has increased since last year:
1) cost of inputs (raw materials, energy, wtc)
2) cost of production
3) cost of overheads (more engineers, more enviro equipment, etc)
4) cost of sales (more sales expenses, lunches, transportation to market, etc)
5) taxes? (depends on weather these are pre or post-tax figures)

Answer 6

" I know Everthing" is right as inventory is an asset and you reduced it by 20%! You should have waited and reduced next year's beginning inventory and you would have been a KING this year!

Answer 7

Sounds like a toss er to me and the company is cra p.

Try and get a new job quick and ditch the losers.

Answer 8

hmmm...you are ordering more, smaller batches at higher cost than holding?


cheers!