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Crouser Report December 1995
Copyright Thomas P. Crouser, December 1, 1995
Crouser & Associates - Helping Printers Prosper Since 1985
Dear Friends. . .
Twice last week I was reminded of the importance of taking inventory. First
while on assignment in Michigan and then again when reviewing financials for
a Performance Group meeting in Pittsburgh. Why is taking inventory important?
At the second ever meeting of NAQP in Atlanta in 1977 (I think the year is
right), a gentleman asked in my session, Why, Crouser, if we did everything
you said. . .hell, we d be taking inventory once a month. Well, yes, I guess
you would.
Taking inventory is misused, abused and misunderstood by many printers.
It s not that big of a deal to accomplish and it s very important.
Why Very Important?
Financially - Folks who value inventory once a year (if they really even do
it then), use the value in preparing their financials. In the interim, when
cost of direct materials goes up, they immediately assume slovenly employees
are wasting and spoiling and go kill someone. Well, not valuing your
inventory for interim financial statements has more to do with mis-stating
your cost of direct materials than waste and spoilage. HOW? An increase in
real inventory increases your direct material costs dollar for dollar if you
do not take an ending inventory. Likewise, a decrease in your real inventory
would decrease direct materials dollar for dollar on the interim statement.
Here s the formula:
- Beginning Inventory of Direct Materials
- + Purchases
- - Ending Inventory
- = Cost of Direct Materials
Some say their inventory level remains the same throughout the year, so it
really doesn t matter. And if, in fact, inventory did remain the same, then
it would not matter. Yet, from experience, I see people having high direct
material costs and blaming workers for waste and spoilage when some of it can
be blamed on not valuing inventory.
So, reason one to take an interim inventory is to avoid killing the workers
for waste and spoilage which is not there.
But That s Not All!
Operationally:
How do you know what to order if you don t know what cha got?
Well, people say, I go look. And that, is technically taking inventory
although it is not placing a value on the inventory taken. That s where the
Michigan experience comes to mind.
Financial ratios showed inventory out of whack and the owner said the value
wasn t updated but once a year. He didn t feel it mattered for he ordered all
of the stock, etc. However, the flip side is, as it has been in every case
where this comes up, workers told us they were constantly hunting for paper;
ordering paper that they already had; and not having paper on hand when it is
needed.
So, reason two is shops not taking inventory spend more time all month
hunting for and ordering paper than do shops who take inventory.
Additionally, I believe although I have done no studies to provide it, that
waste and spoilage is higher in shops who do not regularly attend to their
inventory because of the messiness of storage; sloppiness of care; and a
general non-caring attitude which trickles down to workers from management.
Inventory Turns:
In reviewing financial ratios, inventory turns (yearly cost of direct
materials divided by average inventory) is an indicator of too much or too
little inventory. Twelve turns per year indicates a month s supply on hand.
Twenty-four turns is about two week s supply. How long does it take us to get
paper? One day? Three days? Why then should we have the equivalent of two
months (six turns) on hand?
Five Ways To Make Taking Inventory Simple.
- 1. Keep a list of papers generally on hand in your word processor. Good place
to keep product numbers (if applicable) and the source of the product.
Compare invoice costs to this list as invoices arrive; modify list as
necessary. Add to the list columns for quantity on hand and total cost.
(Could add a fourth column which would be reorder point for stocking items.)
- 2. Use two people to take inventory. One marks stock counted with a marking
pen and calls out quantity. Other person writes down on inventory list. Using
a different color marker each month will give you a visual idea of how long
the stock has been there. Reduce old stock.
- 3. Approximate. Count broken cartons as half cartons. If you stock the paper
in reams only, count only unbroken reams. Count parent size sheets as either
full ream or half ream. Count full containers of chemicals, inks, etc. Ignore
opened containers unless ignoring the value would materially misstate the
inventory value.
- 4. Scrap paper inventory. Ignore stuff which has been charged off to a
previous job such as ends of paper, ink, etc. Many buy parent size sheets,
charge the value of the complete purchase to the job, and then keep count of
the scrap for inventory. Don t worry about it if you have already charged it
to a job. Carry it at a zero value. (When you sell it, use the full cost.)
- 5. Specific area inventories (typesetting; press; counter), should be taken
by the people doing the work. Specific lists can be developed for each area.
And, one more thought. Don t unpack your paper. If you buy it in cartons,
store it in cartons. Unpack as you need. Shelf space should be used for
miscellaneous reams of paper.
Quick, When Do You Get Your Money Out Of Inventory?
Most think every time they sell a job. Actually, you only get your money back
when you close the business. Even though the paper is printed and sold, cash
is used to purchase replacement inventory. Only way to get your money back is
reduce your overall inventory or sell the business.
Work In Process Inventory:
Fully absorbed work in process inventory evaluation is required for most of
us by the Internal Revenue Service. Fully absorbed means allocating a portion
for labor and overhead as well as direct materials cost to the work which is
not yet billed. This is added to our direct materials inventory to
determine our total inventory for tax purposes.
Inventory Evaluation Methods:
Cost or Market; FIFO; LIFO; and FISH.
Once you know what you ve got, how do you put a value on the paper. Assume
you bought it for $6.00 per thousand but it now costs you $8.00 per thousand.
Is the value what you paid for it or what it cost to replace it? Most of us
use a method called cost or market meaning we either use the cost of the
material or the market value of it now assuming the price has gone up. This
works very well.
But, there are a couple other methods with which you might become familiar.
First, there s FIFO or First In, First Out. This is where someone keeps
records and assigns the value of the paper going in to the paper coming out
in the order of first in, first out. Realize in a warehouse, the actual
physical paper first in may not be the physical paper first out. So, the
value moves with the order of usage, not the physical paper. The other highly
recognized method is LIFO, or Last In, First Out which assigns the latest
prices to the first out and, the theory goes, leaves a stable base of
inventory and let s your direct material cost fluctuate possibly more. LIFO
is very attractive tax-wise when you have paper costs going up very fast
(could it happen?).
The final, not so widely recognized method of inventory evaluation is one my
print shops used named FISH. That stands for, it s First In And it s Still Here.
Organize around functions, not people.
I got into trouble with one employee group trying to explain organizing
around functions, not people. I wrote the following paragraph for the August
1995 Crouser Report: Organize around functions, not people. Don t hire
people because they just need a job or you think you might use them one of
these days. Hire a press operator, a sales person, etc. If they then find
they don t like what they are doing, fire them and hire someone else. Do not
create jobs for people. Have jobs for people. Tell people to whom they
report. Don t let assumptions set in. Organize around the three basic gettin
functions: gettin jobs out; gettin jobs in; and gettin paid. Then make
sure everyone does their job. Know who to fire if one of the gettin s isn t
gettin it. If you are not doing your own job, sell the business and do
something you would like to do.
The part I got into trouble with was the quote, If they then find they don t
like what they are doing, fire them and hire someone else. Although there
are some who would advocate such a position at any point in a worker s
career, I do not and did not by that paragraph mean to be one of them.
No, I did not mean if any employee did not like their job at any point in
their career, fire them. In fact, I feel if someone has been with our company
for seven years and still can t set up the folder right, or check out the
cash register or run the copier; then the problem is us, not the worker.
However. And this was my original intent, if an owner hires a sales
representative and, after six weeks of work at that job, the person decides
they do not want to be a sales representative, do not make them a press
operator or a secretary or a supervisor. We have to organize around
functions, not people. If you need a sales person, hire one. If you need a
bindery person. Hire one. But, don t create a job for someone who has been
hired to do one thing and decides they don t want to do it. Fire them and
hire someone else.
As owners, we have a great duty to our workers. They are the people who do
the work which provides the sales which provides our income. We, as owners,
have a responsibility to select, install and train those who work with us and
provide direction for those not performing to expectation. Unfortunately,
sometimes we expect performance without defining it; demand loyalty without
giving it; and order quality without providing the tools to do it. That s how
I mean it.
Happy Trails...Tom Crouser
P.S. That s all I got to say about that. Forrest Gump
P.P.S. The final date you may re-order your Crouser Guide to Estimting
Printing at the continuing subscriber rate of $175 (+ $ shipping) is December
15th.
Crouser & Associates Performance Group program includes two on-site evaluations
by Tom Crouser each year along with two group meetings. Management training is held during the group
meetings along with participation in a meeting with non-competing printers. Join others who have decided
to run their business instead of the business running them. Reply to by Email to
Tom Crouser for more detailed information or call Clark Workman
at (304) 342-5100. Or fax (304) 342-5187 or contact crouser@ibm.net.
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