ible only by utilizing a ladder or fork lift truck.
investment! The remaining $3,000 could be invested in
other products providing other opportunities to earn
a profi t!
Though a very popular measurement of sales
profi tability, gross margin is not affected by changes in
inventory investment. This unfortunate characteristic
can lead to misleading information for management.
Capital and operating costs usually are reduced as a
distributor’s investment in inventory decreases. After
all, not as much money is tied up in stock, there isn’t
as much inventory to keep track of, and less material is
subject to shrinkage and obsolescence.
Adjusted margin is similar to gross margin in that
annual profi t dollars are divided by annual sales
dollars. But to attain a more meaningful and
comprehensive profi tability measurement, the
adjusted margin calculation subtracts the annual
cost of carrying the average inventory investment
from the gross profi t dollars:
Adjusted Margin = [Annual Gross Margin Dollars –
(Annual Carrying Cost % x Average Inventory
Investment)] ÷ Annual Sales Dollars
In the example above, if the company had an annual
cost of carrying inventory of 24% and an average
investment of $10,000, the resulting adjusted margin
would be 4.6%:
[$3,000 – (0.24 x $10,000)] ÷ $13,000 = 4.6%
If the average inventory investment was reduced to
$5,000, the adjusted margin would triple to 13.8%:
[$3,000 – (0.24 x $5,000)] ÷ $13,000 = 13.8%
Many distributors have discovered that adjusted
margin is one of the best tools available to measure
sales profi tability while retaining control of their
investment in stock inventory.
Iits activities accordingly. Since the business forecast drives subsequent operations within each department, a consensus on the demand plan among the various departments is the only way to ensure coordination of operations. For example, misalignment between marketing and...