Maximtze return on invent sted dollars

By Bob Degnan and Clark Colvin CSC Capital Partners, Ltd. Salem, Or.

UPPOSE you could make the same amount of money from two different investments over a year's time.

In both cases you would make $1,000 on your investment. In the first instance, you would have to invest $4,000. In the second you have to invest only $400. Which would you choose?

The answer seems Pretty obvious. Yet most people and organizations, particularly at the retail level, choose to invest far more than necessary to achieve the same dollar return.

It seems that many people focus just on the Bang, and not the Bang for the Buck. Why is this? The answer lies in understanding effective inven- manage- ment, and the difference between corporate profitability and return on investment.

To carry the illustration further, let's assume that the above example refers to the buying and selling of Product A, chrome-plated widgets, that can be purchased for $400 each, and sold for $500, with a 2OVo Gtoss Profit Margin. The demand for these items is l0 sales per year, or $5,000.

In the first instance, knowing we can sell l0 this year, we order l0 to have on hand and support our anticipated sales. Because they cosl $400 each, we invest $4,000 in an inventory of l0 chrome widgets to support our anticipated sales.

In the second instance, although we anticipate selling 10 units this year, we are not sure of the sales volume for the chrome widgets in our market. We know we can get them quicklY, since the main distribution depot is close by and we can get a deliverY every week. We also have other products we would like to buy and stock, and can use the money beneficially elsewhere. We therefore choose to keep one chrome widget in stock, with the commitment to replenish it and buy another one as soon as this one is solc.

In each case we sell 10 chrome widgets and make $1,000. Yet in the first instance this $1,000 profit is a 257o retwn on an investment of

$4,000, and in the second instance the same $ 1,000 is a 250%o return on an investment of only $400. Also, in the second case, the remaining $3,600 can be invested in other products, fueling additional sales with additional incremental returns and profits.

Why doesn't everyone exercise the second option? Certainly we would all like a 2507o return on investment rather than 257o. Certainly we all have additional investment opportunities, ones that we would like to pursue "if only" we had the funds. The answer lies in three key areas: knowledge of anticipated sales (How many chrome widgets will we sell?), knowledge of present sales transactions (How quickly do we know we've sold the chrome widget that is in stock and therefore need to buy another one?), and attention to detail and buyer/management commitment (How do we know that our people will be on top of the situation and act as they need to at all times? Do they care that we have too many or too few widgets? Have they been given the tools they need to act, and empowered to use them? Are they being held accountable and rewarded for the results?).

l. Knowledge of anticipated sales

If we do not have any idea how many chrome widgets we will sell, we may be forced to carry a quantity greater than we need so that we "don't run out." A number of retailers still follow the traditional ordering process of "filling the pegs" and "stocking rhe shelves." They believe that unless all the pegs and shelves are full to overflowing, they are not carrying enough product. (This method may result in us carrying $10,000 or more in chrome widgets inventory to support $5,000 in sales, instead of 94,000).

One step up from this approach, but no less faulty, we may be forced to rely on our memory or inexact sales history, recalling that we think we sold "about so many" chrome widgets this time last year. Since no two months or years are ever the same, this is an equally dangerous approach. How many times have you heard, when asking why so much excess inventory is in stock, "Well, they just didn't sell as many as I thought they would."

The best way to purchase and stock materials, of course, is by an accurate forecast of anticipated sales. This can be done only if we have an information system that allows us to develop accurate forecasting models that are self-educational, and prompt us to get more and more accurate at forecasting future sales as we continue the process over time. The commitment here is needed on the part of all departments, with particularly close coordination between sales, purchasing and accounting/information systems. Companies that have chosen this path and have stayed the course are now reaping the benefits and higher returns on investment. While it is true that you don't benefit by having more of any product than you need, it is also true that "you can't sell what you don't have."

2. Knowledge of present sales lransactions

Perhaps no one today is better equipped to address this issue, or to track their sales and retail transactions in real-time than Wal-Mart. From their headquarters in Bentonville, Ar., the retailer can track sales and inventory by item for each of their 80,000+ items in each of their 3,500+ stores within 24 hours. They have developed relations with their key suppliers whereby this product sales and movement information is shared, and the supplier joins Wal-Mart as a partner in promoting maximum sales and inventory turns at each Wal-Mart location.

But, we are not all Wal-Marts. So what are we to do? Most retailers today do have computerized point-ofsale systems that, if not at the WalMart level of sophistication, still can be customized to provide timely sales and inventory stock-status information. This data enables us to track and monitor sales and inventory levels several times per week, if not on a daily and hourly basis. The point here is to design a selective system that enables us to track sales and inventories in a timely manner in order for us to make timely purchase decisions.

A vast quantity of data alone does not guarantee useful information. Accurate data, however, combined with proper organization and relevance, does. The key is to develop a system that lets us see what we need to see when we need to see it, so we can make the purchasing decisions that need to be made (reorder items. quantities, etc.) in a timely manner, and with minimum error.

"How often can I order?" "How frequently can I get a delivery?"

"How many can I order?" All these are good questions to ask in order to balance over-aggressive turn-growth and just-in-time inventory fixation with the conservative tendencv to always keep more in stock than we need so we'Just don't run out."

3. Attention to detuil and buyer/management commitment

While it's true that accurate information systems are essential, it's also true that no amount of system sophistication or programming can replace the dedication of a trained employee who is positively motivated and committed to maximizing corporate performance and "making things work."

From Wal-Mart to your company, the reason things work well is the dedication and commitment of your employees. Successful companies are a mixture of accurate, timely data systems and motivated, committed employees. Employees and managers are given the proper tools, empowered to act, held accountable for their actions and rewarded for the results. They know their positions and their responsibilities (which are clearly defined and delineated throughout the organization). They know to whom they report, exactly what is expected of them and precisely what they are being held accountable for. Most importantly, they are committed to achieving the established goals for themselves, their department and the entire organization, and receive paid

Mostpeople choose

to invest far more than necessary to achieve the same dollar return.

incentives and rewards for their attainment. All engines are on-track, heading in the same direction. The throttles are set for full-stream ahead, and everyone is engaged.

Any organization that is presently not achieving what it is capable of (or what it believes it is capable of) should look first to itself to solve the problem. Although you deal with customers and other members of the world "outside," your problems are most often not "outside" but "inside."

Whether you are currently managing your company to achieve a 25Vo Return on Investment, a25OVo ROI, or something in between, there is a stepby-step approach that will increase your present and future performance. Your purchasing/inventory control systems, inventory and ROI are excellent places to begin.

Mill Fined Following Fatality

Mary's River Lumber Co., Corvallis, Or., has been fined by state officials for safety violations resulting in the death of a worker at its Montesano. Wa.. sawmill.

The Washington Department of Labor & Industries assessed the company $1,800 after two months of investigations.

Mill worker Carl Butterfield died Jan. 2 after falling 1 2 ft. through a gap in a second-story floor while changing the head rig saw blade.

The state penalty notification criticized the company, saying, "At this work site, the opening for changing the head rig saw blade had no protection for employees from falling to the lower level."

Three hours prior to Butterfield's death, employee Cergene "Shell" Clark was run over by a forklift, resulting in the loss of his leg below the hip. No penalties were assessed against Mary's River in connection with the forklift accident.

In addition to the fine. the Department issued a general violation for an electrical switch box and an electrical outlet not being properly covered. No fine was associated with these violations.

The company had until April 3 to either pay the fine or appeal the decision.

Alaska Forms Get Fed Money

Four Alaskan lumber companies have received U.S. Forest Service grants to improve the efficiency of their operations.

The federal grants are to be used to buy new moulders, add kiln capacity and erect lumber storage buildings.

Logging & Milling Associates, Delta Junction, received $327,500; Nenana Lumber, Nenana, $209,300; Alaska Birch Works, Fairbanks, $82,000, and J & H EnterPrises, North Pole, received $9,450 specifically for a planer and additional kiln capacity.

The grants also require companies to put up their own money toward anY improvements.

Allen Vandiver of the Forest Service said the grants aren't meant to expand harvesting, but to allow companies "to operate more efficiently and get more money for the products they produce."

The grants were awarded on a competitive basis, with points award- ed for factors like local community support, company production, "the number of jobs added by the project, and other factors."

Seven other Alaskan timber flrms received matching grants. Alaska received a total of $2 million.

The Merchant Mag,azine welcr.tmes Letters to the Editor.

Please send to Editor, 4500 Campus Dr., Suite 480, New'port Beach, Cn. 92660; Fax 949-852-023 I, or bv e'mail to dkoenig@ ioc.net.

Location Correction

In your March issue, you stated that Sierra Pacific Industries was building a new sawmill in Junction City, Or. The correct location is Junction City, Wa., which is a suburb of Aberdeen, Wa.

Jack Chase

Sierra-Pacific Industries

P.O. Box 496028 Redding, Ca.96049

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ro. \weyerhauser, green is more than a randomly selected color. rVhen buiders and homeowners see our green edge, they know it represenrs our commitment to superior products and unsurpassed customer service. They know green is good.

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For over 100 years, \Teyerhaeuser has worked hard to be an environmenrally responsible company. To us "green" is more rhan a color - it's a way of life.

The COIOf Of OUalit! \rz.y.rho.user Strucrurwood stands out from the competition. Our panels wear green edge seal iike a badge that represents superiority. It tells br-rilders that a green product is easier to install, has fewer callbacks, and delivers on time - every time.

Billy Gunn has been promoted to mgr. of sales and marketing at Colville Indian Power & Veneer, Omak, Wa. He continues his duties as assistant sales and marketing mgr. of Colville Indian Precision Pine Co.. Omak.

Curt Bodenstab is the new sales mgr. at Starfire Lumber Co., Cottage Grove, Or., replacing Greg Chase, who has left the company.

Val Nielsen, Beaverton, Or., is now selling incense cedar fencing manufactured at Sierra Pacific Industries' Oroville, Ca., fencing facility.

Ray Haroldson has opened The Haroldson Group International, Lake Oswego, Or. The company specializes in western species industrial lumber.

Brett Kelly, formerly with Thompson Mahogany, is new to sales at Oregon-Canadian Forest Products, North Plains, Or.

Tom Herion, v.p.-sales, Potlatch Corp., Spokane, Wa., has retired. Barbara Couch, formerly with Joseph Timber, is new to western lumber sales in Lewiston, Id.

Jim DiSaverio, ex-Boise Cascade, is new to outside sales at Allweather Wood Products, Loveland, Co. Gary Knight has resigned from Caffall Brothers Forest Products, Wilsonville, Or., after 30 years with the company.

Jim Sitton has joined Kruse Enterprises, Albuquerque, N.M., as a trader.

Tracy O'Campo is general mgr. of the new 84 Lumber, Auburn, Ca. Will Macey III has been hired as a mgr. trainee at the San Luis Obispo. Ca.. location.

James Houck has retired as log yard supervisor of Sierra Pacific Industries' Sonora, Ca., division. He started working at the Sonora mill 37 years ago.

Rick Holmes has been named unit general mgr. at WeYerhaeuser Co.'s Aberdeen, Wa., sawmill. He replaces Bob Andrews, who retired last month after 38 years with the company.

Timothy Hewitt has joined Sierra Pacific Windows, Redding, Ca., as a California sales representative. Other new sales reps include: Robert Kaufman, Washington; Jay Sanguinet and Dan Winterfeld, Idaho; Frank Rostad and Jonathan Atzman, Colorado, and Don Chavez, Carlos Diaz and Rob Schroeder, Arizona. Graden Rogers is the new regional sales mgr. for New Mexico, and Scott Henson is the new Arizona regional sales mgr. Patricia Jackson, Bradley Haire and Elisabeth Muzio are new California architectural representatives. CindY Singleton is the new Colorado architectural representative.

Steve Synnott, v.p.-marketing and merchandising, Pro Group, Denver, Co., has been elected to the board of directors. Joe Landry, c.f.o., was elected corporate secretary.

Millard Barron, former president and c.e.o. of Payless Cashways, has joined Home Depot, Atlanta, Ga., as senior v.p.-store merchandising. Dennis Carey has resigned as Depot's executive v.p.-strategy, business development and corporate communication. He is succeeded by Francis S. Blake.

Michael Ainsworth, exec. v.p., Ainsworth Lumber Co., Vancouver, 8.C., has been elected chairman of the board of trustees of APA-The Engineered Wood Association. He succeeds John LeFors, Willamette Industries, who resigned after his company merged with Weyerhaeuser Co. Scott Schroeder, v.p.-manufacturing, Roseburg Forest Products Co., Roseburg, Or., has been elected vice chairman. John Murphy, plywood general mgr., Murphy Plywood Co., Sutherlin, Or., has been nominated as chairman of the advisory committee.

Jim Vaage is new to contractor sales at Alpine Lumber Supply, Sandpoint, Id., specializing in windows, doors and millwork as well as outside sales to Priest Lake, Newport and Priest River communities.

Punky Stanley has been promoted to shipping supervisor at Harwood Products, Branscomb, Ca., succeeding Coy Wirt, who is retiring next month.

Richard Sturma is the new Bostik Findley distribution group territory mgr. responsible for California, Arizona and Nevada. He is based in Los Angeles, Ca.

John Peaslee, Acme Rigging & Supply Co., Ukiah, Ca., has been elected president of the Redwood Region Logging Conference. He succeeds Otto van Emmerik, Simpson Timber Co., Korbel, Ca. Tim Morin, Pacific Lumber Co., Scotia, Ca., was elected v.p. Gary Bare, Wayne Bare Trucking, Arcata, Ca., has been elected to the board of directors. Other recently elected board members include; Dan Callahan, Pacific Lumber Co.; Jackie Deuschle, Simpson Timber Co.; Warren Giacomini.

California Department of Forestry, Willits, Ca.; Mel Goodwin, Harwood Products, Willits; Dave Grady, Northwestern Timber, Fortuna, Ca.; Jeff Heston, Cummins West, Arcata; John Iverson, Iverson Logging, Mendocino, Ca.; Randy Jacobszoon, Jacobszoon Forestry, Redwood Valley, Ca.; Mike Mitchell, Redwood Coast Trucking, Arcata; Steve Rogers, Redwood Reliance Peterbilt, Eureka, Ca., and Adam Steinbuck, Mendocino Redwood Co., Fort Bragg, Ca.

Mark Longfellow has been promoted to the newly created position of director-marketing/market development at Custom Building Products, Seal Beach, Ca.

Pete Noble, owner. Westwind Forest Products, Eugene, Or., recently returned from a vacation in Maui. Hi.

Neil Downe is now providing flooring installation services for Mungus-Fungus Forest Products, Climax, Nv., report owners Hugh Mungus and Freddy Fungus.

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