The Purchasing, Inventory Management & VAT Workshop · The Purchasing, Inventory Management & VAT...

The Purchasing, Inventory Management & VAT Workshop

CFM Business ServicesC. Franklyn Munroe

[email protected]

http://www.pdfcomplete.com/cms/hppl/tabid/108/Default.aspx?r=q8b3uige22


DELIVERABLES

ØInventory Management & Control TechniquesØFundamentals of PurchasingØManaging and Improving Warehouse

OperationsØVAT impact on Purchasing & Inventory Cost



Effective Inventory Management ?

Effective Inventory Management enables a company to meet or exceed customer expectations of product availability with the amount of each item that will maximize net profits or minimize your inventory investment.



Inventory Management & Control Techniques§ Reduce Inventory without reducing service§ Forecasting Inventory Needs§ Understanding Inventory Costs§ Attain higher level of inventory accuracy§ Classification of inventory items§ Establish Key Performance Indicators (KPIs) to

appraise inventory performance



Inventory Management & Control Techniques§ Determine what needs to be stored in each store,

Branch or warehouse§ Liquidating unwanted material§ Analyzing and improving the accuracy of your

forecasts of future demand of products§ Maintaining reserve or safety stock quantities

that will ensure you meet or exceed customer expectations of product availability at lowest possible cost



Inventory Management & Control Techniques§ Stocking – Merchandise you intend to stock§ Stuff – Everything else

Categorize items in warehouse:• List of high value items• List of slow moving items• List of complimentary items



Categories of Inventory§ Good (A) – Stock provides acceptable return

on investment§ Bad (B) – Contributes to other profitable sales;

No acceptable return§ Ugly (C) – Does not provide acceptable return

and does not contribute to other profitable sales



Inventory Carrying Costs§ Costs of putting away stock receipts and moving

material§ Insurance & other charges on inventory§ Rent & utilities for portion of your facility used to store

materials§ Physical inventory & cycle counting – No Buy, no count§ Shrinkage & Obsolescence – Dead , slow moving,

obsolete stock§ Opportunity Cost of the money invested in inventory

(Interest expense or interest earned in safe investment)



Inventory Profitability – Key Performance Indicator (KPI)

§ Gross Margin = Sales – Cost of Goods SoldSales

§ Adjusted Margin = Annual Profit – (Avg. Inventory x Carrying cost %) Annual Sales

§ Inventory Turnover = SalesAvg. Inventory Value

§ Other Indicators – www.r3now.com/about/scor-key-performance-indicators/

§ Forecast accuracy§ Inventory Carrying Costs§ Shrinkage§ Distribution costs



Inventory Profitability – Key Performance Indicator (KPI)

• Gross Margin is not a good indication of profitability because gross margin dollars do not vary as amount of inventory increases.

• Carrying cost such as insurance, rent & Utilities, inventory shrinkage & obsolescence etc. affects product profitability

• Look at adjusted margin for a specific customer. Total sales and profitability for the customer and avg. inventory for inventory maintained for each customer.



Liquidating Stuff and Excess Inventory

• Create report in descending order based on value of what is eligible to be liquidated

• Inventory is sunk expense; only worth what someone will pay

• Don’t get emotional

• Transfer to another location where needed• Reduce price• Provide sales person incentive to sell• Advertise – place on internet, List with excess supply companies• Substitute Products• Return Material to vendor• Donate material to non-profit organizations• Throw it away



Maintenance of Inventory Records

• Stocktaking days – inefficient• Implement Cycle Counting – updated on a periodic basis• Cycle counting used with ABC analysis to determine cycle• Elimination of shutdowns and interruption• Elimination of annual Inventory adjustment• Trained personnel and inventory accuracy• Errors identified and corrected more timely



Level of Inventory Accuracy

• Accurate records are a critical ingredient in production and inventory system

• Allows organization to focus on what is needed• Necessary to make precise decisions about

ordering, scheduling and shipping• Incoming and outgoing record keeping must be

accurate• Stockrooms should be secure



Evaluate & Maintain Safety Stock

Safety stock is reserved Inventory maintained to protect customer service in case of unused demand or delays in receiving stock receipt during the time it takes to replenish inventory.

Safety Stock Items• Products with erratic usage• Products with erratic lead times• High profit items• Stock required for a specific customer• Painful Backorders



Inventory Forecasting

A Demand forecast is a prediction of the quantity of a product that will be sold, transfer, or used during a time period.

Demand Forecast based on five (5) elements:1. Past Usage of product – Increases, decreases and seasonality2. External Trends – economic or environmental factors3. Events – promotions, holidays etc4. Collaborative information from customers / sales persons5. Appropriate forecast horizon or time period

Better your forecast, the less you need to stock to maintain your desired levelof customer service.



Inventory Forecasting – Common Problems

• The if its on paper , it must be true syndrome

• Most systems base demand solely on some average of past usage

• Usually one formula is used to calculate demand for all products

• Usually no verification to see if quantity forecast for a certain month was actually sold or shipped in that month

• No system for reliably obtaining future prediction of customer demand



Inventory Forecasting – Stock Questionnaire

• Who will buy product or product line • Estimates of usage for six (6) months• Anticipated Gross Margin for sales• Usage of product have on existing stock• How many month’s supply. What inventory necessary• Where will inventory be stored• How can unsold stock be liquidated. Can items be returned



New Stock – Sales & Marketing Focus

Provide salesperson with weekly report of sale of new products:

• Items/description• Sales & gross margin projection• Actual sales and gross profits• Available quantity• Value of quantity• Budget for new items• Person requesting item to be stocked



Fundamentals of Purchasing§ How to become savvy negotiator§ Legalities of purchasing decision§ Keep information accessible and up to date§ Basic principles of successful purchasing§ Choose suppliers with lowest overall cost for

best value



What is Procurement / Purchasing ?

Procurement is the acquisition of goods, services or works from an external source. It is favorable that the goods, services or works are appropriate and that they are procured at the best possible cost to meet the needs of the purchaser in terms of quality, quantity, time and location.



Fundamentals of Purchasing§ Buying material at right QUALITY§ In the right QUANTITY§ From the right SOURCE§ At the right PRICE§ Delivered at the right PLACE§ At the right TIME§ With the right mode of TRANSPORT



Lowest Cost, Best value Choice

There are four (4) elements of purchase cost:• Quality – rejection %, shelf life, reliability• Service – Response Time, technical ability• Delivery – Transport, storage, stocking, on time %• Price – Payment terms, discounts, bulk purchases

Total costs of ownership is the sum of cost elements in Quality, Service, Delivery & Price



Legality in Purchasing Decisions

• The procurement department should have polices and procedures, which would include legal rights in purchasing.

• All purchase contracts / agreements should be pre-approved by compliance and/or legal department

• Terms of contract – quantity, quality, price, credit terms, delivery terms etc.

• Know legal impact of Information age – electronic contracts and signatures



Legality in Purchasing Decisions

Purchasing Officer should know the key elements of Purchasing contracts:• Offer and acceptance• Consideration• Intention to create legal relation

Purchasing Officer represents the principal in development and negotiationof contract with third parties:• Expressed Authority• Implied Authority• Emergency Authority



Purchasing Records Management

There are two systems of recording purchases:1. Periodic Inventory System – Easy to implement ; less robust2. Perpetual Inventory System – Real Time tracking

Periodic Inventory system only updates during closing process . There is no adjustment to inventory concurrent with actual purchases and sales transactions. No real time data on levels of inventory or gross profit.




Perpetual Inventory System allows for the purchases and sales transactions to update inventory and costs of sales data into the accounting system on a real time basis. The Inventory account and cost of goods sold are adjusted on a real time basis.

Bar code scanners facilitate speedy transactions linked to Accounting Information System. The Perpetual system uses computer systems to implement the Perpetual Inventory Management system.




Ø Scan Invoices , Credit, debit memos into and supporting detail directly into the accounting system.

ØUse computer systems to access Inventory or purchasinginformation as opposed to utilizing paper files

Ø Routinely compare Purchase orders with actual invoices received



Fundamentals of Negotiation§ Step 1: Know what you want§ Step 2: Know what they want§ Step 3: Propose action in a way they accept

Tools of Savvy Negotiator:Ø Plan for negotiationØ Conduct negotiationØ ConcessionsØWin/Win negotiations



Plan for Negotiation§ Identify Participants§ Develop Objectives§ Analyze strengths & weaknesses§ Gather information§ Recognize other party’s needs§ Identify facts and issues§ Establish positions§ Develop strategies & tactics§ Brief Personnel§ Practice the negotiation



Conduct Negotiation§ Perform fact finding§ Recess or caucus as necessary§ Work to narrow differences§ Manage time pressure§ Maintain informal atmosphere§ Summarize results periodically§ Employ tactics§ Keep relationships positive



Provide Concessions§ Give & Take process§ Concede on minor issues earlier. Make it seem

valuable§ Occasionally say “No”§ Make them work for every concession§ Make enough room for concessions



WIN / Win Negotiations§ International – Added complexity§ Culture Shock§ Be aware of Barriers and obstacles§ Assess need for Translator



Managing & Improving Warehouse Operations

§ Improve Equipment Selection§ Assess and improve warehouse layouts§ Improve procedures for put away, packing,

loading, picking and receiving



Managing & Improving Warehouse Operations

Barcodes, Scanners, Radio Frequency Identification (RFID) systems, Automatic ID and wireless Lans are all part of warehouse and inventory management systems that focus on monitoring flow of products and enhancing accuracy and efficiency.



Improving Warehouse performance & Inventory Control

Ten (10) Tips:1. Start with good upkeep / organization – Inspect your operation regularly

and review warehouse organization. Daily checklist for the manager to hold accountable

2. Know your inventory classification – high, medium, low. Keep high volume closer to shipping area. Easily accessible. Reduce labor costs

3. Utilize Cycle Counts - perform regular cycle counts rather than annual physical Inv. count- Analyze discrepancies to perfect time taken- Monthly or quarterly cycle counts by inventory type



Improving Warehouse performance & Inventory Control, Cont

4. Minimize unauthorized traffic- Eliminate risk of unauthorized people around our valuable inventory- Give personnel special access

5. Make room for receiving- Provide sufficient room for receiving goods- Receiving errors can result in issues in selling cycle, losing money, time ,

credibility

6. Label Everything - Labels on everything to make easier for pickers to choose right inventory



Improving Warehouse performance & Inventory Control, Cont

7. Quality Control- Avoid mistakes by double checking your orders- Get a veteran to check; save your business money

8. Priority Picking- Color code orders for your most valuable customers or pick list

9. Finish Right, Start Tight - Finish order processing; clean up before clock out- Warehouse will be organized for next day

10. Don’t let your warehouse become a maze- Neatly categorize and labeled



Improve Equipment selection

Two issues of Equipment Selection:

1. Identify equipment alternatives that are reasonable for a given storage / Retrieval requirement – Piece, Case or Pallet picking

2. Select reasonable alternatives; Develop method for characterizing requirements by assessing warehouse layout.



Improve Equipment selection

• Automate picking, sorting and retrieval equipment as necessary- Piece Picking – small quantities. Short cycle times- Batch Picking – Multiple orders. Grouped into small

batches- Zone Picking – Assign zones. Pick items within zones- Wave Picking – quickest method. Pick in zone, batch and sort

• Engage a professional consultant in the equipment selection process.

• Attend seminars and tradeshows



Impact of Value Added Tax (VAT)§ Impact on Hawksbill Creek Agreement§ Impact on Inventory Costs§ Sample VAT Transaction§ Standard VAT Invoices§ Sample VAT accounting procedure



VAT impact on Hawksbill Creek Agreement ?

Ø Hawksbill Creek Agreement residents or licences in port area are free from personal income taxes, corporate profit tax, capital gain, death or property taxes until August 2015.

Ø “Bonded Sales” – Sales between Grand Bahama Port Authority (“GBPA”) licensees would be VAT Exempt. These are already exempt from customs duty and will be Zero Rated for VAT purposes. VAT will not be levied on their exports, but they would claim credits for taxes paid on their inputs.

Ø However Goods brought in duty free by GBPA licensees, which are subsequently sold to individuals or households currently attract customs duties on a post paid basis. These sales will attract the 15% VAT.



VAT impact on Hawksbill Creek Agreement ?

Ø GBPA would distinguish between what they sell to licensees and non-licensees

Ø Government currently in discussions with GBPA to deal with VAT under Hawksbill Creek Agreement

Ø GBPA has been operating a sales / consumption tax for decades. Lower costs results in increased inventory, boosting local expenditures by business and individual. Increased local sales: expansion of business and staff



Impact of VAT on Inventory Cost

§ Value Added Tax (VAT) has a direct impact on Inventory Costs. The more inventory purchased impacts company’s cash flow

§ VAT cost carried as a receivable until goods are sold to customer.§ VAT does not impact Company’s Cost of Goods sold. It is a pass

through tax , ultimately borne by the consumer.§ Develop procedures to deal with VAT for loss, theft or damage to

inventory§ Segregate Inventory for those items already in existence prior to

VAT implementation



Impact of VAT on Company’s Operations• All VAT Receipts are accounts payable (“Output VAT”),

while VAT payments are accounts receivable (“Input VAT”)

• At the end of the month, ledger balance should indicate the position, whether to refund or carry the balance forward. Where the balance is on credit (Payable),it means payment should be paid to the VAT authority, with necessary VAT remittance forms. Even with a debit balance (Receivable), there must be return to the VAT authority.



Value Added Tax (VAT) Invoice Specifics

• The date the invoice was issued• A sequential number uniquely identifying the invoice• The supplier Vat ID number• The recipient VAT ID• Full name and address of the vendor and recipient

company• Full description of goods or services and quantity• Dates goods or services received or date payment received• The VAT rate• The VAT amount payable



Example of VAT on Inventory operation• Business buys a bed for $100 + VAT 15% = $115

($15 = Input Tax) – Accounts Receivable

• Business sells a bed for $200 + VAT 15% = $230($30 = Output Tax) - Accounts Payable

• Business Remits the $15 to the VAT Authority (Output tax less input tax)



Value Added Tax (VAT) Accounts Set-up

• Create VAT G/L account – Making or Receiving VAT Payments

• Under “Taxes Payable”, open up subsidiary “VAT Payable ”

• Under “VAT Payable”, open up the following subsidiary accounts:1. “Input Tax”2. “Taxes Paid” 3. “Output Tax”4. “Tax Refund on Export”5. “Input Tax – Transfer Out”



Value Added Tax (VAT) Account Definitions

• “Input Tax” – Records the VAT that has been paid for purchasing goods or services that can be credited against “Output Tax”.

• “Taxes Paid” – Records amount of VAT already paid

• “Output Tax ” – Records the VAT that shall be or is collected for selling goods or providing services.



Value Added Tax (VAT) Account Definitions• “Tax refund on Export” – Records the amount refunded for

exported goods which the zero tax rate is applicable, after going through export declaration procedures with customs, have applied for tax refund by presenting export declaration

• “Input Tax transfer out” – Records the amount of input tax which shall not be credited with the output tax because of abnormal loss of goods purchased, goods in process and finish goods



Conclusion

CFM Business ServicesC. Franklyn Munroe

www.franklynmunroe.wordpress.com


The Purchasing, Inventory Management & VAT Workshop · The Purchasing, Inventory Management & VAT...

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