Inventory Management

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THOMAS M. JOHNSON, UNIVERSITY PRESS OF NEW ENGLAND

The AAUP Business Handbook >> Part Two: Accounting, Budgeting, and Financial Management >> Working Capital Management

Contents

Introduction

Inventory management is one of the primary responsibilities of university press administration. Unfortunately inventory management goals sometimes conflict, causing interdepartmental friction. For decades nearly all university presses promised to keep books in print and available indefinitely (or at least for many years). This goal was so prevalent and so internalized that it became an unspoken rule. More recently, declining sales in traditionally strong university press markets and lower funding levels from parent institutions have required the adoption of goals that conflict with the traditional ones. Presses must now more carefully manage their working capital by reducing their investment in inventory and lowering operating costs.

This paper provides an overview of inventory management goals and concepts, describes the essential inventory measures, and explains some useful analytical tools.

Inventory Management Goals

Traditional “maximizing” goals conflict with newer “minimizing” ones. Maximizing goals, most often guarded by editors and marketing staff, reflects the presses’ desire to satisfy demand-–however small-–especially for new books and course adoption texts. They want to keep entire series “intact” and keep authors happy.

Business/operations personnel champion the minimizing goals of careful stewardship of limited working capital and controlling operating costs. This would be accomplished by keeping the number books stored, and the administrative, design-production, and receiving costs as low as possible.

Presses should develop explicit inventory goals that suit their particular needs and circumstances. Every press must identify its appropriate point or perhaps range of points between keeping unit costs low and always having stock to sell versus having very limited, expensive storage space and working capital.


Who is the Inventory Manager?

Who should be the inventory manager? Who can understand all the issues, be comfortable with studying available data, and fairly arbitrate between departments and individuals with strongly held views? The short answer is that anyone who can think like a publisher can be the inventory manager.

In theory an editor, a marketing manager, a business manager, a sales manager, or a director can perform this function. In reality most non-business people do not have access to or understand inventory data. Further, there are some business staff who are not completely comfortable with some inventory management concepts or tools. The rest of this paper is devoted to filling this conceptual gap for both business and non-business university press managers.


When?

While the main thrust of this paper is managing inventory after a book’s publication, inventory control should begin with the decision to publish itself. Early decisions such as this direct future options. Promises to authors and commitments to suppliers can rule out future options, such as the choice of publication season, the format of initial release (cloth original, simultaneous, etc.), and the use of scarce capital to fund other, possibly better books. The decision-to-publish meeting is perhaps the most important one on the calendar. It should not be a for-your-information or rubber-stamp process. So the presenting editor can hear all aspects and publishing concerns, others at the table must round out the discussion. The marketing representative must determine whether the proposed price, discount, and sales forecast are reasonable. The financial manager must consider the resources that will be required to publish this book, as well as the risk-reward values. The director, who is de jure the publisher, should consider all of these factors in making his or her decision.

There are other pre-publication checkpoints after this: manuscript transmittal, launch, catalog preparation, sending the book to the printer. Still none are as important as the initial decision-to-publish meeting.

After publication, the designated inventory manager should review stock and sales at least once a month. It may be appropriate to keep a closer, more frequent watch over new, potentially “hot” titles and to take a close look at standard texts well in advance of the course adoption seasons.

Most of the time these reviews will focus on reprint candidates. At large presses the inventory manager may be on the lookout for books to be pulped or remaindered, but small- and medium-size presses will do this only once or twice a year. As part of the reprint consideration process, presses will want to evaluate changing printers or even changing printing method, for example from offset to digital print on demand (POD).


How is Inventory Management Done?

Post-publication inventory management begins with reviewing the raw sales and inventory data. Monthly reports for the inventory manager should have preset rules for flagging low stock, big sellers, and inactive titles. These rules should be conservative enough to be sure no titles are missed in any category. The inventory manager will need to study key figures taken from these reports, and then make a number of calculations to derive several significant ratios for further analysis.

Total Inventory Value

Inventory dollar value is, after receivables, the other big number on the asset side of a press’s balance sheet. Unlike receivables, inventory is not a liquid asset. (In fact one could make a good case for not classifying inventory as a current asset since for most university presses the average holding period is well more than one year.) For many university presses, a lack of working capital can be traced directly to over-investment in inventory.

It is worth noting that a press’s particular inventory cost capitalization policy can significantly affect how it compares with other presses. For example if a particular press includes certain plant costs such as copyediting and design in its inventory, this will “inflate” its inventory value relative to others that do not.

Stock on Hand

In addition to assessing inventory value, the inventory manager will want to consider the actual number of units on hand for particular titles and for all books. Every warehouse has its capacity, and the inventory manager must keep stock within those limits. Presses that contract for order fulfillment or only for warehousing are particularly mindful of this number, as they often pay a per-book storage charge, or an excess-inventory penalty if their stock on hand is too high vis-à-vis sales.

Inventory / Sales

Perhaps the most important analysis compares inventory with sales, and this can be done several ways. Readers may be familiar with the inventory-to-sales ratio data that is included in the annual AAUP Statistical Report. In the 2004 report the average for all presses was inventory value as 37% of net sales. The figures for each of the four groups from small to large were 47%, 41%, 42%, and 32% respectively. As mentioned above, the problem with this figure is that there is no uniform capitalization policy among university presses. Consequently a press that included copyediting and other plant costs in its inventory value will have a high inventory/sales ratio compared with the average. A press that expenses costs other than paper, printing, and binding may look low.

Inventory Turnover

An alternative is to compare unit sales and unit inventory. This ratio, called inventory turnover (IT), is equal to Annual Sales / Average Inventory. Because units rather than dollar measures are used there is no accounting policy effect. It is useful for single titles, clusters of books, or an entire list. Here are some examples:

500,000 sold on inventory of 500,000 units = 1.

250,000 sold on inventory of 500,000 units = .5

150,000 sold on inventory of 500,000 units = .3

Years of Stock

The IT ratio can be difficult to conceptualize, especially when the resulting ratio is less than 1.0. University press IT ratios are notoriously low when compared with other industries. Just think how many times a supermarket turns over its produce stock in a year! The year’s supply figure that is derived from the IT ratio is perhaps more meaningful to a broader range of people. Years’ supply is equal to 1 / Inventory Turnover. Here are examples derived from the above IT ratios.

1 / 1 = 1 Year’s Supply

1 / .5 = 2 Years’ Supply

1 / .3 = 3 Years’ Supply


Product Life Cycle

The product life cycle concept is useful in understanding inventory management. Its basic premise is that every product, even a commodity, has a definable, unique demand pattern. The graph below depicts four common product life cycle patterns for university press books. Sales are the vertical scale; years are on the horizontal scale.

The “ideal” pattern is what is often shown in marketing textbooks. Here demand is low initially because the product isn’t well known. Gradually the product is adopted/accepted, and demand increases in a fairly step curve. Eventually sales drop as the market becomes saturated, or new usually better competing products are introduced. Ultimately the curve ends when inventory is exhausted or the product is withdrawn.

There are infinite variations of this classic curve for successful as well as unsuccessful products. In the book trade many products never seem to get off the ground. Sales of more “typical” university press books never reach the minimum targets to be deemed successful, and they die a quick death. Unlike the fireworks pattern of many trade titles, successful text books often start off slowly but have steadier sales for years. Then there are the “late bloomers” that seem to quickly hit that downward curve only to suddenly have their sales surge because of some event: the demise of a competing book, the death of the author, or perhaps some major news event that draws attention to a book’s subject matter.


Realistic Title Budgeting

While it is reasonable to aspire to success for every book, publishers must be realistic about the probability of that achievement. Of a randomly selected number of recent new publications, a university press would find few with sales sufficient to cover all associated costs of initial publication. Even fewer will have exceeded expectations and been reprinted. Indeed, several may even have failed to cover production costs.

Traditionally university presses have prepared title budgets that assume a success that is not necessarily realistic. The “success budget” assumes the book’s first printing will be sold out in a relatively short period of time. Since this does not usually happen, it raises the important question: why budget for an improbable outcome? Why not budget for the most likely outcome?

The table below details five possible outcomes for a book’s finances. A probability factor is given to each, so that the nominal gross margin result is adjusted by this percentage. The adjusted results are summed to yield the most-likely scenario. Since the most probable outcome is closest to C, this is the most realistic title budget.


Possible Outcomes

A = Typical "budget" scenario

B = Better than planned

C = Had to discount some stock to sell out

D = Heavy discounting; pulp 500

E = Heavy discounting; pulp 1,000

Probable = The most likely outcome


First Printing Profile

List Price $25.00
Printing 3,000
Free Copies 150
Avail. for Sale 2,850
Royalty 10%
Mfg. Cost $12,500


Outcome Sales (#) Aver. Disc. Net Sales (COGS) Nominal Gross Margin GM % Outcome Probability Probable Gross Margin
A 2,850 45% $39,188 ($16,419) $22,769 58% 20% $4,554
B 4,350 45% $59,813 ($24,731) $35,081 59% 10% $3,508
C 2,850 55% $32,063 ($15,706) $16,356 51% 20% $3,271
D 2,350 55% $26,438 ($15,144) $11,294 43% 30% $3,388
E 1,850 60% $18,500 ($14,350) $4,150 22% 20% $830
Probable Closest Model = C $15,551 100% $15,551


Budgeting realistically does mean lower gross margins, higher unit costs, more reprints, and that perhaps some books will not be published at all. On the other hand realistic budgeting also means less cash tied up in inventory, lower storage costs, and fewer books to remainder or pulp.


Role of the Press CFO

The press chief financial officer (CFO) or business manager has a special role to play in inventory management and, indeed, is likely to be the designated inventory manager. The CFO is usually the custodian of the sales and inventory data, and his/her natural ability, training, and experience usually make him/her proficient in analytical methods. In addition to these “givens,” the CFO needs to be a good communicator, especially if given the role of inventory manager. That person must be able to explain clearly why a press can and should be shortening print-runs, and stocking fewer books overall. Aside from being persuasive about specific cases, the inventory manager must provide clear and convincing explanations on the general issues of shorter print runs and lower stock levels.


Summary

Inventory management is a continuous process that begins with the decision to publish each individual title. Presses should develop policies that define ideal inventory levels by product line and age of title, as well as policies on uses of working capital, and put in place a system to carry these out. An individual with strong analytical and communication skills who takes a publisher’s point of view should be in charge of this important work.


The AAUP Business Handbook >> Part Two: Accounting, Budgeting, and Financial Management >> Working Capital Management

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