How Much Do Your Groceries Cost?
By Doug Wallace, CPIM, Senior Consultant, Life Cycle Engineering
As appeared on Manufacturing.net
Sometimes my wife does the grocery shopping by herself. Other times I tag along and try to help, but generally I’m just the cart driver. Either way, as man of the house, it’s my responsibility to lug the goods upstairs from the garage to the kitchen. I take it as an opportunity to see how many of those little plastic bags I can dangle from each hand without cramping up, dropping anything, or scuffing up the paint on the walls along the way. I try to make it seem like an impressive demonstration of my strength and dexterity, but we both know that I’m really just lazy and like to get it all in one trip if I possibly can!
The two of us usually share the job of unloading and putting away, and I wish I could say that my materials management experience extends to my home, but alas, we generally just shove the new items into the front of the refrigerator/freezer, kitchen pantry, or downstairs closet, relegating the older stuff to the back.
Every Wednesday morning the trash gets picked up in our neighborhood. That means faithfully every Tuesday night my wife goes spelunking in the fridge, digs out anything that is rotten, moldy, or past its “Best-if-used-by” date, and often fills up another garbage bag for me to kick to the curb. My daughters and I affectionately call her the “FDA Inspector” – a role that she has come to relish.
I always find this process entertaining. My mother – God bless her – almost never threw anything out, even if it had transformed into another state of matter. Fruit with blue-green fur, soggy vegetables that you could poke a finger through, and meat that was more frost than flesh were common in our kitchen growing up. Unless you had to eat the milk with a fork and spoon, it was still good enough to put on your cereal in the morning.
Mom wasn’t nuts. She wasn’t cheap. She wasn’t reckless about our health and well being. She knew that eventually everything would either get eaten or thrown out. The truth is that this stuff just didn’t bother her. She figured that we had enough sense to know what was edible, and if so inclined – which was unlikely – we could run the rest down the garbage disposal ourselves with minimal effort. Maybe she subscribed to the old “If it doesn’t kill you …..” adage, and maybe she wasn’t all wrong. After all, my brothers and I are still alive and never had any health issues related to bad food from home that I know of.
To be fair to my wife, she’s just watching out for our collective best interest, and none of us has ever suffered from bad food at our house either. One thing is certain: whatever manages to survive the weekly purge is good quality merchandise!
About once a year (usually during the Christmas holiday) we also delve into the depths of the dry goods cabinets, tossing some of the stuff that hasn’t moved, and restocking everything else neatly according to item, shape, size etc. If we’re lucky, the fruits of those labors might last until New Year’s Day.
So why do I tell you all this, and what does it have to do with inventory? In case you haven’t figured it out yet, this is analogous to the way some companies handle their materials.
In effect we have three storerooms. The refrigerator is our cold storage unit. Our pantry is the main storeroom for non-perishables. The downstairs closet is our satellite for overflow. The shelves, racks, and compartments contain outside purchased materials (groceries), in-house manufactured items (freshly prepared recipes) and even some used materials (leftovers).
Like many companies, we don’t have assigned bin locations, nor do we try to maintain a perpetual inventory, which occasionally results in misplaced items and unplanned runs to the store (emergency purchases). I’ll readily admit that we also have quite a bit of non-stock material such as seasonal supplies, occasional-use cooking utensils, and other essentials that take up quite a bit of room. Unlike many companies, however, we routinely review our obsolete stock, and sometimes have to make tough decisions about what to keep and what to get rid of, primarily due to space considerations.
Also unlike many companies, we have very low carrying costs. My wife may be amusingly entertained by my Charles Atlas impressions, but doesn’t pay me, so my labor is free. The incremental expense of maintaining and insuring our “storeroom” space is almost negligible, and our energy-efficient refrigerator supposedly runs on $4 worth of electricity per month. Add in a couple cheap garbage bags, and our total annual carrying cost totals about $50 above what we spend at the store. We haven’t completed our yearly reorganization yet, but all told I would estimate that we have about $1,000 worth of groceries scattered throughout the house, so our carrying cost percentage is roughly 5%.
But what if we had to report our grocery inventory as an asset on our tax return and pay another 10 -15% of that $1,000 to local, state, and federal officials on a quarterly or annual basis? What if we paid for our groceries on a credit card with a 20% annual interest rate and could only make minimum payments on our monthly bill? All of a sudden our 5% carrying cost percentage would be more like 35 – 40%, and we would be paying an extra $350 to $400 per year out of our pockets to keep the same supplies on hand. In today’s economy, that could be enough to make some people cut back on their purchases, and we would probably take a much more critical look at our inventory. Even my mother would probably start throwing stuff out!
Fortunately, this is all hypothetical for us, so we don’t have to deal with it. But for many companies, it’s fact. The annual carrying cost percentages may be lower – more like 15 to 20% – but the impact is real and tangible. Yet many materials management and site leadership personnel are either oblivious to the cost, or have learned to live with it like my mother learned to live with freezer burn. Instead of buying what they need, they buy what they want. Instead of monitoring turnover, they simply monitor “service” (as measured by level of complaints). Instead of routinely reviewing obsolete, expired, and damaged inventory, they lament about lack of space. All the while, accountants, risk managers, and others write checks to cover these indiscretions.
Just like the cost of our groceries doesn’t stop at the checkout line, the cost of your inventory doesn’t stop at the receiving dock. So as we head downstairs to rummage through our stockpiles of broth, tomato paste, crackers, etc., now might be a good time for you to head to your raw material and MRO storerooms, take a good hard look at your inventories, and ask yourself, “How much do our groceries really cost?”
Doug Wallace is a Senior Consultant and Materials Management Subject Matter Expert for Life Cycle Engineering (LCE). In addition to his materials management expertise, Doug is knowledgeable in planning and scheduling and operator care best practices. He is also certified in Prosci’s Change Management methodology. Doug can be reached at dwallace@LCE.com.
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