Time value of money

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code_compliant

code_compliant

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My question stems from an observation of my boss. He owns a small company but carries what a I consider an excessive amount of inventory. For example, there are two pallets of 200amp bypass meter sockets in back. He hasn't bought romex in two years. He says he has to in order to stay competitive when material costs go up. At current size his company will see two code changes before using any of this up. I am curious what the material turn-a-round time is for material overhead for other contractors.

I'm sure he got a discount on them but can it be so much as to warrent stocking them for 4 years?

In addition this must really help his end of year balance sheet and P&L but I'd like to know what the true cost of stocking all this material is?

Thanks.
 
stocking up

stocking up

If he stocked up on copper he is way ahead of the game.A1000 ft used to be 80 dollars now it has gone up as high as 540
 
There is no way around the simple fact that it costs some amount of money, each month, to store anything. I don't mean that you have to write a monthly check to a storage company. The stuff you store on your own site takes up in real estate. That is never free, even if you already own it. If you need a value of the cost of storage, you will have to talk to an accountant.
 
Unless this guy is expecting copper to go back down, he needs to be replacing what he is using as he goes, or else he'll eventually run out.

Having inventory on hand means he can choose when to buy -- he doesn't have to run out and buy materials at the current prices. He can stock up if the prices drop. But if he just runs out, and then restocks, he'll be paying whatever price is the then current price.
 
In many industrial plants, the cost of taxes, insurance, and financing will cause most items to be worth "zero" after three years of sitting on the shelf.
 
Less than one year for me, typically. If I get a screaming deal on something, I will buy 4 or 5 years worth without thinking too hard about it. The storage space is already owned, so why not find a profitable way to fill it? Day to day items normally only have less than one month's shop stock. Remember to update your prices regularly if you keep much shop stock. The supply house sure does!
 
Stocking up has its advantages and it’s hard to say whether or not I am losing money but I have a mini-supply house and buy my stock in pallet, lifts, and master reel quantities. Yes, storing your money on stock shelves sucks, but being able to get whatever you need to your crews on very short notice also has a value. My crews don’t spend time at the supply house.

Generally I try to do a buyout when I get a few big jobs together and buy all my pipe, wire a devices on three big POs and then add a bit on top of those for stock.

It works best to be able to draw on stored materials then not only do you have what you need but you got a great price and you get to use someone else’s money.

quogueelectric, my last wire nut buyout was 25,000 of each color (RYB) and I do 2-3 of these a year. Sometimes a color wont move then all of the sudden I am out of it and the cycle starts again.
 
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The phrase that springs to mind is Net Present Value.

He's swapping the cost of goods when he needs to buy them against the cost of money he doesn't have or has to borrow. He's a one man futures market.

Is this good business? Well, if he's got spreadsheet that using realistic assumptions proves the case, then maybe so. But I suspect not. Most folks try to carry as little stock as is reasonably practicable, as stockholding has both direct and indirect costs.

The secret of real estate investing is that you make the money when you buy, not when you sell, so if you can buy something at below its normal cost then its a bargain. Buying at normal cost today for stock isn't bargain.

Except for copper, which continues to increase in cost in a manner well ahead of inflation, investment returns and storage space.
 
Where I used to work, they decided that it was cheaper to let the suppliers keep the stock than us. It was called "just in time" or something like that. When you need something you just call and they ship it right away. Well that works great until you find out they don't have it. Keeping a bunch of stock on hand or having the line down for two days at $13,000 an hour is a choice you have to make.

It's all personal preferance I think.
 
It?s a hard call, but my gut tells me that the savings I enjoy having what I need, when I need it outweighs windshield time, and other down time that occurs when you have a bunch of labor standing around waiting on something. None of my production crews spend any time at the supply house.

There is also the savings from the buyouts, that allows me to buy common material at 30-50% less than counter price.

My big problem is tracking and pricing it. This turns out to be a bigger headache than you might think.
 
ITO said:
My big problem is tracking and pricing it. This turns out to be a bigger headache than you might think.
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Yes, indeed, that is very true!

How many times have you had to finally buy a certain item at the supply house that you were formerly selling from your stored goods, and found out that it actually costs you more to buy that item than you were selling your old stock for? That's what keeps happening to me. You need to keep on top of the present market price of the items that you got a good deal and stocked up on, to maximize your profits.
 
Couple of questions from a guy that has never run a business

1) Aren't you required to pay tax on the value of the stock sitting on your shelfs?


2) Is it any of an employees business how the owner chooses to provide supplies as long as the pay check cashes?
 
iwire said:
Couple of questions from a guy that has never run a business

1) Aren't you required to pay tax on the value of the stock sitting on your shelfs?


2) Is it any of an employees business how the owner chooses to provide supplies as long as the pay check cashes?
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You have federal, state, and in some places city tax on inventory, and on top of that in my state we have a 7% sales tax, and if your inventory is insured, as most large inventories are , you also carry that cost.
 
Where I'm at it's required that you pay taxes on the value of all inventory that you have at the end of the each year.
 
iwire said:
Couple of questions from a guy that has never run a business

1) Aren't you required to pay tax on the value of the stock sitting on your shelfs?


2) Is it any of an employees business how the owner chooses to provide supplies as long as the pay check cashes?
Click to expand...
The tax matter varies, but the employee has really no interest in how or where the inventory comes from. Like you say... as long as you get a good paycheck on Friday, don't sweat it.
 
1) Yes there are tax issues but bare in mind you only have to pay taxes once on it, and not all jobs are taxable. There are book keeping headaches associate with it, but if you have ANY inventory then you still have the headache.

2) That's funny every man I have working for me seems to have an opinion. For the most part my guys like it because they have what they need when they need it.
 
18 years ago I got a heck of a deal from a company going out of business on fuses, every size and class.

With in two weeks I had made my money back. I often get calls at 2:00 AM for fuses. At 2:00 AM the cost for those fuses is HIGH, but I have to go get them and often have to test the item requiring fuses and then install the fuses. Storage has never been an issue as there is plenty of space in our warehouse. I replace the larger ones (600 amp and up) as we use them, the smaller ones I still have loads left and these are usually stock at supply houses, so as they go, I do not restock.

Anyone need some 6000 Amp KTU's
 
Along the lines of Brian's comments, some level of inventory is necessary in a service business (in my opinion) to continue to offer to your customers the level of service they're used to receiving. Rather, I should say, a superior level of service does require some stock. In larger, more metropolitan areas, the contractor can call the after-hours number for the supply house and meet someone in there to buy items. This luxury isn't available to every contractor in every area, thus having some stock is inevidable to handle emergency and after-hours calls.

It seems like when I go to a certain supply house, I always see certain guys in there picking up stuff. Things's I'd have on the truck. Three QO breakers or cut lengths of 10-2 and other goofy stuff like that. I wonder how expensive it gets to run after every little thing, verses keeping shop and truck stock?
 
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