LRI developed Inventory Value Added™ (IVA) as an inventory financial performance measure several years ago. It is the difference between gross margin and inventory carrying cost. Like GMROI, it holds gross margin accountable for the inventory investment required to achieve it. It is the best indicator we have developed so far to predict the impact of various inventory strategies on shareholder value.
IVA = GM – ICC
In the example in Figure 2.18, the maximum IVA™ is $475,557 achieved at a target unit fill rate of 99.95% and a target inventory turn rate of 12.4. For the slower moving SKU in Figure 2.19 the maximum IVA™ is $23,878 achieved at a target unit fill rate of 90.00% and a target inventory turn rate of 4.2.
= Revenue – Expense – Inventory Carrying Cost
= Margin – Inventory Carrying Cost
= [ AD x (USP – UIV)] – (AIV x ICR)
The annual demand for item was 5,000 units. The unit selling price was $5,00. The unit inventory value was $3.00. The inventory carrying rate was 30%/year and the average inventory level for the item was 12,000 units. Then the Inventory Value Added™ would be computed as follows:
- AIV = 12,000 units x $3.00/unit = $36,000.00
- ICC = AIV x ICR = $36,000.00 x 30%/year = $10,800.00/year
- Margin = 5,000 units/year x $2.00/unit = $10,000.00/year
- IVA = Margin – ICC = $10,000.00 – $10,800.00 = -$800.00