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Massey University
119.281 Decision Tools for Primary Industries

Inventory in Horticulture
Ewen Cameron and Warren Anderson
Massey University (2010)
The process of inventory planning and implementation starts with the goals and
objectives of management. It is assumed that profit is an objective of management,
usually profit maximisation.

Enterprise: an activity of business that has its own inputs and products for sale. An
enterprise needs to be managed. Financial assessment of an enterprise is done before
fixed costs such as rates, interest on loans and principal repayments are deducted. One
firm may have only one enterprise e.g. dairy production, or multiple enterprises e.g.
apples, peaches and grapes. There may be synergies between them, such as common
labour and tractors, but they could also stand alone.

Inventory Management: the counting (and valuation) and manipulation of production
resources (stock, capital items, labour) in a firm.
1. Stock is:
Things the firm means to sell - home-grown
Trading stock
- purchased and on-sold

Things produced or purchased by the business for future production: Capital Assets
Things the firm has bought: - Consumables: inputs, things used up in the production
process; excludes labour here. Examples: Fuel,
electricity, sprays, seeds, cuttings, fertiliser, potting
media, pots and bags.
- to produce products for sale e.g. bud wood.
- to facilitate the employment of labour (plant and
equipment).
Setting up for new stock: changing the system: - staff: knowledge, skills, attitude
Efficacy
Dealing with old stock
Consider a container-plant nursery: over the year, plants can either be on hand at the
start; be grown (propagated) or purchased; be sold; disappear or die; be stock on hand
at the end of the year.

Inventories are kept for both managerial and statutory purposes.

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2. Statutory Regulations:
(i) Changes in number and value of stock on hand are of interest to the Department
of Inland Revenue (IRD) for tax estimation. An increase in stock value may be
taxable; decrease in stock value may be tax-deductable, but a taxable loss does
not result in a tax refund; only over-paid tax is refunded. IRD is interested in
wealth created by a firm, not just the taxable cash position
e.g. grower plants bulbs; assessed bulb number and value at start of year = 0; $0
assessed bulb number and value at end of year = 4,000,000; $8,000,000.

Immature plants and plants not suitable for sale have zero value.

(ii) Hazard Management, Health and Safety in Employment Act, requires that all
hazards be identified and either eliminated; where impracticable to eliminate, to
be isolated; where impracticable to isolate, to be minimised.
Hazard Inventory is required by law. Accident Compensation Commission (ACC)
and Occupational Safety and Health (OSH) share information. Failure to comply
with the law can be very costly (and unprofitable).
(iii) Staff inventories: (also staff IRD numbers) record; by employment laws.
(iv) Agrichemicals: inventory required to ensure that materials are available as and
when required. The law also requires this list of inventory be kept.
Traceability of livestock at slaughter is imperative to protect overseas and local
markets from failure to withhold stock after chemical treatment for parasites, or
for antibiotics in meat. Search bacterial resistance to antibiotics.

3. Production planning:
Inventories of inputs help one to organise them to produce items for sale.
Obtaining (ordering) and holding (carrying) stock brought in from beyond the
business carries a cost.
Costs of Stock: Setting up
Ordering costs:
Carrying costs: storage of inputs to preserve their effectiveness
can be expensive.
Examples:
Ordering costs Carrying/Storage Costs
Communication Cash tied up
Negotiation Wasted space
Trucking Spoilage
Handling Shrinkage- theft and damage
Shrinkage theft and damage Logistics
Hire of pallets etc Insurance
Insurance Dated lines obsolescence
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Logistics is concerned with ensuring things are where you want them, how you want
them and when you want them. It also involves printing and recording.
Management aims to deal with these because there are costs in not having stock
available for sale:

Stock-out (being out of stock) costs include:
Lost sales; staff down-time
Cost of sending stock at short notice
Costs of interruption; wasted capacity

Setting up for new stock:
Change systems
Re-organise staff
New stock versus old: issues of form and function.
May have to deal with old stock e.g. agrichemicals

Maximise profit by:
Finding minimum order that will meet demand while obtaining supply as
cheaply as possible
Ordering supplies so that they are delivered as existing stock runs out

Why do businesses carry inventory?
Satisfy customer demand
Maintain production
Discount benefits
Hedge against future price increases.
Just In Time (JIT): (tied to quality circles and supply-chain management) aims to reduce
inventory costs to zero. But it involves more than inventory management. It is a
production philosophy.
JIT :
Relies on preventative maintenance
Reduces ordering costs with long-term contracts
Reduces carrying costs by minimising stock
Requires that suppliers supply to specification when required and
sometimes just to help out

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Just in Time supply of goods and services;
to the producer/finisher
from the producer / finisher to the customer or processing company.
Inventories should be kept to:
Assess how the business has changed since the last inventory
e.g. how successful was the sale last week? Computers can assist with
reconciliation if set up correctly.
e.g. how many lambs docked/tailed this year compared to last year?
Were livestock losses typical or abnormal?
Assess how the business can operate in future

Importance of recording resources now, in future and the changes that inevitably occur
in horticulture to stocks of inputs, products and plant material. There must always be a
concept of gaining something from the enterprise; potentially losing something and there
are usually elements of risk and commercial orientation (a profit motive).

Inventory may be formal (computerised and shared with interested third parties)
or informal (pocket note book).

The information from inventory: opening stock, purchases, sales, losses, closing stock
Time of inventory: daily, weekly, monthly, annually

Nursery Inventory

Plant Inventory System:
Management system
Minimise overselling / underselling
Work plan schedules
Labour needs
Storage requirements
Land use

Planning production programmes:
Number of variety and cultivar
Number according to age/size
Financial:
Change in inventory value
Tax calculation
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Marketing:
Stock-taking as an aid to marketing strategies; customers help to count items by
carrying them to the electronic till to pay for them, thereby avoiding having fewer unsold
stock to count.

Production:
Yield profiles for productivity forecasting or replacement policy
Input supplies to ensure availability when needed
Equipment Inventory:
Vehicles, tractors
Machinery, spray and lifting equipment etc
Develop plans for:
Security
Proper use
Maintenance
Inventory coding: (match the accountants system)
Year of purchase
Functional unit (if needed)
Purchase cost
Depreciation schedule (a book figure recorded each year by an accountant, or
the grower that enables a depreciation figure to be calculated and deducted from
income liable for income tax).
Example bulb reconciliation problem:

In operations such as bulb growing, the losses in inventory are not recorded because
bulbs die in the ground and rot away so they cant be counted. There is only interest in
the bulbs that are bought, planted/sold, and harvested.

A calla flower grower buys in 10,000 2-4 cm tubers a year and takes flowers off those
tubers in the cycle they are planted. At the end of the cycle, she digs the tubers and
replant all grades. The data in the bulk multiplication and flower production table below
can be used to determine products for sale and bulbs for retention to replant.
It should not be too difficult for you to write a spreadsheet to show the table below with formulae
to assess the effects of changing the independent variables (bulk reproduction by bulb size and
flower production by bulb size) to see their effects on the dependent outcomes (bulbs and flowers
harvested).

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Tuber
grade
Rejects
%
2 - 4 cm 4 6 cm 6 8 cm Flower Production
(stems/cycle/tuber)
2 4 cm 40% 60% 40% 30% 2 first grade stems
4 6 cm 70% 60% 25% 30% 4 first grade stems
6 8 cm 100% 5 first grade stems

Note: 6 8 cm bulbs have flowers harvested from them but at the end of their crop
cycle, they and all of their offshoot bulbs are destroyed by rotary hoe.

Stock reconciliation and flower production estimator for year 22 and year 23 of the
operation.
Year 22
Grade Opening
Balance
Purchases Flower
Production
Harvested bulbs
2 4 cm 4 6 cm 6 8 cm
2 4 cm 40,000 10,000 100,000 30,000 20,000 15,000
4 6 cm 30,000 0 120,000 18,000 7,500 9,000
6 8 cm 10,000 0 50,000 0 0 0
Totals 270,000 48,000 27,500 24,000

Year 23
Grade Opening
Balance
Purchases Flower
Production
Harvested bulbs
2 4 cm 4 6 cm 6 8 cm
2 4 cm 48,000 10,000 116,000 34,800 23,200 17,400
4 6 cm 27,500 0 110,000 16,500 6,875 8,250
6 8 cm 24,000 0 120,000 0 0 0
Totals 346,000 51,300 30,075 25,650

Please see how the numbers of flowers and harvested bulbs for each year were calculated.
Each assumption in the first table is multiplied by the number of bulbs in the relevant category
in Years 22 and 23.
Flowers: in Year 22, the grower gets 100,000 flowers from 2 4 cm bulbs: i.e. 2 flowers
per bulb from 50,000 (i.e. 40,000 + 10,000) bulbs.
Bulb reproduction: 60% of the starting number of 2 4 cm bulbs result in 2 4 cm bulbs
at the end of the year i.e. 50,000 x 0.60 = 30,000.
Of course, the grower could decide to not plant all available bulbs. She really has too few to sell
and there would be other issues to consider such as size of market, timing, pests and diseases,
labour availability, knowledge and skills. Likewise, not all flowers need to be sold if there is a risk
of over-supplying the market or physical constraints.

Question: what percent reproduction would occur in each bulb size to maintain the status quo in
year 22 i.e. Opening Balance in each bulb size = Closing Balance in each bulb size?