WACOG Inventory Valuation

Inventory valuation is essential to making effective supply and optimization decisions. Leveraging a WACOG or weighted average cost of goods sold model provides fuel suppliers with simple and effective valuation of all fuel inventory.

Inventory Pools

Fuel suppliers must establish a method to pool or group inventory for valuation purposes. Suppliers with terminals may treat each terminal as an independent pool or terminals may be grouped together if located in a geographic proximity to each other. Fuel retailers may treat each retail location and associated satellite locations as inventory pools.

Inventory pooling establishes how inventory is grouped together to report on a current ending balance, current valuation, and then a basis for a cost of goods calculation for margin reporting.

Why WACOG Inventory Valuation

WACOG provides a smooth curve during volatile market periods. By establishing a WACOG valuation, the inventory value will trend upward or downward immediately as inventory receipts are booked with latest pricing.

Conversely, FIFO inventory tends to trail current market conditions as inventory cost uses a layer approach where we are valuing current sales on the “oldest” layer in inventory that was priced with a previous market condition.

LIFO inventory inevitably ends up with inventory cost layers that are never used as the inventory is never totally depleted. These lower layers often carry an unrealistic cost as they have existed longer than feasible with current market conditions

WACOG Supply Optimization

With a real time WACOG inventory value, fuel suppliers are able to optimize whether using inventory is the most cost effective decision. In certain market conditions, it will be advantageous to pull inventory versus pulling on a purchase contract. Other market conditions will predicate using a purchase contract and holding inventory. This decision making ability lowers supply cost continuously therefore adding margin to the business.

Real Time P&L Reporting

Flash reporting or real time profit and loss reporting is essential for fuel suppliers to manage profitability. Waiting until the month is over to have a financial picture does not provide predictable and stable margins especially in volatile markets.

With current sales revenue, product cost, and inventory valuation, real time gross margin reporting becomes feasible under a real time WACOG model. This reporting helps fuel suppliers respond and adjust during volatile markets and generate predictable and stable margins.

Key Takeaways

WACOG inventory valuation provides fuel suppliers with critical decision making ability in volatile markets for effectively optimizing supply cost. This leads to improved margins and smarter supply decisions. Real time WACOG inventory valuation also enables real time profit and loss reporting at a pool level, region level, or organization level. This enables the fuel supplier to pivot and adjust during volatile markets.

About Optistream

Optistream is a provider of SaaS based software solutions focused on the midstream wholesale and retail fuel sector. Our mission is leverage cutting edge technology to bring quantifiable solutions that maximize profit and minimize risk.

We bring 25+ years of experience in midstream fuel supply with a deep knowledge of commodity marketing, trading, and position management. We also bring a broad understanding of back office processes and ERP systems.