Problem 13-17 The U.S. Airfilter company has hired you as a supply chain consult
ID: 328954 • Letter: P
Question
Problem 13-17
The U.S. Airfilter company has hired you as a supply chain consultant. The company makes air filters for residential heating and air-conditioning systems. These filters are made in a single plant located in Louisville, Kentucky, in the United States. They are distributed to retailers through wholesale centers in 100 locations in the United States, Canada, and Europe. You have collected the following data relating to the value of inventory in the U.S. Airfilter supply chain:
a. What is the average inventory turnover for the firm? (Round your answer to 3 decimal places.)
Average inventory turnover
b. If you were given the assignment to increase inventory turnover, what would you focus on?
c. The company reported that it used $500M worth of raw material during the year. On average, how many weeks of supply of raw material are on hand at the factory? (Round your answer to 2 decimal places.)
Weeks of raw material supply
QUARTER 1(JANUARY
THROUGH
MARCH) QUARTER 2
(APRIL THROUGH
JUNE) QUARTER 3
(JULY
THROUGH
SEPTEMBER) QUARTER 4
(OCTOBER
THROUGH
DECEMBER) All amounts in millions of U.S. dollars Sales (total quarter): United states 582 476 700 440 Canada 112 71 97 101 Europe 74 43 42 18 Cost of goods sold (total quarter) 570 429 633 381 Raw materials at the Louisville plant
(end-of-quarter) 96 50 79 76 Work-in-process and finished goods at
the Louisville plant (end-of-quarter) 191 176 148 191 Distribution center inventory
(end-of-quarter): United states 59 54 50 60 Canada 17 13 25 20 Europe 6 6 13 6
Explanation / Answer
a. Inventory Turnover = Market Value of Sales / Ending Inventory
Market Value of Sales = 768 (582+112+74) + 590 + 839 + 559 = 2756
Ending Inventory = 82 (59+17+6) + 73 + 88 + 86 = 329
Inventory Turnover = 2756/329 = 8.376
b. As we can see the equation for inventory turnover is Market Value of Sales/ Ending Inventory
So if we want to Increase Inventory Turnover, we should increase the numerator (i.e. market value of sales) and reduce the denominator (Ending Inventory)
Thus we should, Reduce the amount of inventory or increase sales or both.
c. Total Value of Raw Materials = 500 Million USD for the year.
Average Raw Material Inventory(average of raw material inventory across 4 quarters) = 301/4 = 75.25
500/75.25 = 6.64 weeks of inventory of raw material on average.