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:

	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	456	402	476	512
Canada	130	149	121	165
Europe	32	40	24	16
Cost of goods sold (total quarter)	377	362	384	431
Raw materials at the Louisville plant   (end-of-quarter)	83	41	62	86
Work-in-process and finished goods at   the Louisville plant (end-of-quarter)	197	141	140	226
Distribution center inventory   (end-of-quarter):
United states	67	51	30	40
Canada	16	14	17	18
Europe	7	6	9	5

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?

    

o	Increase the amount of inventory or increase sales or both
o	Reduce the amount of inventory or increase sales or both
o	Reduce the amount of inventory or reduce sales or both

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 [ ]

Answer 1

a)

Total COGS across all quarters = 377+362+384+431 = 1554

Raw Materials inventory = 83+41+62+86 = 272

Work-in-progress and Finished goods = 197+141+140+226 = 704

Distribution center inventory = (67+16+7) + (51+14+6) + (30+17+9) + (40+18+5) = 280

Average aggregate inventory = Raw Materials + Work-in-progress and Finished goods + Distribution center inventory

= 272+704+280
=1256

Average inventory turnover = COGS/Average aggregate inventory = 1554/1256 = 1.237261146 = 1.237 (Rounded to 3 decimal places)

b)

Correct answer is Reduce the amount of inventory or increase sales or both

Focus would be on : Reducing the WIP or distribution inventory that would have direct implication on reduction of average aggregate inventory .This will increase inventory turnover ratio.

Increase of sales also can increase inventory turnover ratio as it will increase COGS .

Decreasing inventory and increasing sales simultaneously also can increase inventory turnover ratio

c)

Weeks of supply of raw material = (Raw material inventory/COGS)*52 = ((272+500)/1554)*52 = 25.83269 = 25.83 (Rounded to 2 decimal places)