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	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

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?

    

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