First Report RISE OF INVENTORYThe inventory rose because PTC tyre company Mining and Industrial Tyre Supply Inc (MITSI) Australia received $15.4 million worth of tyres more than the $79.1 million worth that they sold. As a result the available stock with the company has enhanced and consequently the inventory level has enhanced. The following data will illustrate the position. Period: 2006 -2007A class items Sales 130.0 90.0COGS 100.0 68.0Inventory 7.2 13.3Cover 3.3 weeks 10.0 weeksAll other Pareto classesSales 35.0 25.0COGS 22.7 15.1Inventory 16.0 20.2Cover 38.4 weeks 70.00 weeksLast year, MITSI was badly under stocked in A class tyres and they are probably slightly overstocked this year.
The growth in inventory that is of real concern is in B, C and D Pareto classes. Whilst I do not have last year’s breakdown by B, C and D, we do know that at present there are 23.8weeks, 134.2weeks and an infinite supply in these three classes respectively. It would be safe to say that ordering at branch level is completely out of control. This is because branch managers order the majority of C class items from local suppliers and it is my calculated guess that most of the dead items were previously C class items.
Shortage of A class items and rise in C class items has increased the inventory, decrease in the sales and consequently decrease profits. The said situation has emerged due to a number of administrative and marketing factors as for example; There are any number of reasons why this has occurred, but the most obvious is that MITSI branch managers have no idea of basic business management or inventory management as they have not calculated the stock position properly and similarly they have not reported the same to the top management for placing orders to the overseas supplier for timely supply of the specific sales item. The branch managers have not compared their sales position with the corresponding period of the previous year to deduce an idea about the market demand of the products for maintaining a reasonable balance of the items in the stock.
B class items, mostly Pirchelinota product, have risen most likely because the GM and state managers have tried to increase orders to achieve the Pirchelinota base rebate quantities.
As a result the stock of other class items has not catered the demands of the market. Disproportion in the available stock for example increase in the C and D type and decrease in the A and B type. Gross margin to sales for A type is 18 % and for B type is 25 % . For C type he same figure is 22%. Due to disturbance in stock position the sales and profits has affected. RECOMMENDED INVENTORY LEVEL. It is tempting to do first cut calculations on average demand and safety stock to determine a target inventory level, but I am aware that MITSI managers are actually comfortable with the current level.
This comfort is borne of ignorance and lack of skills and business acumen resulting in the decrease in the businesses of the company and therefore profits. To propose a drastically reduced target is likely to be greeted with derision, skepticism, of which there is already a healthy dose, resulting in stubborn resistance to change. With this background, I recommend the following inventory as a first cut.
We can tighten the screws later when we other things in place. The table below contains my recommendations (assuming $100m sales), and short reasoning: