(Hover to enlarge)
Figure 25 MMP Long-Term Turnover
Figure 25 MMP Long-Term Turnover
Figure 26 Product-Volume Analysis
Figure 26 Product-Volume Analysis
Figure 27 Product-Volume FKT Only
Figure 27 Product-Volume FKT Only
Figure 28 Product-Volume
Detail FKT
Figure 28 Product-Volume
Detail FKT
Midwest Machinery Parts
The firm marketed and distributed replacement parts
for a particular type of industrial equipment. They
imported the majority of these SKUs from China. Most
SKU’s came as finished product, ready for sale. Some
arrived as semi-finished product that was completed in
MMP’s own shop according to customer specifications. We
will emphasize primarily those aspects of the project
involving the inventory analysis and what it reveals.
Long-Term History
Figure 25 shows MMPs overall inventory turnover for
the previous four years. Earlier history was
unavailable.
Turnover based on COG and COGS was 3.1 in 2007. It
dropped to 2.0 in 2009, rose to 3.0 in 2010. However,
recent additions to inventory indicated another drop in
turnover was imminent.
This turnover is way below average for the industry.
In fact, very few distributors in any industry have a
turnover less than 2.5. Moreover, MMP’s turnover appears
to be worsening.
Product-Volume Analysis
Figure 26 show MMP’s product lines and volumes for
the previous 6-months. The green bars represent dollar
volume at COG. The blue bars represent unit volume. The
chart shows that the FKT product group represents 74% of
total sales volume and a similar portion of unit volume.
Casual observation indicated that the vast majority of
inventory was the FKT product.
For this reason, we decided to focus the remainder of
the study on FKT products. Most of the data, charts and
tables that follow figure 26 include only those FKT
products.
Figure 27 is the P-V chart for the 1112 FKT parts.
About 100 items account for 75% of FKT sales volume. The
remaining 1000 or so items represent only 26% of sales.
Figure 28 examines the highest volume 100 items to
reveal more detail. Here we see that only about 10 part
numbers account for 42% of all FKT sales.
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(Hover to enlarge)
Figure 29 FKT Sales &
Inventory Cumulative
Figure 29 FKT Sales &
Inventory Cumulative
Usage of Inventory Funds
Figure 29 is similar to figure 27. Individual part numbers are on the X-axis and are ranked, left to right, by sales volume. The actual part number is not shown due to space constraints on the diagram. The upper curve (green) shows the cumulative percentage of total sales for each part number. The lower (red) line shows corresponding cumulative inventory for those part numbers.
In an ideal situation, inventory level for a part would reflect the sales for that part, the inventory turns would be identical for all parts and the two graphs would coincide. In practice, slower moving parts usually have higher variability, more inventory is required to compensate for the variability and turns are lower. The cumulative inventory curve would fall slightly below the cumulative sales curve in the left portion of the graph but would gradually rise to meet it.
The continued gap on the right of this graph is the result of dead inventory. It represents about $141,000 of inventory with zero sales during the six-month study period.
The gap at the left of this graph indicates that too much inventory is dedicated to slow moving items and probably insufficient inventory to fast moving items.
Fig 30 Short Term History-All Items
Figure 30 Short Term History-All Items
Short-Term History
A short-term history was compiled from a spreadsheet
maintained by the Accountants. It reflected total daily
inventory as entered into the inventory control system
from January through June. The blue line in figure 30
shows this daily value while the narrow green line is a
31-day moving average. The patterns provoked several
important questions:
• What was creating the
steady decline from January through mid-April?
• What created the
sudden, periodic, short-term increases?
The sudden, periodic increases resulted from the
arrival of shipments from China. Orders were placed one
per month (maybe) and consisted of 20-25 containers.
These were all scheduled to arrive simultaneously. The
red arrows indicate arrival dates.
The decline in inventory originated with a management
edict to reduce inventory in the face of falling sales.
After 2-3 months, shortages developed and purchasing
increased orders. However, it required 60 days or more
to build and ship the replenishment material. When these
larger orders started arriving in May, inventory
increased again.
It would require as much as two weeks to unload and
receive such a large number of containers and this is
why the increases are not instantaneous. When a shipment
arrived, most other operations were shut down and there
was a lot of commotion and confusion during receiving.
After receiving, it might take several more weeks to put
the material in its proper position and this created
even more confusion.
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