Mining and Industrial Tyre Supply Inc - Case Study Example

Title: OPERATIONS & SUPPLY CHAIN MANAGEMENT  Dated: November 5, 2008. First Report RISE OF INVENTORY The 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 -2007 A class items Sales 130.0 90.0 COGS 100.0 68.0 Inventory 7.2 13.3 Cover 3.3 weeks 10.0 weeks All other Pareto classes Sales 35.0 25.0 COGS 22.7 15.1 Inventory 16.0 20.2 Cover 38.4 weeks 70.00 weeks Last 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; a. 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. b. 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. c. 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. d. 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: a. A class: 8 weeks cover, $12.9m. High safety stock as highly erratic, though predictable, the said level of stock will cater the customer’s needs and confidence level of the product among the company and the end users will enhance and the share of the product in the market will be restored with the passage of time. b. B class: 12 weeks cover, $6.8m. Extra high safety stock, to allow greater review time. The branch managers will be in a position to review the stock position on weekly basis and the information will be passed on to the central office to take decisions for placing orders to the supplier for its timely supply. As a result there will be no shortage or increase in the inventory of the B type in the stock and finally the stock will be in a balance position. c. C class: 26 weeks cover, $1.5m. Give branches freedom to stock full sets of 4 tyres. The availability of complete set will satisfy the customers at the same site for all the products of the C type and therefore increase in the overall sales of the branch and finally of the company at the national level. d. D class: 0 weeks cover, but $1m. There will always be redundant or dead stock. The challenge is to recognize when it is going dead and prevent further ordering. A vigilant monitoring of the inventory position will help in the maintenance of the stock and no or minimum dead stock at the stores for a longer period of times. This adds to $ 22.2 million, which is slightly above the prorated value from last year. This will still be viewed as unreasonable by MITSI and we need to tackle that issue boldly with all administrative and business tactics for restoring the lost image of the company in the market for achieving the objectives of the company as per its strategic mission and goals for ensuring its sustainability and profitability with more orders, less inventory and increased sales. REDUCTION PROGRAM AND TIMING The biggest challenge is in educating the MITSI personals, such that they will understand that the $22.2 million is (a) acceptable for now and (b) nowhere near as low as we could take it, without any deterioration in customer service. Therefore we need to run a basic business skills workshop for all MITSI managers to enhance their existing business skills and therefore improving the capacity for acquiring business tactics in favor of the managers and consequently of the company. This would be followed up with a second workshop on Pareto principles and basic forecasting and inventory management for a particular period of time and finally for the whole business year. The first workshop should be scheduled within the next four weeks and the second, two weeks later than the first workshop. In the meantime, there is a considerable amount of work to be done. I will undertake a Pareto analysis of every SKU and every customer, at each branch. This will be at gross profit level, rather than sales. To take it to net profit, will cause more questions than it will answer. This analysis will take me about four weeks, as the data has to be downloaded to a PC and massaged to remove SKUs that relate only to Pirchelinota direct customers, and to correctly allocate the WA transfers which result from its separate legal status. In the two weeks after the first workshop, there is further analysis required to identify all SKUs that are dead in a location, but selling in one or more other locations. After the second workshop, I will spend time at each location, firstly to conduct an independent stocktaking, and then to work through all SKUs to identify those C class items that can be deleted from the range at that location. System data will be accurate following the stocktaking. There are eleven locations and this part of the exercise will take eight weeks. Ordering procedures and new guidelines will be discussed at each location, and a set of working instructions left at each location. Following this step, we will be in a position to commence finding buyers for all SKUs that are to be deleted. At this stage, I would allow up to 18 months for the sale and disposal of the identified C and all the D items from the existing stock position for maintaining a strategic inventory position in the market attracting the customers and ensuring the profits for the company. Reduction programs for A and B items are not required. All items are selling and inventory will reduce to acceptable levels over the next 12 months. To bring A and B item under control (they are almost 100% Pirchelinota product), I will be responsible for all order quantity calculation for all SKUs at each location. State personnel will still have to physically raise the purchase order from all the potential buyers of the item. I have already requested that download files be made available for each of the last three years. These files will contain month by month listings of sales units by SKU at each location. I have also requested download files of sales to those ex-customers who now deal direct with Pirchelinota. This is also by month, by SKU and by location. These files are in delimited text format and will take considerable time to reformat and disinfect, so that we have sales histories comparable to today’s sales and customer base. This work will be done while I am visiting each location. This information will fed into a spreadsheet to help with a basic forecasting process. I will be three months into my program by the time this data is ready for use, and this leaves us with a problem. What do we order from Pirchelinota in each of the next three months? This part is easy. Set the maximum inventory at 8 weeks (A) and 12 weeks (B), then use last year’s adjusted sales as the forecast. I have already done the adjustments for the last 12 months. This is rough, but with large safety stocks, we should avoid stock outs, unless there are further blowouts in leadtimes. I will confirm outstanding order quantities with Pirchelinota in the next day or so. ADDITIONAL RESOURCES Additional resources will be available with the reduction of the inventory in the stock .Only an amount of $22.2 million will be required for maintaining the level of the proposed inventory and the obsolete inventory will also be converted into hard money. All these steps will provide additional resources for the company to utilized for irs on going operations. (5) A detail timing for each step as mentioned in section 3 of the report is as under: Serial No. Step Timing 1 Basic business skills workshop for all MITSI managers Four week 2 Second workshop on Pareto principles and basic forecasting and inventory management Two weeks later than the first workshop 3 Undertaking a Pareto analysis of every SKU and every customer, at each branch by the Supply chain manager. Four weeks 4 Analysis to identify all SKUs that are dead in a location, but selling in one or more other locations. Four weeks. 5 Finding buyers for all SKUs that are to be deleted. Eighteen months. Second Report 1.CHANGES REQUIRED TO ACHIEVE REDUCTION Following changes are recommended that MITSI may adopt to ensure that the inventory level may remain at its reduced level. (a) The most significant change at MITSI is for the GM and all other senior managers to be educated in basic business skills. To ensure that the inventory reduction program is implemented and successfully concluded, you, as CEO, must issue the instructions to attend the workshops and then tell all managers what is going to happen. (b) Strong leadership from the CEO, in conveying the right message, effectively side-steps the GM and the other managers will do as they are told. Apart from the requirements listed in my first report, no other changes are required to achieve the reduction. 2.CHANGES REQUIRED MAINTAINING THE INVENTORY LEVEL As I said previously, the target level is still much higher than it needs to be, but it is adequate and will serve its purpose until MITSI is ready to move into the next phase. This next phase will require investment in human resources. MITSI has no business plan or goals, does not have a demand plan or forecasts, and the sales staff, such as they are, are best described as order-takers, rather than order-makers. It is imperative that at the very least, MITSI hires both a national sales manager and a national marketing manager. The extent to which additional staff will be required in these departments will be determined at a later time. These positions are critical: we need marketing skills to develop marketing plans and to take control of demand management and demand forecasting and we need sales skills in order to be able to sell the 15-20% extra product that will enable MITSI to retain its sole distributor status and start to gain the benefits of purchasing rebates. It will take more than 12 months for the inventory reduction program to really start to take effect, and during this period, MITSI must develop the processes and people skills that will be necessary for it to maintain the target inventory level and ultimately to reduce it even further. Once we have hired a sales manager, it will be necessary to have all other managers, including the GM, and the branch sales staff, attend a series of selling skills training sessions. These sessions should be compulsory. With the number of people to be trained, and the potential disruption to normal business that this might entail, I recommend that these training sessions be held over the six month period following the appointment of the sales manager. The last of these sessions will coincide, more or less, with the clearance of the C and D items. (3) MITSI is in position to meet the Michyear’s minimum annual order quantities as the sale of Michyear’s products are having their acceptance in the market and the placement of order at a specific strategic time period will ensure the delivery of the product for a specific sales month. Timely supply of the product to the customers will enhance a confidence level between MITSI and the customers and therefore, a continuous enhancement in the Michyear’s products will be the end result. In view thereof it is expected that MITSI with a lower inventory level and continuous and timely of the product will be in a position to maintain its minimum annual order quantities. (4) Yes, MITSI will return to profitability by adopting the steps as given preceding paragraphs especially lowering the inventory level, ensuring supply chain mechanism and taking strategic decisions for offering orders at a specific time for the specific class of the product. (5) A period of two years is required to restore the status of MITSI as sole distributor status for the Michyear’s products as a reduction in the inventory’s level, timely supply of the products to the customers will rebuilt the confidence of the company in the market and in a span of two years approximately hundred percent customers with improved supply chain mechanism prefer to purchase the Michyear’s products through MITSI (Douglas, 2008) (1). Reference 1. Lambert, Douglas M. Supply Chain Management: Processes, Partnerships, Performance, 3rd edition, 2008. Read More