Question

The PM Computer Company makes build-to-order (BTO) computers at its distribution center year round. The following table shows the average value (in $ millions) of component parts, work-in-process, and ?nished computers at the DC for the past four years.

years	1	2	3	4
Component parts	$20.5	27.8	30.8	37.3
Work-in-process	4.2	6.7	7.1	9.5
Finished computers	3.6	7.2	8.6	10.1
Cost of goods sold	226	345	517	680

a. Determine the number of inventory turns and the days of supply for each year.

b. As the company has grown, does it appear that the company’s supply chain performance has improved? Explain your answer.

c. If the company wants to improve its supply chain performance, what items should it focus on? Why?

Answer 1

a) Inventory Turns(Year 1) = Cost of Goods Sold/Average Inventory = 226/(20.5+4.2+3.6) = 7.99

Inventory Turns(Year 2) = 345/(27.8+6.7+7.2) = 8.27

Inventory Turns(Year 3) = 517/(30.8+7.1+8.6) = 11.12

Inventory Turns(Year 4) = 680/(37.3+9.5+10.1) = 11.95

Days of supply(Year 1) = [(Average Inventory)*365]/COGS = (28.3*365)/226 = 45.71

Days of supply(Year 2) = (41.7*365)/345 = 44.12

Days of supply(Year 3) = (46.5*365)/517 = 32.83

Days of supply(Year 4) = (56.9*365)/680 = 30.54

b) Yes, the firm's supply chain performance has improved as the number of inventory turns have increased over the years which means the firm is getting frequent orders and is replenishing the inventory rather than stocking it for long leading to higher inventory holding costs. Days of supply have decreased over years which means the firm is holding lesser inventory.

c) The firm needs to focus on reducing its component parts inventory which has increased 25% nearly from year 3 to year 4 while focusing on increase of COGS which is a reflection of the sales of the firm.