Write an executive summary two page double spaced ( Inventory Turnover Analysis

MGMT 3620 Inventory Turnover Analysis

Executive Summary Assignment

Background: Inventory Turnover Analysis provides a metric for comparison of supply chain operations within the same industry. A higher ratio indicates higher inventory liquidity and higher efficiency of operations.

Inventory Turnover is calculated as Cost of Goods Sold divided by Inventory. Cost of Goods Sold is found on the Income Statement and Inventory is on the Balance Sheet. (See the section on Measuring Supply Chain Performance in Chapter 11: Supply Chain Management of our text.)

An improvement in operational efficiency, as indicated by a higher turnover ratio, yields two financial benefits. First, the reduced inventory results in a lower inventory carrying cost. Second, the reduced inventory results in a first year reduction in expenditures (you are operating off of already purchased inventory) and therefore, a positive cash flow impact equivalent to the reduction in inventory.

Assignment: Compare the 2014 inventory turnover results for two or more publicly traded companies. Examples: 1) AutoZone (a Memphis based company) with Advance Auto, 2) Apple, Dell, and Best Buy, 3) WalMart and Target .

Write an executive summary (two page, double spaced, 12 pt Georgia or Tahoma font) detailing the respective inventory turnover ratios for the given period, giving the equivalent number of days of inventory for each company, and the potential financial impact if the under-performing company could match the inventory turnover ratio of the higher-performing company. Assume a 25% carrying cost ratio. Be careful to use the correct units for the financial impact. (Financial numbers in Income Statements and Balance Sheets are often in $millions.)

See the attached template for the summary.

Date

Subject: AutoZone – Advance Auto Inventory Turnover Analysis

From: yourname

Introduction: Brief introduction of the two companies. One paragraph.

Results: Results of the inventory turnover analysis. Inventory turnover ratio for each and days of inventory for each. One paragraph. Comment on the results. If the ratios you calculate are not close then you probably have chosen two companies that are fundamentally different and should not be compared. Why are they different?

Improvement opportunity: What is the potential financial impact if _________ could achieve the same turnover ratio as __________. One paragraph.

In order to evaluate the improvement opportunity you must calculate the following:

1. The inventory level the underperforming company will have to achieve to match the turnover ratio of the better performing company. This is just New Inventory Level = COGS / Higher Turnover Level.

2. The savings achieved on a first year basis. This is the reduction in inventory carried = Old inventory level – New Inventory Level.

3. The annual savings due to reduced inventory carrying costs. This is the reduction in inventory (see 2) X inventory carrying cost ratio expressed as a decimal (0.25 in our example).

4. Express 2 and 3 in terms of actual savings in $. Often the financial statements are in $ millions.