Explain the reasoning behind determining the inventory turnover ratio. What value does this action have for Middleton? What are the two main ways single-sourcing can help reduce expenses? What is the risk?

Case Study

Write an executive summary, case summary, problem and issue analysis, recommendation for action, and case questions that are:
Explain the reasoning behind determining the inventory turnover ratio. What value does this action have for Middleton? What are the two main ways single-sourcing can help reduce expenses? What is the risk? What are the two types of costs that Kenisha and Ellie must consider when reevaluating the company’s make-or-buy decisions? from the given case study below.

Middleton Fine Furniture—Supply Chain Savings Opportunities
The furniture industry is a tough industry to complete in. It is a very price-driven business and every expense must be constantly reviewed and reduced as much as possible. Middleton Fine Furniture was feeling the pressure of the economic downturn and needed to cut expenses. If they could not accomplish this, the only alternative was to lay off employees.

Sally Sherman was the chief executive officer of Middleton Fine Furniture. In its 100 years of operations, Middleton Fine Furniture was extremely proud of the fact that its employees were like family and Sally didn’t feel layoffs were an option. Sally knew that until the economy turned around her company would need to tighten its belt. However, Sally wanted more than immediate financial relief, she wanted sustainable cost reductions.

Ms. Sherman met with Kenisha Yost, chief financial officer, and Ellie Gomez, vice president of supply chain management to discuss Middleton’s financial predicament. Sally emphasized that she wanted a solution that enabled Middleton Fine Furniture to manage expenses in a manner that potentially could result in recurring savings. She didn’t just want to survive this current financial crisis, she wanted to avoid it happening again.

Kenisha and Ellie began brainstorming on what they could do to provide a long term solution. Kenisha mentioned that inventory, while essential to their business, was money on the shelf. It did no good sitting there. How could they reduce inventory without endangering the business?

Ellie pointed out that the initial step to reducing inventory was to calculate their current inventory turnover ratio. Once they had that as a baseline, they could work on specific actions to reduce inventory. Furthermore, by analyzing their current inventory turnover ratio they could identify actions in other departments, other than just the supply department, that may be contributing to having too much money sitting on the shelf. Ellie explained that low inventory turnover can also be an indicator of poor sales, overstocking, and obsolete inventory. Issues that would need marketing’s support to correct.

Ellie looked deeper into Middleton Fine Furniture’s supply chain management processes. She discovered that Middleton had preferred to use multiple sourcing as its procurement method. Although multiple sourcing has many advantages, single sourcing can be advantageous as well. Although not all the parts they procured for the furniture could be single sourced, there were several that could. These were large-volume parts where quality was critical. Consequently, switching to single sourcing for these particular parts would ensure less quality variability and potentially less waste, a true cost reduction. Another advantage would be the opportunity to lower the cost of the parts because of the volume they would purchase from a single vendor. The increased volume for a single vendor would result in a lower purchase cost per unit for Middleton Fine Furniture.

As Ellie continued to ponder the problem, she reflected on the changes in Middleton’s processes over the years. In its early years Middleton made all the parts for its furniture. As it grew it sourced more and more pieces from suppliers. Ellie decided the time was right for a make-or-buy break-even analysis on the parts they still made in-house and the parts they bought. This would be a challenging task and it would take time; however, the potential benefit of reducing costs outweighed the effort required.

Kenisha and Ellie met with Sally. They outlined the three major initiatives they were pursuing, inventory turnover analysis, single versus multiple sourcing for specific parts, and an evaluation of whether to change from make or buy where applicable. Sally believed their solutions would generate the savings they needed and the processes put in place as a result would facilitate sustainable cost reductions.