a. What are the cost savings if savings were 3%, 5%, 8% or 10% of total spend pe

Question

a. What are the cost savings if savings were 3%, 5%, 8% or 10% of total spend per year.

b.What are the Inventory turns for each of the Farm Supply Categories in Exhibit 3.

c. What is the annual carrying cost for the average inventory if the carrying cost is 25%?

d. If Annual Purchases remained constant, calculate the a) average inventory, b) inventory reduction, and carrying cost savings based on the following inventory turns:

Inventory Turns

Average Inventory

Inventory Reduction

Carrying Costs Savings

3 times

4 times

5 times

6 times

f. Based on the analysis above, how do they compare to the proposal of the MIS Director?

Inventory Turns

Average Inventory

Inventory Reduction

Carrying Costs Savings

3 times

4 times

5 times

6 times

lowa Elevators Scott McBride, direct was reviewing information collected by his analyst. Cathy units were the grain-handlin Ritchie, as he prepared for a meeting with the executive the farm supplies division management team scheduled for W rchasing at Iowa Elevators, and employed more than 2,500 people. Its two business day, June 11 The grain-handling and marketing division operated Scott had been asked by Walter Lettridgowa Eleva- approximately 300 grain elevators in the Midwest. This division represented approximately 75 percent of total department at the meeting. In preparation for the meet company revenues, although total revenues had declined by 20 percent from the previous year due to drought con- ditions that had affected farm crop production. Over the vious five years, the company had invested heavily in upgrading its elevator system to improve throughput and tor's CEO, to present a five-year plan fo y to prepare a rt analyzing all expenditures er the previous year. It was now June 3, and Scott knew ere was still a lot of work that had to be completed to get ready for the meeting the following week. increase capacity in key regions. The farm supplies division sold crop-protection prod- ucts, equipment and supplies, fertilizer, and seed through its network of country elevators and approximately 30 market IOWA ELEVATORS lowa Elevators was one of the largest grain-handling com- panies in the United States. Headquartered in Des Moines, lowa, the company had annual revenues of $2.3 billion ing centers. Revenues for this division had doubled over the previous five years as part of a strategy to tap the company's country elevator network to diversify its revenue base

Explanation / Answer

a) Cost savings if savings were

i) 3% of total spend = $728.273 Million * 3% = 21.85 Million

ii) 5% of total spend = $728.273 Million * 5% = 36.42 Million

iii) 8% of total spend = $728.273 Million * 8% = 58.26 Million

iv) 10% of total spend = $728.273 Million * 10% = 72.83 Million

b) Inventory turns for each of the farm supply category

Overall inventory turnover ratio is 2.6

C) Annual carrying cost = 25% * Avg Inventory = 25 % * $118.813 Million = $ 29.70 million

D)

$118813 -$103594

=15218.67

15218.67*25%

=3804.67

$118813- $77695

=41117.25

41117.25*25%

=10279.32

118813-62156.60

=56656.40

56656.40*25%

=14164.10

118813-51797.17

=67015.83

67015.83*25%

=16753.95

Farm supplies calculation inventory turns Crop Protection products 124696/65098 1.91 equipment & supplies 13743/22388 0.61 Fertilizer 130557/20398 6.40 seed 41787/10389 4.02

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