Delph Manufacturing Company is going to purchase an auto parts component from on

Question

Delph Manufacturing Company is going to purchase an auto parts component from one of two competing suppliers. Delph is going to base its decision, in part, on the supply chain performance of the two suppliers. The company has obtained the following data for average raw materials, work-in-process, and finished goods inventory value, as well as cost of goods sold for the suppliers. Supplier 2 $14,850,000 860,000 570,000 195,000 Supplier 1 Cost of goods sold Raw materials Work-in-process Finished goods $8,360,000 270,000 63,500 33,500 Each company operates 52 weeks per year Determine the number of inventory turns and the days of supply for Delph Manufacturing Company. (Round answers to 1 decimal places, e.g. 52.7. Use 52 weeks for calculation. Supplier 1 Supplier 2 Number of inventory turns Weeks of supply Determine which supplier has the best supply chain performance according to inventory turns and weeks of supply. Inventory turns Weeks of supply Best supply chain performance

Explanation / Answer

Total inventory for supplier 1

=Raw material inventory + work in process inventory +Finished goods inventory

= $270,000 + $63,500 + $33,500

= $367,000

Total inventory for supplier 2

= Raw material inventory + work in process inventory + Finished goods inventory

= $860,000 + $570,000 + $195,000

= $1625,000

Following formula may be noted:

Inventory turns = Cost of goods sold/ Total inventory

Number of weeks of supply = (Total inventory / Cost of goods sold ) x 52

Therefore ,

Number of inventory turns for supplier1 = 8360000/367000 = 22.78 ( 22.8 rounded to one decimal place )

Number of inventory turns for supplier 2 = 14850000/1625000 = 9.138 ( 9.1 rounded to one decimal place )

Weeks of supply for supplier 1 = ( 367,000/ 8360000) x 100 = 4.389 ( 4.4 rounded to one decimal place )

Weeks of supply for supplier 2 = ( 1625000/14850000) x 100 = 10.942 ( 10.9 rounded to one decimal place )

Supplier 1

Supplier 2

Number of inventory turns

22.8

9.1

Weeks of supply

4.4

10.9

To ensure lesser capital is locked up in form of inventory , it is always desirable to have a high number of inventory turns and consequently low number of weeks of supply .

On basis of above , Supplier 1 has the best supply chain performance

Inventory turns

Weeks of supply

Best supply chain performance

22.8

4.4

Supplier 1

Supplier 2

Number of inventory turns

22.8

9.1

Weeks of supply

4.4

10.9

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