Mining and Industrial Tyre Supply Inc (MITSI) distributes and sells tyres. While most of MITSI's sales come from earthmover and industrial tyres, they also stock and sell a very mixed range of truck, bus, agricultural and passenger tyres. MITSI was owner-managed, but five years ago the owner sold the business to a publicly listed corporation. Since the change in ownership, performance has not met the expectations of the new owners and in recent months, financial performance has been poor with a continued decline in sales and losses recorded.
The company, at the insistence of the parent, allowed a logistics consulting firm to perform a diagnostic of the business. One of the recommendations was that MITSI needed to appoint a full-time Supply Chain Manager - you have just been appointed to that role.
During your recruitment to MITSI, you were provided with a copy of the consultants' report. A summary of this report follows.
The markets
Earthmover tyres
These tyres are used exclusively in the mining industry. They are very big tyres with a minimum internal radius of 29 inches (the tyre industry has not yet gone metric) up to a maximum internal radius of 63 inches. The internal radius is the measure of the diameter of the wheel rim to which the tyre is fitted. (It is the hole inside the tyre). Prices range from around $6000 for the smaller tyres, up to $50000 for the largest tyres. The largest tyres weigh more than 5 tonnes and a mining haulage truck has 6 of these tyres as standard fitment. There are four key mining areas in Australia - Bowen Basin in Queensland, Kalgoorlie area in Western Australia, Hunter Valley in New South Wales and the Pilbara/Kimberley area in far north-western Australia. This latter area is supplied direct by all manufacturers. No distributors supply to this area. There are four manufacturers of earthmover tyres, none of which manufacture in Australia.
Industrial tyres
Internal radius starts at 7.5 inches (forklift tyres) and goes up to 27 inches. Prices range from $100 to $25000. Most of these tyres are used by local councils and road-making companies and of course, anyone who has a forklift.
Other items
MITSI also carries a large range of other types of tyres suitable for anything from Ag bikes, lawnmowers, shopping trolleys, tractors, cars, to trucks and buses.
Sales and inventory
The consulting firm's Pareto analysis of MITSI's sales and the split of their inventory by Pareto class is summarised in the table below:
|
Pareto
class
|
No. of
SKUs
|
Sales
$m
|
Ave.
Price $
|
Gross Margin
% to sales
|
Gross Margin
$m
|
Inventory
$m
(at cost)
|
|
A (80% of sales)
|
80
|
96.0
|
21700
|
17.0
|
16.3
|
13.8
|
|
B (16%)
|
466
|
19.2
|
1600
|
24.0
|
4.6
|
5.1
|
|
C (4%)
|
706
|
4.8
|
260
|
21.0
|
1.0
|
8.2
|
|
D (no sales)
|
506
|
0.0
|
|
0.0
|
0.0
|
6.9
|
|
Total
|
1758
|
120.0
|
|
18.3
|
21.9
|
34.0
|
Inventory level
The current inventory is $34.0 million, a historically high level. 12 months ago, the total inventory level was $26.5 million. The CEO of the parent company believed that at $26.5 million, the inventory level was already too high. Over the last 12 months, the combined inventory of A and B class items has declined by $0.1 million, but the combined inventory of C and D items has risen by $7.6 million The consultants were alarmed that the management of MITSI has never seen a Pareto analysis, did not understand what it was, and claimed that they were comfortable with the current level of inventory.
Supply chain
All Goodmich tyres are manufactured overseas, in factories located in Europe, North America, South America and China. Standard supply terms are for an average 'order-receipt-to-tyre-delivery time' of 120 days or less, with payment terms of 120 days from date of receipt by MITSI.