A manufacturer of air conditioner compressors is concerned that too much money is tied up in its value chain. Average raw material inventory is $50 million and work-in-process (WIP) production inventory is $20 million. Sales are $20 million per week and finished goods inventory averages $30 million. The average outstanding accounts receivable is $60 million. Assume 50 weeks in one year.
The value chain is shown below:
Raw Materials Inventory--->Production (WIP) Inventory---> Finished Goods---->Accounts Recievables
a. What is the total flow (process) time of a throughput dollar? (Hint: Use a WIP = R*T format and table as shown in Problem # 14 to organize your solution.)
b. What is the average dollar inventory in the value chain?
c. Which of the major stages—raw materials, WIP, finished goods or accounts receivable—is the best candidate for freeing up dollars for the air conditioner manufacturer?
d. What is the target level of average accounts receivable inventory if management can reduce the time a dollar spends in accounts receivable inventory (processing and collections) by one-half by improving the accounts receivable process?
e. What else does this flow time analysis problem demonstrate?