To read this content please select one of the options below:

(excl. tax) 30 days to view and download

A Case Analysis of Matheson Foods

International Journal of Physical Distribution & Materials Management

ISSN: 0269-8218

Article publication date: 1 June 1979

57

Abstract

As the president of a large cosmetics manufacturing firm put it, “All of management's mistakes end up in inventory”. This seems to be an accurate description of the 1977 situation at Matheson Foods. Finished goods inventories had ballooned to $40 million, which represented 16 weeks demand compared with a planned 8 weeks demand. This is a turnover ratio of a little over 3, where a ratio of 7 to 10 might be more typical for a food manufacturer. Rejected raw materials have also contributed to elevated inventory levels and the need for external storage space. Although the exact rejection rate was not known, a fair estimate seems to be a range of 7 to 15% of all raw material purchases. A rough evaluation can be made of what this means in terms of inventory value and carrying costs. With sales of approximately $100,000,000 per year and purchased materials amounting to 50% of sales, a 7% rejection rate results in $100,000 × 0.50 × 0.07 = $3,500,000 in rejected raw materials. Disposition of these materials takes 90 days or 4 turns per year. The average value of rejected materials is $3,500,000÷4 = $875,000. At an average carrying cost of 25% per year, $875,000 × 0.25 = $218,750. A rejection rate of 15% would result in a cost of $468,750 per year. It was also estimated that these materials were absorbing 7% of the internal storage space.

Citation

Ballou, R.H. (1979), "A Case Analysis of Matheson Foods", International Journal of Physical Distribution & Materials Management, Vol. 10 No. 1, pp. 68-75. https://doi.org/10.1108/eb014467

Publisher

:

MCB UP Ltd

Copyright © 1979, MCB UP Limited

Related articles