ASIA NOVA CERAMICS,

INC.
INVENTORY MANAGEMENT
PRESENTED BY: JULIE SUSAN GARCIA

FACTS PROVIDED:

ASIA NOVA CERAMICS, INC. ("Asia Nova") was one of the leading manufacturers
of ceramic tiles in the country. Its distribution market was the most extensive
in the industry, and its outlets were loyal to it.

The manufacturing process for ceramics was simple but extensive on capital
investments.

In 1993, with the advent of trade liberalization under the Asian Free Trade
Agreement, imported ceramic products entered the country. In the same year,
a Malaysian conglomerate went into a joint venture in the country that
threatened to cut into Asia Nova's traditional markets.

Thus, Asia Nova's 1994 sales declined by 20 per cent and profits declined
by 45 per cent.

COMPANY PLANS:

Competition:

mostly through prices

more liberal customer credit terms

Asia Nova's President Proposition:

To lower costs, run the plant at full scale but only with the efficient machinery
line, thus mothballing two other lines

Increase the availability of products and protect sales and profit margins and
accumulate inventory equal to six months of the prior year's sales in terms or
pesos, P33 million.

EXPECTATIONS:

Sales will be maintained in 1995

Prices had gone down such that competitors appeared very reluctant to
reduce selling prices further that his consultants assured him that the cost
reduction could be achieved

The plant restructuring would increase the new profit margin from 1.04
per cent of sales in 1994 to 9.5 per cent in 1995 (excluding new interest
expense in 1995)

Gross margin from 23.6 to 38 per cent.

All other balance sheet items would remain at current levels barring the
effects of the proposed strategy and his financing decisions.

FINANCING REQUEST:

Required financing of additional inventory P22.7 million (round figure

P25 million) to P33 million

Maintain cash balance at P1.0 million at any time even if Asia Nova
borrows.

RESULTING COMPUTATION FROM THE GIVEN INFORMATION:

Income statement

Sales
Cost of goods sold

% of gross
profit

% of gross
profit

1994

1995

Movement

Remarks

Sales will be
- maintained*

100.00%

86.4

100.%

86.4

-76.4%

(66.0)

62%

(53.5)

20.4

38%

32.9

Gross margin from

12.5 23.6 to 38 %

Additional cost of
(2) P Million

(12.5)

Gross profit

23.6% -

Selling, general and administrative

expenses

19.8%

(17.1)

(19.1)

2.3%

(2.0)

(2.0)

(19.1)

(21.1)

(2)

Interest expenses (short-term)

11.8
Income before tax

Income tax

1.5%

1.3

30.8%

0.4

10.5

-30.8%

3.6

3.2

*The prices might be lower in 1995 but additional sales is anticipated due to the proposed plan of the Company
plant restructuring and additional inventory, also good credit terms, which incur cash discounts.

30.77%
including
Net income

1.04%

0.9

9.5%

8.2

Profit margin from

7.3 1.04% to 9.5%

ASSUMPTIONS:

There are information not provided in the case study wherein the
management can decide on the budget/forecast:

Selling and administrative expenses should be increased due to below

probable additional costs, say additional P2 million:

the Company needs to improve their marketing strategy which will incur costs
should additional inventory will be produced.

the Company should be more aggressive without damaging the relationship with
the customers in collecting the accounts receivable which is 12% of sales in
1994

Interest expense bank loan, per research, 14.68% in 1995

Depreciation method of plant and equipment assumed to be straight-line

ASSUMPTIONS:

There are information not provided in the case study wherein the
management can decide on the budget/forecast:

Cost of restructuring of plant site say, P20 million

Question 2: Internal sources of financing

Temporary investments P3.4 million

to decide whether to sell or not, depending on the gains earned on these

investments, if above the interest to be paid in the loan (to be obtained),
consider not to sell. In this case study, the presenter decides to sell the
temporary investments

Accounts receivable P14.1 million

as discussed in the selling and administrative expenses, the Company should be

aggressive in collecting the receivables. Say, in 1995, the Company collected
50% of the receivables, P7.1 million

Balance sheet
1994

1995

Movement

% Movement

Balance sheet

Current assets
Cash
Temporary investments

2.1
3.4

17.8
- -

15.7
3.4

14.1
10.3

7.2 20.6

6.9
10.3

29.9

45.6

15.7

Plant and equipment

52.4

64.9

12.5

Total assets

82.3

110.5

28.2

Accounts receivable
Inventory

cash balance will increase with the bank loan

747.62% proceeds
-100.00%temporary investment to be sold
accounts receivable suggested to be collected and
-48.94% reduced by half
100.00%see next slide

Non-current assets

Current liabilities
Accounts payable
Bank loan - short term
Accrued liabilities

8.5 15.1 2.0 -

8.5
15.1
2.0

25.6 -

25.6

Deduct depreciation of P7.5M and add P20M for

23.85% restructuring

0.00%Other balance sheet items remained the same

0.00%Other balance sheet items remained the same
0.00%Other balance sheet items remained the same

Question 1

Asia Nova is not in a loss nor in a profitable condition. There are assets
available for reinvestment and reallocation.

The decline in the profit is mainly affected by the competitor.

The plan of restructuring seem to have a good effect in the net profit since it
will decrease COGS. But since the there are no increase in sales in 2015 based
on forecast, it is not a good idea to increase the inventory at a high level.

Question 3

The Company may obtain bank loan amounting to P20 million which can be
paid within 3-5 years considering the net profit that is expected to be 8.2
million in 1995 and is expected to increase in the coming years
Cash requirement

Inventory
Plant restructuring

10.3
20
30.3

Available financing

Temporary investment
Accounts receivable collected

3.4
6.9
10.3

Cash to be obtained from loan

20

Question 3

When the plant restructuring is completed, the Company will be more

efficient in the production, the overhead costs will be reduced, the workers
will be able to produce more units, then the Company may increase the raw
materials/finished products for sale.

Should the Bank grant the loan to the Company and the inventory level will
be stacked in the planned level (P33M), there will be probable spoilage and
obsolescence and the Bank might not be able to collect payments for the
loan.

Section 12.2 Analysis for Inventory Management and

Policy

When the inventory of Asia Nova will be maintained as high as

P33 million (6 months of the previous year's sales, the following
situation might happen as discussed in Section 12.2)

Section 12.2 Analysis for Inventory Management and

Policy

An unsuccessful sales operation has the possible adverse effects on such

company:

failure to achieve the targeted sales volume or product mix

profits would be less than the targeted figure

unsold inventory would accumulate

there might be losses from unsold products

the company might not be able to pay bank loans that finance production or purchases

unpaid creditors will closely monitor the company's operations and may foreclose on its collateral, causing
further losse

the company will be in poor financial position for subsequent operating cycles because of unsold inventory,
more pressure from creditors, erosion of net worth due to losses

Section 12 Part 4: Working Capital Management

Principles and Techniques

ECONOMIC ORDER QUANTITY

ASIA NOVA should review the ordering costs and carrying costs of the inventory (raw, goods-inprocess and finished goods) to determine the level of the inventory to keep.