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  • [Solved] Business Finance – Management Overview of Case Study Types Assignment

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    [>Management homework help](https://www.sweetstudy.com/fields/business-finance-management) [**Read: Yin: Chapter 1, pp 46-61, and pp 226-231**](https://canvas.liberty.edu/courses/768960/modules/items/78148348 "Read: Yin: Chapter 1, pp 46-61, and pp 226-231") [**Read: Keller: Chapters 1 — 2**](https:…

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    [>Management homework help](https://www.sweetstudy.com/fields/business-finance-management)

    [**Read: Yin: Chapter 1, pp 46-61, and pp 226-231**](https://canvas.liberty.edu/courses/768960/modules/items/78148348 "Read: Yin: Chapter 1, pp 46-61, and pp 226-231")

    [**Read: Keller: Chapters 1 — 2**](https://canvas.liberty.edu/courses/768960/modules/items/78148359 "Read: Keller: Chapters 1 — 2")

    [Read: Linking ontology, epistemology, and research methodology.](https://doaj.org/article/5a8cfdc6262f41fa92c56789e71e70bd "Read: Linking ontology, epistemology, and research methodology. ")

    https://doaj.org/article/5a8cfdc6262f41fa92c56789e71e70bd

    – Read: Synthesizing source ideas for your research paper.

    https://www.liberty.edu/casas/academic-success-center/wp-content/uploads/sites/28/Writing-Aid-Synthesizing-Research.pdf

    – Watch: Different Types of Case Studies

    https://canvas.liberty.edu/courses/768960/pages/watch-different-types-of-case-studies?module_item_id=78148394

    – [\
    \
    OverviewofCaseStudyTypesAssignmentInstructions1.docx](https://www.sweetstudy.com/files/overviewofcasestudytypesassignmentinstructions1-docx "OverviewofCaseStudyTypesAssignmentInstructions1.docx")
    – [\
    \
    OverviewofCaseStudyTypes.docx](https://www.sweetstudy.com/files/overviewofcasestudytypes-docx "OverviewofCaseStudyTypes.docx")

    – 2 years ago

  • [Solved] W1 paper

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    [>Accounting homework help](https://www.sweetstudy.com/fields/business-finance-accounting) – 2 years ago **files (2)** – ## W1CaseP.docx – ## CAsww1.pdf **## W1CaseP.docx** DUE Sunday 01/19 Use the Case Study Guidelines under the "Getting Started" tab as a guide on writing this. Your paper should be…

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    [>Accounting homework help](https://www.sweetstudy.com/fields/business-finance-accounting)

    – 2 years ago

    **files (2)**

    – ## W1CaseP.docx

    – ## CAsww1.pdf

    **## W1CaseP.docx**

    DUE Sunday 01/19

    Use the Case Study Guidelines under the "Getting Started" tab as a guide on writing this. Your paper should be a minimum of 3 pages (not including the cover sheet and references) and follow APA guidelines.

    Using current literature, complete "Case 17-10, ABC Retailers-Internal Controls" that is attached. Here are the specific questions that need to be answered:

    Required:

    1. What are the key considerations when evaluating the severity of a deficiency in a control that directly addresses a risk of material misstatement?

    2. Does the Assistant Controller’s failure to adequately review the Vendor Change Form represent a deficiency in the design or operating effectiveness of the control?

    3. Is the failure in the vendor request change form control indicative of a material weakness in internal control over financial reporting?

    4. Would the deficiency warrant disclosure in the Company’s Form 10-K, Item 9A? If so, what information would the Company be expected to disclose?

    5. What implications does the deficiency have on other direct or indirect controls

    6. What are the ethical issues that need to be considered? (this question is in addition to the ones at the end of the case)

    **## CAsww1.pdf**

    Copyright 2020 Deloitte Development LLC
    All Rights Reserved.

    Case 17-10
    ABC Retailers — Internal Controls

    ABC Retailers Inc. (ABC or the “Company”) is a U.S. public company that files
    quarterly and annual reports with the Securities and Exchange Commission (SEC) with a
    fiscal year end of August 31, 20X8. ABC is a leading retail chain operating more than
    100 department stores across the continental United States. ABC department stores offer
    customers a variety of nationally advertised products, including clothing, shoes, jewelry,
    and other accessories. The Company’s supply chain of products is managed through a
    single warehouse and distribution facility located in Kansas City, Missouri.

    ABC has a centralized accounting and finance structure at its corporate headquarters,
    where all processes and controls related to all significant account balances occur. ABC
    recognizes revenues from retail sales at the point of sale to its customers. Discounts
    provided to customers by the Company at the point of sale, including discounts provided
    in connection with loyalty cards, are recognized as a reduction in sales as the products are
    sold. Cost of goods sold for the Company primarily consist of inbound freight and costs
    relating to purchasing and receiving, inspection, depreciation, warehousing, internal
    transfer, and other costs of distribution.

    Case Facts

    Audit Issue

    On June 1, 20X8, the Accounts Payable (AP) Manager received an e-mail inquiry about
    the process required for a vendor to change its bank account information. The e-mail was
    sent from John Smith at a domain address listed as “Watch-Makers.” Watch Makers is a
    manufacturer that supplies ABC-branded watches to ABC’s west region department
    stores. In addition, John Smith is the primary contact at Watch Makers with whom the
    Company typically interacts.

    The AP Manager responded to the e-mail request on June 15, 20X8, with the procedures
    required of the vendor, which include completing a vendor bank account request form.
    On June 20, 20X8, the AP Manager received a reply e-mail from John Smith at “Watch-
    Makers” with a completed vendor bank account request form, which included John
    Smith’s signature, new bank account information, and other related information.

    Upon receiving the vendor bank account request form, the AP Manager completed a
    separately required Vendor Change Form for internal processing. The Vendor Change
    Form is completed for new vendors or changes to existing vendors’ information,
    including bank account information. The AP Manager sent the completed Vendor Change
    Form to ABC’s Assistant Controller, who reviewed and approved the request on June 24,
    20X8. The bank account information was updated within the Vendor Master File on June
    26, 20X8.

    Throughout the month of July 20X8, valid Watch Makers invoices were processed
    through the Company’s accounts payable process, and the valid invoices were paid in
    accordance with the Company’s process and controls for cash disbursements and wire

    Case 17-10: ABC Retailers – Internal Controls Page 2

    Copyright 2020 Deloitte Development LLC
    All Rights Reserved.

    transfers. On August 2, 20X8, the Company received an inquiry from Watch Makers
    about the expected timing of the $2 million in outstanding invoices. As a result of the
    direct interaction with Watch Makers’ employee John Smith, the Company determined
    that the previous vendor bank account change form was received from a fraudulent
    domain name with the intent to defraud the Company. The e-mail domain for Watch
    Makers is “Watch Makers,” with no hyphen, rather than “Watch-Makers,” with a hyphen.
    Both e-mails received from “Watch-Makers” were determined to be from a fraudulent
    source (that also fraudulently used John Smith’s name in the e-mail). Because the bank
    account information for Watch Makers was changed (as a result of the June 1, 20X8, e-
    mail request) approximately $2 million in payments was wired to an incorrect bank
    account.

    As noted above, there are two employees within the Company that were involved in
    processing and approving the Vendor Change Form. The Company’s policy on bank
    account change requests was put into effect and communicated by ABC’s Assistant
    Controller in a September 1, 20X7 e-mail that indicated that for each Vendor Change
    Form requesting a vendor bank account change, the accounts payable department was
    required to (1) obtain a previously processed and paid invoice from the vendor requesting
    the bank account change, (2) call the vendor using the contact information obtained from
    the prior invoice, (3) verify the authenticity of the requested bank account change request
    by directly contacting the vendor, and (4) include all relevant information obtained in
    steps (1) through (3) as an attachment to the Vendor Change Form. The Company’s
    control description relating to the review of a Vendor Change Form by the Assistant
    Controller is not explicit regarding the specific attributes of the review. However,
    because the policy was distributed by the Assistant Controller and the Assistant
    Controller is also the control owner (e.g., performs the review), there is a presumption
    that the Assistant Controller would understand that as part of her review, she should
    evaluate whether the AP Manager obtained sufficient information to confirm the
    authenticity of the bank account change request.

    Other Relevant Facts

    • Materiality — $8 million.
    • The Company processed approximately 105 vendor requested bank account changes

    during FY20X8 before the realization that the request from “Watch-Makers” was
    fraudulent (from September 1, 20X7, to August 2, 20X8). After the identification of
    the misappropriation of assets, the Company’s internal audit department obtained and
    reviewed all 105 Vendor Change Forms reviewed by the Assistant Controller, noting
    that only five Vendor Change Forms contained the information required by the
    policy. In addition, internal audit determined that the primary review procedure
    performed by the Assistant Controller related to the verification that the bank account
    number was appropriately included on the Vendor Change Form. This procedure was
    performed in all cases before the bank account information was input into the
    accounts payable system.

    • The total wire transfer payments made to the 105 vendors that requested bank account
    changes in FY20X8 totaled approximately $56.2 million (based on an analysis

    Case 17-10: ABC Retailers – Internal Controls Page 3

    Copyright 2020 Deloitte Development LLC
    All Rights Reserved.

    prepared by Internal Audit of the invoices processed and paid by the Company after
    the processing of a Vendor Change Form for the 105 vendors).

    • There are more than 30 vendors with annual purchase activity of over $20 million (12
    of which have purchase activity of over $40 million); thus, the amount of payments
    made to any single vendor in a payables cycle could approximate $2 million,
    assuming a cycle of 30 days.

    • The Company’s Chief Security Officer completed an internal investigation and
    concluded that there was no indication that the AP Manager and Assistant Controller
    were involved in the scheme that resulted in the $2 million misappropriation.

    • After the determination on August 2, 20X8, that the Vendor Change Form was from a
    fraudulent source, the Company ceased processing additional Vendor Change Forms
    until it could understand the root cause of the deficiency. On September 1, 20X8, the
    Assistant Controller sent a reminder regarding the importance of following the vendor
    bank account request change policy. The e-mail also highlighted an enhancement to
    the process, which primarily included an enhancement to the Vendor Change Form.
    The form was revised to include the following three new, explicit sections that are
    required to be completed: (1) contact phone number pulled from previously processed
    and paid vendor invoice, (2) name of individual at the vendor (from a previous
    invoice) that was contacted, and (3) date discussed/contacted. The policy e-mail
    reiterated the requirement to include a copy of the previously processed vendor
    invoice with the Vendor Change Form.

    • Internal Audit performed a thorough evaluation of the competency of the Assistant
    Controller and concluded that notwithstanding the Assistant Controller’s lack of
    historical performance, the Assistant Controller was suitably competent to perform
    the control.

    Engagement Team Note

    In planning the FY20X8 audit, the engagement team obtained an understanding of the
    internal controls related to cash disbursements. This understanding was developed
    through the engagement team’s walkthrough of the cash disbursements process. As part
    of its walkthrough procedures, the engagement team made inquiries of appropriate
    personnel, inspected relevant documentation, and in certain cases, observed the control
    performers carrying out required control procedures. As a result, the engagement team
    concluded that there were no significant changes to the cash disbursements process in the
    current year.

    The engagement team identified three risks of material misstatement relating to the cash
    disbursements process. Additionally, the team identified seven control activities within
    the cash disbursements process that address the identified risks of material misstatement
    in the excerpted worksheet (see Handout 1). As a result of the Audit Issue described
    above, the engagement team identified a control deficiency in the following control:

    CD5C — The Assistant Controller reviews each Vendor Change Form requesting a bank
    account change, including the attached supporting documentation which includes the
    following:

    Case 17-10: ABC Retailers – Internal Controls Page 4

    Copyright 2020 Deloitte Development LLC
    All Rights Reserved.

    1. A previously processed and paid invoice from the vendor requesting the bank
    account change.

    2. Details regarding a phone conversation with the vendor using the contact
    information from the obtained invoice.

    3. Verification of the authenticity of the requested bank account change request.

    The Company’s control description regarding the Assistant Controller’s review of the
    Vendor Change Form is not prescriptive regarding the specific attributes of the review.
    However, based on the Company’s policy on bank account change requests put into
    effect and communicated by the Assistant Controller in a September 1, 20X7 e-mail and
    the supporting documentation described in the control description, there is a presumption
    that the Assistant Controller would understand the primary objective of the control,
    which is to evaluate whether sufficient information was obtained by the AP Manager to
    confirm that the bank account change request was authentic.

    Required:

    1. What are the key considerations when evaluating the severity of a deficiency in a
    control that directly addresses a risk of material misstatement?

    2. Does the Assistant Controller’s failure to adequately review the Vendor Change
    Form represent a deficiency in the design or operating effectiveness of the
    control?

    3. Is the failure in the vendor request change form control indicative of a material
    weakness in internal control over financial reporting?

    4. Would the deficiency warrant disclosure in the Company’s Form 10-K, Item 9A?
    If so, what information would the Company be expected to disclose?

    5. What implications does the deficiency have on other direct or indirect controls?

    – Case 17-10
    – ABC Retailers — Internal Controls
    – Required:

    **## CAsww1.pdf**

    Copyright 2020 Deloitte Development LLC
    All Rights Reserved.

    Case 17-10
    ABC Retailers — Internal Controls

    ABC Retailers Inc. (ABC or the “Company”) is a U.S. public company that files
    quarterly and annual reports with the Securities and Exchange Commission (SEC) with a
    fiscal year end of August 31, 20X8. ABC is a leading retail chain operating more than
    100 department stores across the continental United States. ABC department stores offer
    customers a variety of nationally advertised products, including clothing, shoes, jewelry,
    and other accessories. The Company’s supply chain of products is managed through a
    single warehouse and distribution facility located in Kansas City, Missouri.

    ABC has a centralized accounting and finance structure at its corporate headquarters,
    where all processes and controls related to all significant account balances occur. ABC
    recognizes revenues from retail sales at the point of sale to its customers. Discounts
    provided to customers by the Company at the point of sale, including discounts provided
    in connection with loyalty cards, are recognized as a reduction in sales as the products are
    sold. Cost of goods sold for the Company primarily consist of inbound freight and costs
    relating to purchasing and receiving, inspection, depreciation, warehousing, internal
    transfer, and other costs of distribution.

    Case Facts

    Audit Issue

    On June 1, 20X8, the Accounts Payable (AP) Manager received an e-mail inquiry about
    the process required for a vendor to change its bank account information. The e-mail was
    sent from John Smith at a domain address listed as “Watch-Makers.” Watch Makers is a
    manufacturer that supplies ABC-branded watches to ABC’s west region department
    stores. In addition, John Smith is the primary contact at Watch Makers with whom the
    Company typically interacts.

    The AP Manager responded to the e-mail request on June 15, 20X8, with the procedures
    required of the vendor, which include completing a vendor bank account request form.
    On June 20, 20X8, the AP Manager received a reply e-mail from John Smith at “Watch-
    Makers” with a completed vendor bank account request form, which included John
    Smith’s signature, new bank account information, and other related information.

    Upon receiving the vendor bank account request form, the AP Manager completed a
    separately required Vendor Change Form for internal processing. The Vendor Change
    Form is completed for new vendors or changes to existing vendors’ information,
    including bank account information. The AP Manager sent the completed Vendor Change
    Form to ABC’s Assistant Controller, who reviewed and approved the request on June 24,
    20X8. The bank account information was updated within the Vendor Master File on June
    26, 20X8.

    Throughout the month of July 20X8, valid Watch Makers invoices were processed
    through the Company’s accounts payable process, and the valid invoices were paid in
    accordance with the Company’s process and controls for cash disbursements and wire

    Case 17-10: ABC Retailers – Internal Controls Page 2

    Copyright 2020 Deloitte Development LLC
    All Rights Reserved.

    transfers. On August 2, 20X8, the Company received an inquiry from Watch Makers
    about the expected timing of the $2 million in outstanding invoices. As a result of the
    direct interaction with Watch Makers’ employee John Smith, the Company determined
    that the previous vendor bank account change form was received from a fraudulent
    domain name with the intent to defraud the Company. The e-mail domain for Watch
    Makers is “Watch Makers,” with no hyphen, rather than “Watch-Makers,” with a hyphen.
    Both e-mails received from “Watch-Makers” were determined to be from a fraudulent
    source (that also fraudulently used John Smith’s name in the e-mail). Because the bank
    account information for Watch Makers was changed (as a result of the June 1, 20X8, e-
    mail request) approximately $2 million in payments was wired to an incorrect bank
    account.

    As noted above, there are two employees within the Company that were involved in
    processing and approving the Vendor Change Form. The Company’s policy on bank
    account change requests was put into effect and communicated by ABC’s Assistant
    Controller in a September 1, 20X7 e-mail that indicated that for each Vendor Change
    Form requesting a vendor bank account change, the accounts payable department was
    required to (1) obtain a previously processed and paid invoice from the vendor requesting
    the bank account change, (2) call the vendor using the contact information obtained from
    the prior invoice, (3) verify the authenticity of the requested bank account change request
    by directly contacting the vendor, and (4) include all relevant information obtained in
    steps (1) through (3) as an attachment to the Vendor Change Form. The Company’s
    control description relating to the review of a Vendor Change Form by the Assistant
    Controller is not explicit regarding the specific attributes of the review. However,
    because the policy was distributed by the Assistant Controller and the Assistant
    Controller is also the control owner (e.g., performs the review), there is a presumption
    that the Assistant Controller would understand that as part of her review, she should
    evaluate whether the AP Manager obtained sufficient information to confirm the
    authenticity of the bank account change request.

    Other Relevant Facts

    • Materiality — $8 million.
    • The Company processed approximately 105 vendor requested bank account changes

    during FY20X8 before the realization that the request from “Watch-Makers” was
    fraudulent (from September 1, 20X7, to August 2, 20X8). After the identification of
    the misappropriation of assets, the Company’s internal audit department obtained and
    reviewed all 105 Vendor Change Forms reviewed by the Assistant Controller, noting
    that only five Vendor Change Forms contained the information required by the
    policy. In addition, internal audit determined that the primary review procedure
    performed by the Assistant Controller related to the verification that the bank account
    number was appropriately included on the Vendor Change Form. This procedure was
    performed in all cases before the bank account information was input into the
    accounts payable system.

    • The total wire transfer payments made to the 105 vendors that requested bank account
    changes in FY20X8 totaled approximately $56.2 million (based on an analysis

    Case 17-10: ABC Retailers – Internal Controls Page 3

    Copyright 2020 Deloitte Development LLC
    All Rights Reserved.

    prepared by Internal Audit of the invoices processed and paid by the Company after
    the processing of a Vendor Change Form for the 105 vendors).

    • There are more than 30 vendors with annual purchase activity of over $20 million (12
    of which have purchase activity of over $40 million); thus, the amount of payments
    made to any single vendor in a payables cycle could approximate $2 million,
    assuming a cycle of 30 days.

    • The Company’s Chief Security Officer completed an internal investigation and
    concluded that there was no indication that the AP Manager and Assistant Controller
    were involved in the scheme that resulted in the $2 million misappropriation.

    • After the determination on August 2, 20X8, that the Vendor Change Form was from a
    fraudulent source, the Company ceased processing additional Vendor Change Forms
    until it could understand the root cause of the deficiency. On September 1, 20X8, the
    Assistant Controller sent a reminder regarding the importance of following the vendor
    bank account request change policy. The e-mail also highlighted an enhancement to
    the process, which primarily included an enhancement to the Vendor Change Form.
    The form was revised to include the following three new, explicit sections that are
    required to be completed: (1) contact phone number pulled from previously processed
    and paid vendor invoice, (2) name of individual at the vendor (from a previous
    invoice) that was contacted, and (3) date discussed/contacted. The policy e-mail
    reiterated the requirement to include a copy of the previously processed vendor
    invoice with the Vendor Change Form.

    • Internal Audit performed a thorough evaluation of the competency of the Assistant
    Controller and concluded that notwithstanding the Assistant Controller’s lack of
    historical performance, the Assistant Controller was suitably competent to perform
    the control.

    Engagement Team Note

    In planning the FY20X8 audit, the engagement team obtained an understanding of the
    internal controls related to cash disbursements. This understanding was developed
    through the engagement team’s walkthrough of the cash disbursements process. As part
    of its walkthrough procedures, the engagement team made inquiries of appropriate
    personnel, inspected relevant documentation, and in certain cases, observed the control
    performers carrying out required control procedures. As a result, the engagement team
    concluded that there were no significant changes to the cash disbursements process in the
    current year.

    The engagement team identified three risks of material misstatement relating to the cash
    disbursements process. Additionally, the team identified seven control activities within
    the cash disbursements process that address the identified risks of material misstatement
    in the excerpted worksheet (see Handout 1). As a result of the Audit Issue described
    above, the engagement team identified a control deficiency in the following control:

    CD5C — The Assistant Controller reviews each Vendor Change Form requesting a bank
    account change, including the attached supporting documentation which includes the
    following:

    Case 17-10: ABC Retailers – Internal Controls Page 4

    Copyright 2020 Deloitte Development LLC
    All Rights Reserved.

    1. A previously processed and paid invoice from the vendor requesting the bank
    account change.

    2. Details regarding a phone conversation with the vendor using the contact
    information from the obtained invoice.

    3. Verification of the authenticity of the requested bank account change request.

    The Company’s control description regarding the Assistant Controller’s review of the
    Vendor Change Form is not prescriptive regarding the specific attributes of the review.
    However, based on the Company’s policy on bank account change requests put into
    effect and communicated by the Assistant Controller in a September 1, 20X7 e-mail and
    the supporting documentation described in the control description, there is a presumption
    that the Assistant Controller would understand the primary objective of the control,
    which is to evaluate whether sufficient information was obtained by the AP Manager to
    confirm that the bank account change request was authentic.

    Required:

    1. What are the key considerations when evaluating the severity of a deficiency in a
    control that directly addresses a risk of material misstatement?

    2. Does the Assistant Controller’s failure to adequately review the Vendor Change
    Form represent a deficiency in the design or operating effectiveness of the
    control?

    3. Is the failure in the vendor request change form control indicative of a material
    weakness in internal control over financial reporting?

    4. Would the deficiency warrant disclosure in the Company’s Form 10-K, Item 9A?
    If so, what information would the Company be expected to disclose?

    5. What implications does the deficiency have on other direct or indirect controls?

    – Case 17-10
    – ABC Retailers — Internal Controls
    – Required:

    **## W1CaseP.docx**

    DUE Sunday 01/19

    Use the Case Study Guidelines under the "Getting Started" tab as a guide on writing this. Your paper should be a minimum of 3 pages (not including the cover sheet and references) and follow APA guidelines.

    Using current literature, complete "Case 17-10, ABC Retailers-Internal Controls" that is attached. Here are the specific questions that need to be answered:

    Required:

    1. What are the key considerations when evaluating the severity of a deficiency in a control that directly addresses a risk of material misstatement?

    2. Does the Assistant Controller’s failure to adequately review the Vendor Change Form represent a deficiency in the design or operating effectiveness of the control?

    3. Is the failure in the vendor request change form control indicative of a material weakness in internal control over financial reporting?

    4. Would the deficiency warrant disclosure in the Company’s Form 10-K, Item 9A? If so, what information would the Company be expected to disclose?

    5. What implications does the deficiency have on other direct or indirect controls

    6. What are the ethical issues that need to be considered? (this question is in addition to the ones at the end of the case)

    **## CAsww1.pdf**

    Copyright 2020 Deloitte Development LLC
    All Rights Reserved.

    Case 17-10
    ABC Retailers — Internal Controls

    ABC Retailers Inc. (ABC or the “Company”) is a U.S. public company that files
    quarterly and annual reports with the Securities and Exchange Commission (SEC) with a
    fiscal year end of August 31, 20X8. ABC is a leading retail chain operating more than
    100 department stores across the continental United States. ABC department stores offer
    customers a variety of nationally advertised products, including clothing, shoes, jewelry,
    and other accessories. The Company’s supply chain of products is managed through a
    single warehouse and distribution facility located in Kansas City, Missouri.

    ABC has a centralized accounting and finance structure at its corporate headquarters,
    where all processes and controls related to all significant account balances occur. ABC
    recognizes revenues from retail sales at the point of sale to its customers. Discounts
    provided to customers by the Company at the point of sale, including discounts provided
    in connection with loyalty cards, are recognized as a reduction in sales as the products are
    sold. Cost of goods sold for the Company primarily consist of inbound freight and costs
    relating to purchasing and receiving, inspection, depreciation, warehousing, internal
    transfer, and other costs of distribution.

    Case Facts

    Audit Issue

    On June 1, 20X8, the Accounts Payable (AP) Manager received an e-mail inquiry about
    the process required for a vendor to change its bank account information. The e-mail was
    sent from John Smith at a domain address listed as “Watch-Makers.” Watch Makers is a
    manufacturer that supplies ABC-branded watches to ABC’s west region department
    stores. In addition, John Smith is the primary contact at Watch Makers with whom the
    Company typically interacts.

    The AP Manager responded to the e-mail request on June 15, 20X8, with the procedures
    required of the vendor, which include completing a vendor bank account request form.
    On June 20, 20X8, the AP Manager received a reply e-mail from John Smith at “Watch-
    Makers” with a completed vendor bank account request form, which included John
    Smith’s signature, new bank account information, and other related information.

    Upon receiving the vendor bank account request form, the AP Manager completed a
    separately required Vendor Change Form for internal processing. The Vendor Change
    Form is completed for new vendors or changes to existing vendors’ information,
    including bank account information. The AP Manager sent the completed Vendor Change
    Form to ABC’s Assistant Controller, who reviewed and approved the request on June 24,
    20X8. The bank account information was updated within the Vendor Master File on June
    26, 20X8.

    Throughout the month of July 20X8, valid Watch Makers invoices were processed
    through the Company’s accounts payable process, and the valid invoices were paid in
    accordance with the Company’s process and controls for cash disbursements and wire

    Case 17-10: ABC Retailers – Internal Controls Page 2

    Copyright 2020 Deloitte Development LLC
    All Rights Reserved.

    transfers. On August 2, 20X8, the Company received an inquiry from Watch Makers
    about the expected timing of the $2 million in outstanding invoices. As a result of the
    direct interaction with Watch Makers’ employee John Smith, the Company determined
    that the previous vendor bank account change form was received from a fraudulent
    domain name with the intent to defraud the Company. The e-mail domain for Watch
    Makers is “Watch Makers,” with no hyphen, rather than “Watch-Makers,” with a hyphen.
    Both e-mails received from “Watch-Makers” were determined to be from a fraudulent
    source (that also fraudulently used John Smith’s name in the e-mail). Because the bank
    account information for Watch Makers was changed (as a result of the June 1, 20X8, e-
    mail request) approximately $2 million in payments was wired to an incorrect bank
    account.

    As noted above, there are two employees within the Company that were involved in
    processing and approving the Vendor Change Form. The Company’s policy on bank
    account change requests was put into effect and communicated by ABC’s Assistant
    Controller in a September 1, 20X7 e-mail that indicated that for each Vendor Change
    Form requesting a vendor bank account change, the accounts payable department was
    required to (1) obtain a previously processed and paid invoice from the vendor requesting
    the bank account change, (2) call the vendor using the contact information obtained from
    the prior invoice, (3) verify the authenticity of the requested bank account change request
    by directly contacting the vendor, and (4) include all relevant information obtained in
    steps (1) through (3) as an attachment to the Vendor Change Form. The Company’s
    control description relating to the review of a Vendor Change Form by the Assistant
    Controller is not explicit regarding the specific attributes of the review. However,
    because the policy was distributed by the Assistant Controller and the Assistant
    Controller is also the control owner (e.g., performs the review), there is a presumption
    that the Assistant Controller would understand that as part of her review, she should
    evaluate whether the AP Manager obtained sufficient information to confirm the
    authenticity of the bank account change request.

    Other Relevant Facts

    • Materiality — $8 million.
    • The Company processed approximately 105 vendor requested bank account changes

    during FY20X8 before the realization that the request from “Watch-Makers” was
    fraudulent (from September 1, 20X7, to August 2, 20X8). After the identification of
    the misappropriation of assets, the Company’s internal audit department obtained and
    reviewed all 105 Vendor Change Forms reviewed by the Assistant Controller, noting
    that only five Vendor Change Forms contained the information required by the
    policy. In addition, internal audit determined that the primary review procedure
    performed by the Assistant Controller related to the verification that the bank account
    number was appropriately included on the Vendor Change Form. This procedure was
    performed in all cases before the bank account information was input into the
    accounts payable system.

    • The total wire transfer payments made to the 105 vendors that requested bank account
    changes in FY20X8 totaled approximately $56.2 million (based on an analysis

    Case 17-10: ABC Retailers – Internal Controls Page 3

    Copyright 2020 Deloitte Development LLC
    All Rights Reserved.

    prepared by Internal Audit of the invoices processed and paid by the Company after
    the processing of a Vendor Change Form for the 105 vendors).

    • There are more than 30 vendors with annual purchase activity of over $20 million (12
    of which have purchase activity of over $40 million); thus, the amount of payments
    made to any single vendor in a payables cycle could approximate $2 million,
    assuming a cycle of 30 days.

    • The Company’s Chief Security Officer completed an internal investigation and
    concluded that there was no indication that the AP Manager and Assistant Controller
    were involved in the scheme that resulted in the $2 million misappropriation.

    • After the determination on August 2, 20X8, that the Vendor Change Form was from a
    fraudulent source, the Company ceased processing additional Vendor Change Forms
    until it could understand the root cause of the deficiency. On September 1, 20X8, the
    Assistant Controller sent a reminder regarding the importance of following the vendor
    bank account request change policy. The e-mail also highlighted an enhancement to
    the process, which primarily included an enhancement to the Vendor Change Form.
    The form was revised to include the following three new, explicit sections that are
    required to be completed: (1) contact phone number pulled from previously processed
    and paid vendor invoice, (2) name of individual at the vendor (from a previous
    invoice) that was contacted, and (3) date discussed/contacted. The policy e-mail
    reiterated the requirement to include a copy of the previously processed vendor
    invoice with the Vendor Change Form.

    • Internal Audit performed a thorough evaluation of the competency of the Assistant
    Controller and concluded that notwithstanding the Assistant Controller’s lack of
    historical performance, the Assistant Controller was suitably competent to perform
    the control.

    Engagement Team Note

    In planning the FY20X8 audit, the engagement team obtained an understanding of the
    internal controls related to cash disbursements. This understanding was developed
    through the engagement team’s walkthrough of the cash disbursements process. As part
    of its walkthrough procedures, the engagement team made inquiries of appropriate
    personnel, inspected relevant documentation, and in certain cases, observed the control
    performers carrying out required control procedures. As a result, the engagement team
    concluded that there were no significant changes to the cash disbursements process in the
    current year.

    The engagement team identified three risks of material misstatement relating to the cash
    disbursements process. Additionally, the team identified seven control activities within
    the cash disbursements process that address the identified risks of material misstatement
    in the excerpted worksheet (see Handout 1). As a result of the Audit Issue described
    above, the engagement team identified a control deficiency in the following control:

    CD5C — The Assistant Controller reviews each Vendor Change Form requesting a bank
    account change, including the attached supporting documentation which includes the
    following:

    Case 17-10: ABC Retailers – Internal Controls Page 4

    Copyright 2020 Deloitte Development LLC
    All Rights Reserved.

    1. A previously processed and paid invoice from the vendor requesting the bank
    account change.

    2. Details regarding a phone conversation with the vendor using the contact
    information from the obtained invoice.

    3. Verification of the authenticity of the requested bank account change request.

    The Company’s control description regarding the Assistant Controller’s review of the
    Vendor Change Form is not prescriptive regarding the specific attributes of the review.
    However, based on the Company’s policy on bank account change requests put into
    effect and communicated by the Assistant Controller in a September 1, 20X7 e-mail and
    the supporting documentation described in the control description, there is a presumption
    that the Assistant Controller would understand the primary objective of the control,
    which is to evaluate whether sufficient information was obtained by the AP Manager to
    confirm that the bank account change request was authentic.

    Required:

    1. What are the key considerations when evaluating the severity of a deficiency in a
    control that directly addresses a risk of material misstatement?

    2. Does the Assistant Controller’s failure to adequately review the Vendor Change
    Form represent a deficiency in the design or operating effectiveness of the
    control?

    3. Is the failure in the vendor request change form control indicative of a material
    weakness in internal control over financial reporting?

    4. Would the deficiency warrant disclosure in the Company’s Form 10-K, Item 9A?
    If so, what information would the Company be expected to disclose?

    5. What implications does the deficiency have on other direct or indirect controls?

    – Case 17-10
    – ABC Retailers — Internal Controls
    – Required:

    **## W1CaseP.docx**

    DUE Sunday 01/19

    Use the Case Study Guidelines under the "Getting Started" tab as a guide on writing this. Your paper should be a minimum of 3 pages (not including the cover sheet and references) and follow APA guidelines.

    Using current literature, complete "Case 17-10, ABC Retailers-Internal Controls" that is attached. Here are the specific questions that need to be answered:

    Required:

    1. What are the key considerations when evaluating the severity of a deficiency in a control that directly addresses a risk of material misstatement?

    2. Does the Assistant Controller’s failure to adequately review the Vendor Change Form represent a deficiency in the design or operating effectiveness of the control?

    3. Is the failure in the vendor request change form control indicative of a material weakness in internal control over financial reporting?

    4. Would the deficiency warrant disclosure in the Company’s Form 10-K, Item 9A? If so, what information would the Company be expected to disclose?

    5. What implications does the deficiency have on other direct or indirect controls

    6. What are the ethical issues that need to be considered? (this question is in addition to the ones at the end of the case)

    **## CAsww1.pdf**

    Copyright 2020 Deloitte Development LLC
    All Rights Reserved.

    Case 17-10
    ABC Retailers — Internal Controls

    ABC Retailers Inc. (ABC or the “Company”) is a U.S. public company that files
    quarterly and annual reports with the Securities and Exchange Commission (SEC) with a
    fiscal year end of August 31, 20X8. ABC is a leading retail chain operating more than
    100 department stores across the continental United States. ABC department stores offer
    customers a variety of nationally advertised products, including clothing, shoes, jewelry,
    and other accessories. The Company’s supply chain of products is managed through a
    single warehouse and distribution facility located in Kansas City, Missouri.

    ABC has a centralized accounting and finance structure at its corporate headquarters,
    where all processes and controls related to all significant account balances occur. ABC
    recognizes revenues from retail sales at the point of sale to its customers. Discounts
    provided to customers by the Company at the point of sale, including discounts provided
    in connection with loyalty cards, are recognized as a reduction in sales as the products are
    sold. Cost of goods sold for the Company primarily consist of inbound freight and costs
    relating to purchasing and receiving, inspection, depreciation, warehousing, internal
    transfer, and other costs of distribution.

    Case Facts

    Audit Issue

    On June 1, 20X8, the Accounts Payable (AP) Manager received an e-mail inquiry about
    the process required for a vendor to change its bank account information. The e-mail was
    sent from John Smith at a domain address listed as “Watch-Makers.” Watch Makers is a
    manufacturer that supplies ABC-branded watches to ABC’s west region department
    stores. In addition, John Smith is the primary contact at Watch Makers with whom the
    Company typically interacts.

    The AP Manager responded to the e-mail request on June 15, 20X8, with the procedures
    required of the vendor, which include completing a vendor bank account request form.
    On June 20, 20X8, the AP Manager received a reply e-mail from John Smith at “Watch-
    Makers” with a completed vendor bank account request form, which included John
    Smith’s signature, new bank account information, and other related information.

    Upon receiving the vendor bank account request form, the AP Manager completed a
    separately required Vendor Change Form for internal processing. The Vendor Change
    Form is completed for new vendors or changes to existing vendors’ information,
    including bank account information. The AP Manager sent the completed Vendor Change
    Form to ABC’s Assistant Controller, who reviewed and approved the request on June 24,
    20X8. The bank account information was updated within the Vendor Master File on June
    26, 20X8.

    Throughout the month of July 20X8, valid Watch Makers invoices were processed
    through the Company’s accounts payable process, and the valid invoices were paid in
    accordance with the Company’s process and controls for cash disbursements and wire

    Case 17-10: ABC Retailers – Internal Controls Page 2

    Copyright 2020 Deloitte Development LLC
    All Rights Reserved.

    transfers. On August 2, 20X8, the Company received an inquiry from Watch Makers
    about the expected timing of the $2 million in outstanding invoices. As a result of the
    direct interaction with Watch Makers’ employee John Smith, the Company determined
    that the previous vendor bank account change form was received from a fraudulent
    domain name with the intent to defraud the Company. The e-mail domain for Watch
    Makers is “Watch Makers,” with no hyphen, rather than “Watch-Makers,” with a hyphen.
    Both e-mails received from “Watch-Makers” were determined to be from a fraudulent
    source (that also fraudulently used John Smith’s name in the e-mail). Because the bank
    account information for Watch Makers was changed (as a result of the June 1, 20X8, e-
    mail request) approximately $2 million in payments was wired to an incorrect bank
    account.

    As noted above, there are two employees within the Company that were involved in
    processing and approving the Vendor Change Form. The Company’s policy on bank
    account change requests was put into effect and communicated by ABC’s Assistant
    Controller in a September 1, 20X7 e-mail that indicated that for each Vendor Change
    Form requesting a vendor bank account change, the accounts payable department was
    required to (1) obtain a previously processed and paid invoice from the vendor requesting
    the bank account change, (2) call the vendor using the contact information obtained from
    the prior invoice, (3) verify the authenticity of the requested bank account change request
    by directly contacting the vendor, and (4) include all relevant information obtained in
    steps (1) through (3) as an attachment to the Vendor Change Form. The Company’s
    control description relating to the review of a Vendor Change Form by the Assistant
    Controller is not explicit regarding the specific attributes of the review. However,
    because the policy was distributed by the Assistant Controller and the Assistant
    Controller is also the control owner (e.g., performs the review), there is a presumption
    that the Assistant Controller would understand that as part of her review, she should
    evaluate whether the AP Manager obtained sufficient information to confirm the
    authenticity of the bank account change request.

    Other Relevant Facts

    • Materiality — $8 million.
    • The Company processed approximately 105 vendor requested bank account changes

    during FY20X8 before the realization that the request from “Watch-Makers” was
    fraudulent (from September 1, 20X7, to August 2, 20X8). After the identification of
    the misappropriation of assets, the Company’s internal audit department obtained and
    reviewed all 105 Vendor Change Forms reviewed by the Assistant Controller, noting
    that only five Vendor Change Forms contained the information required by the
    policy. In addition, internal audit determined that the primary review procedure
    performed by the Assistant Controller related to the verification that the bank account
    number was appropriately included on the Vendor Change Form. This procedure was
    performed in all cases before the bank account information was input into the
    accounts payable system.

    • The total wire transfer payments made to the 105 vendors that requested bank account
    changes in FY20X8 totaled approximately $56.2 million (based on an analysis

    Case 17-10: ABC Retailers – Internal Controls Page 3

    Copyright 2020 Deloitte Development LLC
    All Rights Reserved.

    prepared by Internal Audit of the invoices processed and paid by the Company after
    the processing of a Vendor Change Form for the 105 vendors).

    • There are more than 30 vendors with annual purchase activity of over $20 million (12
    of which have purchase activity of over $40 million); thus, the amount of payments
    made to any single vendor in a payables cycle could approximate $2 million,
    assuming a cycle of 30 days.

    • The Company’s Chief Security Officer completed an internal investigation and
    concluded that there was no indication that the AP Manager and Assistant Controller
    were involved in the scheme that resulted in the $2 million misappropriation.

    • After the determination on August 2, 20X8, that the Vendor Change Form was from a
    fraudulent source, the Company ceased processing additional Vendor Change Forms
    until it could understand the root cause of the deficiency. On September 1, 20X8, the
    Assistant Controller sent a reminder regarding the importance of following the vendor
    bank account request change policy. The e-mail also highlighted an enhancement to
    the process, which primarily included an enhancement to the Vendor Change Form.
    The form was revised to include the following three new, explicit sections that are
    required to be completed: (1) contact phone number pulled from previously processed
    and paid vendor invoice, (2) name of individual at the vendor (from a previous
    invoice) that was contacted, and (3) date discussed/contacted. The policy e-mail
    reiterated the requirement to include a copy of the previously processed vendor
    invoice with the Vendor Change Form.

    • Internal Audit performed a thorough evaluation of the competency of the Assistant
    Controller and concluded that notwithstanding the Assistant Controller’s lack of
    historical performance, the Assistant Controller was suitably competent to perform
    the control.

    Engagement Team Note

    In planning the FY20X8 audit, the engagement team obtained an understanding of the
    internal controls related to cash disbursements. This understanding was developed
    through the engagement team’s walkthrough of the cash disbursements process. As part
    of its walkthrough procedures, the engagement team made inquiries of appropriate
    personnel, inspected relevant documentation, and in certain cases, observed the control
    performers carrying out required control procedures. As a result, the engagement team
    concluded that there were no significant changes to the cash disbursements process in the
    current year.

    The engagement team identified three risks of material misstatement relating to the cash
    disbursements process. Additionally, the team identified seven control activities within
    the cash disbursements process that address the identified risks of material misstatement
    in the excerpted worksheet (see Handout 1). As a result of the Audit Issue described
    above, the engagement team identified a control deficiency in the following control:

    CD5C — The Assistant Controller reviews each Vendor Change Form requesting a bank
    account change, including the attached supporting documentation which includes the
    following:

    Case 17-10: ABC Retailers – Internal Controls Page 4

    Copyright 2020 Deloitte Development LLC
    All Rights Reserved.

    1. A previously processed and paid invoice from the vendor requesting the bank
    account change.

    2. Details regarding a phone conversation with the vendor using the contact
    information from the obtained invoice.

    3. Verification of the authenticity of the requested bank account change request.

    The Company’s control description regarding the Assistant Controller’s review of the
    Vendor Change Form is not prescriptive regarding the specific attributes of the review.
    However, based on the Company’s policy on bank account change requests put into
    effect and communicated by the Assistant Controller in a September 1, 20X7 e-mail and
    the supporting documentation described in the control description, there is a presumption
    that the Assistant Controller would understand the primary objective of the control,
    which is to evaluate whether sufficient information was obtained by the AP Manager to
    confirm that the bank account change request was authentic.

    Required:

    1. What are the key considerations when evaluating the severity of a deficiency in a
    control that directly addresses a risk of material misstatement?

    2. Does the Assistant Controller’s failure to adequately review the Vendor Change
    Form represent a deficiency in the design or operating effectiveness of the
    control?

    3. Is the failure in the vendor request change form control indicative of a material
    weakness in internal control over financial reporting?

    4. Would the deficiency warrant disclosure in the Company’s Form 10-K, Item 9A?
    If so, what information would the Company be expected to disclose?

    5. What implications does the deficiency have on other direct or indirect controls?

    – Case 17-10
    – ABC Retailers — Internal Controls
    – Required:

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    The case studies are designed to provide the opportunity for you to interpret situations involving supply chain logistics, distribution, and warehousing, and apply the material you have read and discussed.
    **In a Word document**, answer the following questions.

    **Remember all of your assignments should be in APA format. Your case study analysis is due at the end of the week and should be a minimum of 3 – 4 pages.** **Question:**

    ·
    **_As Sondra Fox, what is your analysis of the inventory problem at Covington Meters? What action would you take and why?_**

    ·
    **_What forecasting technique would you suggest for Covington Meters?_**

    ·
    **_What model would you suggest to determine order quantities and inventory levels?_**

    ·
    **_What would you suggest to assist Covington Meters with resource planning?_**

    Please answer the following questions based on textbook:
    **Purchasing and Supply Management by:** P. Fraser Johnson

    **## CaseStudy.docx**

    **Case 8–3 Sondra Fox**

    Page 250

    As the weekly senior management team meeting concluded, Roy Hoffman, president of Covington Meters (Covington) in Cincinnati, Ohio, summarized his frustration with the company’s high levels of inventory to Sondra Fox, supply chain manager: “We missed our working capital target again this year because our inventories levels are too high. I want to see a plan to cut at least $1 million in inventory in the next six months. Keep in mind that our business plan calls for a 30 percent increase in sales next year, which will be impossible to achieve if our current four-week lead time is extended. I need you to work with Chris and Gino to prepare a plan for us to review at our meeting next Monday.”

    Sondra stayed behind in the meeting room with Chris Spear, Covington’s CFO, and Gino Ricci, operations manager, as the other members of the senior management team left the room. It was Monday, January 19, and all three people had been expecting Roy to raise the problem of high inventories at the meeting. Understanding that Gino had to leave for another meeting shortly, Sondra got right to her point: “I have run some inventory reports and will get this information out to you later this morning. I suggest we set aside a couple of hours on Tuesday or Wednesday to get together and prepare a plan for the meeting next week. Let me know your availability and I will set something up.”

    **COVINGTON METERS LTD.**

    The transportation system for natural gas consisted of a complex network of pipelines, designed to efficiently move natural gas from its origin to where it was needed. Utilities and pipeline companies used metering systems to measure and regulate the amount of natural gas entering, exiting, and flowing through their pipeline systems. Metering requirements differed based on the diameter, pressure, and volume of the pipeline. For example, transmission pipeline networks were often large in diameter, designed to carry high volumes of natural gas compressed to as much as 1,500 pounds per square inch (psi).

    Natural gas meter capacity was measured in standard cubic feet per hour (SCFH). Covington designed and manufactured rotary meters ranging in size from 600 SCFH to 56,000 SCFH. Customers were mostly gas utility companies and its products were sold and distributed in North America, Western Europe, and Asia. Although the company offered 14 standard product sizes (e.g., 600 SCFH, 1,000 SCFH, 1,500 SCFH, and 2,000 SCFH), orders were customized to customer specifications. For example, eight options were available for measuring gas flow (e.g., five mechanical and three electronic), and each meter was available in metric and imperial units. In addition, customers also specified installation requirements (e.g., pipe connections), accessories (e.g., restrictor orifice plates), and exterior shields (e.g., metal or plastic). Order sizes varied significantly, ranging from 5 to 2,000 units, and lead times were 4 weeks, compared to 8 to 12 weeks for Covington’s competitors. Prices ranged from $600 to $5,000 per meter, with an average selling price of approximately $1,250 per meter.

    Covington had been acquired two years prior by a local private equity firm, when the owner and founder of the business decided to retire. The previous owner had developed a durable product, but preferred to focus sales efforts on utilities in the Midwest region. Roy Hoffman, a seasoned industry executive, was hired by the new owners with a mandate to grow the business and strengthen the management team. Each member of the senior management team, including Sondra, had joined Covington in the last two years. Company sales were $20 million in the most recent fiscal year ended April 30, compared to $14 million the previous year. Sales at Covington had doubled since the acquisition, and the five-year business plan targeted $40 million in revenues.

    Manufacturing costs, including depreciation of approximately $2 million per year, were approximately 50 percent of revenues. Selling, general, and administrative (SG&A) expenses, including rent, represented about 33 percent of revenues. The company was currently carrying a high debt load, as a result of the financial structure set up by the new owner following the acquisition two years prior. As a result, interest costs were approximately $1 million per year.

    Page 251

    Gas utility companies placed multiyear orders with suppliers, typically for a term of three years, with volumes dependent on meter replacement forecasts. Utilities used a competitive RFQ process, with bidders prequalified based on a formal evaluation process that usually included a supplier audit. Contracts were awarded on the basis of price, usually as part of a dual sourcing arrangement. The average contract was approximately $2 million per year.

    A second market segment was short lead time, or rush orders. Because most utilities did not carry large amounts of inventories, special circumstances sometimes created shortages and required fast deliveries to avoid downtime on their pipeline network. In these situations, product availability was the main criterion used in supplier selection.

    Roy had been working hard, using his industry connections, during the previous two years to position Covington to compete in both market segments. However, qualifying Covington for long-term contracts was a multiyear process since most utilities had several established, qualified meter suppliers for their RFQ process. Consequently, much of Covington’s recent growth had come from rush orders. However, the sales team had made inroads with several large utilities recently for participation in bids for long-term contracts, and it was expected that this market segment would help accelerate growth in the next three years.

    **PRODUCTION OPERATIONS**

    Covington operated two shifts, with minimal overtime, and employed a total of 85 production workers. There were five departments in the plant: machining, painting and anodizing, subassembly, final assembly, and testing and proving. Labor efficiency in the plant averaged 85 percent, measured by actual labor hours per meter divided by standard hours per meter, and scrap costs were negligible. Connie Linn, production manager, scheduled the plant and set staffing levels. Connie reported to Gino Ricci.

    Meter production involved three subassemblies: pressure body, flow module, and accessories. The pressure body included machined components, such as the housing, impellers, and head plate. Castings where ordered from local suppliers, with an average lead time of 10 to 12 weeks, and machined in-house. Flow modules measured the volume of gas as it flowed through the meter. Approximately one-half of the electronic modules were purchased from a large supplier with lead times ranging from 10 to 15 weeks at an average cost of approximately $90. Covington also offered its own branded electronic module that was assembled in-house and required the acquisition of component parts that ranged in cost from less than 10 cents each (e.g., resistors and diodes) to more than $100 each (e.g., transducers). Subassemblies for high-volume mechanical modules were sourced from a supplier in Mexico, with the balance of mechanical modules assembled in-house. Lead times from the Mexican supplier were 8 to 12 weeks. Accessories included shields, connectors, and restrictor plates. Machining for most accessories were performed in-house with raw material lead times ranging from six to eight weeks.

    Reorder points for raw material components were set in Covington’s ERP system, using supplier lead times and preestablished safety stock levels. The production schedule was entered into the system, and Alex Dolan, materials planner in the supply chain group, ran a report each week and placed orders with suppliers.

    Covington’s manufacturing strategy was to machine critical components in-house, such as impellers, pressure body housings, and head plates. The machining department included five computer numeric control (CNC) lathes and two CNC grinders. Sondra believed that the current capacity of the plant could support approximately $28 to $30 million in sales.

    **INVENTORY REDUCTION PLAN**

    Sondra received information from the sales department each month outlining pending bids and orders. This information was used to develop a forecast and place orders with suppliers. However, raw material and work-in-progress inventories had remained high, despite Sondra’s efforts to make reductions. Exhibits 1 and 2 provide inventory investments and quantities by category.

    ![A screenshot of a data sheet Description automatically generated](https://www.sweetstudy.com/questions/gscmcs)

    ![A table with numbers and text Description automatically generated](https://www.sweetstudy.com/questions/gscmcs)

    Sondra described the challenges she faced balancing lead times and inventory levels:

    Page 252

    Long raw material lead times require that we place bets on product mix and volumes before we get orders from customers. We do our best to work with sales and production, but it is impossible to predict exactly what our customers will order and when. As a result, we end up with excess and slow-moving inventory. For example, we might expect to get an order for 100 metric 1,500 SCFH meters from a customer, but the order might come in at 85 meters spread over six months. We end up holding the surplus inventory until another order is received for a similar product.

    Another problem is supplier minimum order quantities. All of our orders are built to customer specifications. Every customer has their own unique specifications, requiring special orders for everything from electronics to accessories. Using the same example for a 100-meter order, we might need special mounting plates, with a minimum order quantity of 500 pieces. As a result, we have $1.4 million in slow-moving raw material and work-in-progress inventory, which we define as inventory that has an age of more than 180 days in stock.

    Page 253

    Our finished goods inventory levels are nominal, usually between $150,000 and $200,000. All finished products are assembled to customer order and shipped out almost immediately. We need a plan to get our raw material and work-in-progress inventories under control. With sales increasing, the problem is only going to get worse.

    ## image1.png

    ## image2.png

    **## CaseStudy.docx**

    **Case 8–3 Sondra Fox**

    Page 250

    As the weekly senior management team meeting concluded, Roy Hoffman, president of Covington Meters (Covington) in Cincinnati, Ohio, summarized his frustration with the company’s high levels of inventory to Sondra Fox, supply chain manager: “We missed our working capital target again this year because our inventories levels are too high. I want to see a plan to cut at least $1 million in inventory in the next six months. Keep in mind that our business plan calls for a 30 percent increase in sales next year, which will be impossible to achieve if our current four-week lead time is extended. I need you to work with Chris and Gino to prepare a plan for us to review at our meeting next Monday.”

    Sondra stayed behind in the meeting room with Chris Spear, Covington’s CFO, and Gino Ricci, operations manager, as the other members of the senior management team left the room. It was Monday, January 19, and all three people had been expecting Roy to raise the problem of high inventories at the meeting. Understanding that Gino had to leave for another meeting shortly, Sondra got right to her point: “I have run some inventory reports and will get this information out to you later this morning. I suggest we set aside a couple of hours on Tuesday or Wednesday to get together and prepare a plan for the meeting next week. Let me know your availability and I will set something up.”

    **COVINGTON METERS LTD.**

    The transportation system for natural gas consisted of a complex network of pipelines, designed to efficiently move natural gas from its origin to where it was needed. Utilities and pipeline companies used metering systems to measure and regulate the amount of natural gas entering, exiting, and flowing through their pipeline systems. Metering requirements differed based on the diameter, pressure, and volume of the pipeline. For example, transmission pipeline networks were often large in diameter, designed to carry high volumes of natural gas compressed to as much as 1,500 pounds per square inch (psi).

    Natural gas meter capacity was measured in standard cubic feet per hour (SCFH). Covington designed and manufactured rotary meters ranging in size from 600 SCFH to 56,000 SCFH. Customers were mostly gas utility companies and its products were sold and distributed in North America, Western Europe, and Asia. Although the company offered 14 standard product sizes (e.g., 600 SCFH, 1,000 SCFH, 1,500 SCFH, and 2,000 SCFH), orders were customized to customer specifications. For example, eight options were available for measuring gas flow (e.g., five mechanical and three electronic), and each meter was available in metric and imperial units. In addition, customers also specified installation requirements (e.g., pipe connections), accessories (e.g., restrictor orifice plates), and exterior shields (e.g., metal or plastic). Order sizes varied significantly, ranging from 5 to 2,000 units, and lead times were 4 weeks, compared to 8 to 12 weeks for Covington’s competitors. Prices ranged from $600 to $5,000 per meter, with an average selling price of approximately $1,250 per meter.

    Covington had been acquired two years prior by a local private equity firm, when the owner and founder of the business decided to retire. The previous owner had developed a durable product, but preferred to focus sales efforts on utilities in the Midwest region. Roy Hoffman, a seasoned industry executive, was hired by the new owners with a mandate to grow the business and strengthen the management team. Each member of the senior management team, including Sondra, had joined Covington in the last two years. Company sales were $20 million in the most recent fiscal year ended April 30, compared to $14 million the previous year. Sales at Covington had doubled since the acquisition, and the five-year business plan targeted $40 million in revenues.

    Manufacturing costs, including depreciation of approximately $2 million per year, were approximately 50 percent of revenues. Selling, general, and administrative (SG&A) expenses, including rent, represented about 33 percent of revenues. The company was currently carrying a high debt load, as a result of the financial structure set up by the new owner following the acquisition two years prior. As a result, interest costs were approximately $1 million per year.

    Page 251

    Gas utility companies placed multiyear orders with suppliers, typically for a term of three years, with volumes dependent on meter replacement forecasts. Utilities used a competitive RFQ process, with bidders prequalified based on a formal evaluation process that usually included a supplier audit. Contracts were awarded on the basis of price, usually as part of a dual sourcing arrangement. The average contract was approximately $2 million per year.

    A second market segment was short lead time, or rush orders. Because most utilities did not carry large amounts of inventories, special circumstances sometimes created shortages and required fast deliveries to avoid downtime on their pipeline network. In these situations, product availability was the main criterion used in supplier selection.

    Roy had been working hard, using his industry connections, during the previous two years to position Covington to compete in both market segments. However, qualifying Covington for long-term contracts was a multiyear process since most utilities had several established, qualified meter suppliers for their RFQ process. Consequently, much of Covington’s recent growth had come from rush orders. However, the sales team had made inroads with several large utilities recently for participation in bids for long-term contracts, and it was expected that this market segment would help accelerate growth in the next three years.

    **PRODUCTION OPERATIONS**

    Covington operated two shifts, with minimal overtime, and employed a total of 85 production workers. There were five departments in the plant: machining, painting and anodizing, subassembly, final assembly, and testing and proving. Labor efficiency in the plant averaged 85 percent, measured by actual labor hours per meter divided by standard hours per meter, and scrap costs were negligible. Connie Linn, production manager, scheduled the plant and set staffing levels. Connie reported to Gino Ricci.

    Meter production involved three subassemblies: pressure body, flow module, and accessories. The pressure body included machined components, such as the housing, impellers, and head plate. Castings where ordered from local suppliers, with an average lead time of 10 to 12 weeks, and machined in-house. Flow modules measured the volume of gas as it flowed through the meter. Approximately one-half of the electronic modules were purchased from a large supplier with lead times ranging from 10 to 15 weeks at an average cost of approximately $90. Covington also offered its own branded electronic module that was assembled in-house and required the acquisition of component parts that ranged in cost from less than 10 cents each (e.g., resistors and diodes) to more than $100 each (e.g., transducers). Subassemblies for high-volume mechanical modules were sourced from a supplier in Mexico, with the balance of mechanical modules assembled in-house. Lead times from the Mexican supplier were 8 to 12 weeks. Accessories included shields, connectors, and restrictor plates. Machining for most accessories were performed in-house with raw material lead times ranging from six to eight weeks.

    Reorder points for raw material components were set in Covington’s ERP system, using supplier lead times and preestablished safety stock levels. The production schedule was entered into the system, and Alex Dolan, materials planner in the supply chain group, ran a report each week and placed orders with suppliers.

    Covington’s manufacturing strategy was to machine critical components in-house, such as impellers, pressure body housings, and head plates. The machining department included five computer numeric control (CNC) lathes and two CNC grinders. Sondra believed that the current capacity of the plant could support approximately $28 to $30 million in sales.

    **INVENTORY REDUCTION PLAN**

    Sondra received information from the sales department each month outlining pending bids and orders. This information was used to develop a forecast and place orders with suppliers. However, raw material and work-in-progress inventories had remained high, despite Sondra’s efforts to make reductions. Exhibits 1 and 2 provide inventory investments and quantities by category.

    ![A screenshot of a data sheet Description automatically generated](https://www.sweetstudy.com/questions/gscmcs)

    ![A table with numbers and text Description automatically generated](https://www.sweetstudy.com/questions/gscmcs)

    Sondra described the challenges she faced balancing lead times and inventory levels:

    Page 252

    Long raw material lead times require that we place bets on product mix and volumes before we get orders from customers. We do our best to work with sales and production, but it is impossible to predict exactly what our customers will order and when. As a result, we end up with excess and slow-moving inventory. For example, we might expect to get an order for 100 metric 1,500 SCFH meters from a customer, but the order might come in at 85 meters spread over six months. We end up holding the surplus inventory until another order is received for a similar product.

    Another problem is supplier minimum order quantities. All of our orders are built to customer specifications. Every customer has their own unique specifications, requiring special orders for everything from electronics to accessories. Using the same example for a 100-meter order, we might need special mounting plates, with a minimum order quantity of 500 pieces. As a result, we have $1.4 million in slow-moving raw material and work-in-progress inventory, which we define as inventory that has an age of more than 180 days in stock.

    Page 253

    Our finished goods inventory levels are nominal, usually between $150,000 and $200,000. All finished products are assembled to customer order and shipped out almost immediately. We need a plan to get our raw material and work-in-progress inventories under control. With sales increasing, the problem is only going to get worse.

    ## image1.png

    ## image2.png

    **## GSCMCS.docx**

    The case studies are designed to provide the opportunity for you to interpret situations involving supply chain logistics, distribution, and warehousing, and apply the material you have read and discussed.
    **In a Word document**, answer the following questions.

    **Remember all of your assignments should be in APA format. Your case study analysis is due at the end of the week and should be a minimum of 3 – 4 pages.** **Question:**

    ·
    **_As Sondra Fox, what is your analysis of the inventory problem at Covington Meters? What action would you take and why?_**

    ·
    **_What forecasting technique would you suggest for Covington Meters?_**

    ·
    **_What model would you suggest to determine order quantities and inventory levels?_**

    ·
    **_What would you suggest to assist Covington Meters with resource planning?_**

    Please answer the following questions based on textbook:
    **Purchasing and Supply Management by:** P. Fraser Johnson

    **## CaseStudy.docx**

    **Case 8–3 Sondra Fox**

    Page 250

    As the weekly senior management team meeting concluded, Roy Hoffman, president of Covington Meters (Covington) in Cincinnati, Ohio, summarized his frustration with the company’s high levels of inventory to Sondra Fox, supply chain manager: “We missed our working capital target again this year because our inventories levels are too high. I want to see a plan to cut at least $1 million in inventory in the next six months. Keep in mind that our business plan calls for a 30 percent increase in sales next year, which will be impossible to achieve if our current four-week lead time is extended. I need you to work with Chris and Gino to prepare a plan for us to review at our meeting next Monday.”

    Sondra stayed behind in the meeting room with Chris Spear, Covington’s CFO, and Gino Ricci, operations manager, as the other members of the senior management team left the room. It was Monday, January 19, and all three people had been expecting Roy to raise the problem of high inventories at the meeting. Understanding that Gino had to leave for another meeting shortly, Sondra got right to her point: “I have run some inventory reports and will get this information out to you later this morning. I suggest we set aside a couple of hours on Tuesday or Wednesday to get together and prepare a plan for the meeting next week. Let me know your availability and I will set something up.”

    **COVINGTON METERS LTD.**

    The transportation system for natural gas consisted of a complex network of pipelines, designed to efficiently move natural gas from its origin to where it was needed. Utilities and pipeline companies used metering systems to measure and regulate the amount of natural gas entering, exiting, and flowing through their pipeline systems. Metering requirements differed based on the diameter, pressure, and volume of the pipeline. For example, transmission pipeline networks were often large in diameter, designed to carry high volumes of natural gas compressed to as much as 1,500 pounds per square inch (psi).

    Natural gas meter capacity was measured in standard cubic feet per hour (SCFH). Covington designed and manufactured rotary meters ranging in size from 600 SCFH to 56,000 SCFH. Customers were mostly gas utility companies and its products were sold and distributed in North America, Western Europe, and Asia. Although the company offered 14 standard product sizes (e.g., 600 SCFH, 1,000 SCFH, 1,500 SCFH, and 2,000 SCFH), orders were customized to customer specifications. For example, eight options were available for measuring gas flow (e.g., five mechanical and three electronic), and each meter was available in metric and imperial units. In addition, customers also specified installation requirements (e.g., pipe connections), accessories (e.g., restrictor orifice plates), and exterior shields (e.g., metal or plastic). Order sizes varied significantly, ranging from 5 to 2,000 units, and lead times were 4 weeks, compared to 8 to 12 weeks for Covington’s competitors. Prices ranged from $600 to $5,000 per meter, with an average selling price of approximately $1,250 per meter.

    Covington had been acquired two years prior by a local private equity firm, when the owner and founder of the business decided to retire. The previous owner had developed a durable product, but preferred to focus sales efforts on utilities in the Midwest region. Roy Hoffman, a seasoned industry executive, was hired by the new owners with a mandate to grow the business and strengthen the management team. Each member of the senior management team, including Sondra, had joined Covington in the last two years. Company sales were $20 million in the most recent fiscal year ended April 30, compared to $14 million the previous year. Sales at Covington had doubled since the acquisition, and the five-year business plan targeted $40 million in revenues.

    Manufacturing costs, including depreciation of approximately $2 million per year, were approximately 50 percent of revenues. Selling, general, and administrative (SG&A) expenses, including rent, represented about 33 percent of revenues. The company was currently carrying a high debt load, as a result of the financial structure set up by the new owner following the acquisition two years prior. As a result, interest costs were approximately $1 million per year.

    Page 251

    Gas utility companies placed multiyear orders with suppliers, typically for a term of three years, with volumes dependent on meter replacement forecasts. Utilities used a competitive RFQ process, with bidders prequalified based on a formal evaluation process that usually included a supplier audit. Contracts were awarded on the basis of price, usually as part of a dual sourcing arrangement. The average contract was approximately $2 million per year.

    A second market segment was short lead time, or rush orders. Because most utilities did not carry large amounts of inventories, special circumstances sometimes created shortages and required fast deliveries to avoid downtime on their pipeline network. In these situations, product availability was the main criterion used in supplier selection.

    Roy had been working hard, using his industry connections, during the previous two years to position Covington to compete in both market segments. However, qualifying Covington for long-term contracts was a multiyear process since most utilities had several established, qualified meter suppliers for their RFQ process. Consequently, much of Covington’s recent growth had come from rush orders. However, the sales team had made inroads with several large utilities recently for participation in bids for long-term contracts, and it was expected that this market segment would help accelerate growth in the next three years.

    **PRODUCTION OPERATIONS**

    Covington operated two shifts, with minimal overtime, and employed a total of 85 production workers. There were five departments in the plant: machining, painting and anodizing, subassembly, final assembly, and testing and proving. Labor efficiency in the plant averaged 85 percent, measured by actual labor hours per meter divided by standard hours per meter, and scrap costs were negligible. Connie Linn, production manager, scheduled the plant and set staffing levels. Connie reported to Gino Ricci.

    Meter production involved three subassemblies: pressure body, flow module, and accessories. The pressure body included machined components, such as the housing, impellers, and head plate. Castings where ordered from local suppliers, with an average lead time of 10 to 12 weeks, and machined in-house. Flow modules measured the volume of gas as it flowed through the meter. Approximately one-half of the electronic modules were purchased from a large supplier with lead times ranging from 10 to 15 weeks at an average cost of approximately $90. Covington also offered its own branded electronic module that was assembled in-house and required the acquisition of component parts that ranged in cost from less than 10 cents each (e.g., resistors and diodes) to more than $100 each (e.g., transducers). Subassemblies for high-volume mechanical modules were sourced from a supplier in Mexico, with the balance of mechanical modules assembled in-house. Lead times from the Mexican supplier were 8 to 12 weeks. Accessories included shields, connectors, and restrictor plates. Machining for most accessories were performed in-house with raw material lead times ranging from six to eight weeks.

    Reorder points for raw material components were set in Covington’s ERP system, using supplier lead times and preestablished safety stock levels. The production schedule was entered into the system, and Alex Dolan, materials planner in the supply chain group, ran a report each week and placed orders with suppliers.

    Covington’s manufacturing strategy was to machine critical components in-house, such as impellers, pressure body housings, and head plates. The machining department included five computer numeric control (CNC) lathes and two CNC grinders. Sondra believed that the current capacity of the plant could support approximately $28 to $30 million in sales.

    **INVENTORY REDUCTION PLAN**

    Sondra received information from the sales department each month outlining pending bids and orders. This information was used to develop a forecast and place orders with suppliers. However, raw material and work-in-progress inventories had remained high, despite Sondra’s efforts to make reductions. Exhibits 1 and 2 provide inventory investments and quantities by category.

    ![A screenshot of a data sheet Description automatically generated](https://www.sweetstudy.com/questions/gscmcs)

    ![A table with numbers and text Description automatically generated](https://www.sweetstudy.com/questions/gscmcs)

    Sondra described the challenges she faced balancing lead times and inventory levels:

    Page 252

    Long raw material lead times require that we place bets on product mix and volumes before we get orders from customers. We do our best to work with sales and production, but it is impossible to predict exactly what our customers will order and when. As a result, we end up with excess and slow-moving inventory. For example, we might expect to get an order for 100 metric 1,500 SCFH meters from a customer, but the order might come in at 85 meters spread over six months. We end up holding the surplus inventory until another order is received for a similar product.

    Another problem is supplier minimum order quantities. All of our orders are built to customer specifications. Every customer has their own unique specifications, requiring special orders for everything from electronics to accessories. Using the same example for a 100-meter order, we might need special mounting plates, with a minimum order quantity of 500 pieces. As a result, we have $1.4 million in slow-moving raw material and work-in-progress inventory, which we define as inventory that has an age of more than 180 days in stock.

    Page 253

    Our finished goods inventory levels are nominal, usually between $150,000 and $200,000. All finished products are assembled to customer order and shipped out almost immediately. We need a plan to get our raw material and work-in-progress inventories under control. With sales increasing, the problem is only going to get worse.

    ## image1.png

    ## image2.png

    **## GSCMCS.docx**

    The case studies are designed to provide the opportunity for you to interpret situations involving supply chain logistics, distribution, and warehousing, and apply the material you have read and discussed.
    **In a Word document**, answer the following questions.

    **Remember all of your assignments should be in APA format. Your case study analysis is due at the end of the week and should be a minimum of 3 – 4 pages.** **Question:**

    ·
    **_As Sondra Fox, what is your analysis of the inventory problem at Covington Meters? What action would you take and why?_**

    ·
    **_What forecasting technique would you suggest for Covington Meters?_**

    ·
    **_What model would you suggest to determine order quantities and inventory levels?_**

    ·
    **_What would you suggest to assist Covington Meters with resource planning?_**

    Please answer the following questions based on textbook:
    **Purchasing and Supply Management by:** P. Fraser Johnson

    **## CaseStudy.docx**

    **Case 8–3 Sondra Fox**

    Page 250

    As the weekly senior management team meeting concluded, Roy Hoffman, president of Covington Meters (Covington) in Cincinnati, Ohio, summarized his frustration with the company’s high levels of inventory to Sondra Fox, supply chain manager: “We missed our working capital target again this year because our inventories levels are too high. I want to see a plan to cut at least $1 million in inventory in the next six months. Keep in mind that our business plan calls for a 30 percent increase in sales next year, which will be impossible to achieve if our current four-week lead time is extended. I need you to work with Chris and Gino to prepare a plan for us to review at our meeting next Monday.”

    Sondra stayed behind in the meeting room with Chris Spear, Covington’s CFO, and Gino Ricci, operations manager, as the other members of the senior management team left the room. It was Monday, January 19, and all three people had been expecting Roy to raise the problem of high inventories at the meeting. Understanding that Gino had to leave for another meeting shortly, Sondra got right to her point: “I have run some inventory reports and will get this information out to you later this morning. I suggest we set aside a couple of hours on Tuesday or Wednesday to get together and prepare a plan for the meeting next week. Let me know your availability and I will set something up.”

    **COVINGTON METERS LTD.**

    The transportation system for natural gas consisted of a complex network of pipelines, designed to efficiently move natural gas from its origin to where it was needed. Utilities and pipeline companies used metering systems to measure and regulate the amount of natural gas entering, exiting, and flowing through their pipeline systems. Metering requirements differed based on the diameter, pressure, and volume of the pipeline. For example, transmission pipeline networks were often large in diameter, designed to carry high volumes of natural gas compressed to as much as 1,500 pounds per square inch (psi).

    Natural gas meter capacity was measured in standard cubic feet per hour (SCFH). Covington designed and manufactured rotary meters ranging in size from 600 SCFH to 56,000 SCFH. Customers were mostly gas utility companies and its products were sold and distributed in North America, Western Europe, and Asia. Although the company offered 14 standard product sizes (e.g., 600 SCFH, 1,000 SCFH, 1,500 SCFH, and 2,000 SCFH), orders were customized to customer specifications. For example, eight options were available for measuring gas flow (e.g., five mechanical and three electronic), and each meter was available in metric and imperial units. In addition, customers also specified installation requirements (e.g., pipe connections), accessories (e.g., restrictor orifice plates), and exterior shields (e.g., metal or plastic). Order sizes varied significantly, ranging from 5 to 2,000 units, and lead times were 4 weeks, compared to 8 to 12 weeks for Covington’s competitors. Prices ranged from $600 to $5,000 per meter, with an average selling price of approximately $1,250 per meter.

    Covington had been acquired two years prior by a local private equity firm, when the owner and founder of the business decided to retire. The previous owner had developed a durable product, but preferred to focus sales efforts on utilities in the Midwest region. Roy Hoffman, a seasoned industry executive, was hired by the new owners with a mandate to grow the business and strengthen the management team. Each member of the senior management team, including Sondra, had joined Covington in the last two years. Company sales were $20 million in the most recent fiscal year ended April 30, compared to $14 million the previous year. Sales at Covington had doubled since the acquisition, and the five-year business plan targeted $40 million in revenues.

    Manufacturing costs, including depreciation of approximately $2 million per year, were approximately 50 percent of revenues. Selling, general, and administrative (SG&A) expenses, including rent, represented about 33 percent of revenues. The company was currently carrying a high debt load, as a result of the financial structure set up by the new owner following the acquisition two years prior. As a result, interest costs were approximately $1 million per year.

    Page 251

    Gas utility companies placed multiyear orders with suppliers, typically for a term of three years, with volumes dependent on meter replacement forecasts. Utilities used a competitive RFQ process, with bidders prequalified based on a formal evaluation process that usually included a supplier audit. Contracts were awarded on the basis of price, usually as part of a dual sourcing arrangement. The average contract was approximately $2 million per year.

    A second market segment was short lead time, or rush orders. Because most utilities did not carry large amounts of inventories, special circumstances sometimes created shortages and required fast deliveries to avoid downtime on their pipeline network. In these situations, product availability was the main criterion used in supplier selection.

    Roy had been working hard, using his industry connections, during the previous two years to position Covington to compete in both market segments. However, qualifying Covington for long-term contracts was a multiyear process since most utilities had several established, qualified meter suppliers for their RFQ process. Consequently, much of Covington’s recent growth had come from rush orders. However, the sales team had made inroads with several large utilities recently for participation in bids for long-term contracts, and it was expected that this market segment would help accelerate growth in the next three years.

    **PRODUCTION OPERATIONS**

    Covington operated two shifts, with minimal overtime, and employed a total of 85 production workers. There were five departments in the plant: machining, painting and anodizing, subassembly, final assembly, and testing and proving. Labor efficiency in the plant averaged 85 percent, measured by actual labor hours per meter divided by standard hours per meter, and scrap costs were negligible. Connie Linn, production manager, scheduled the plant and set staffing levels. Connie reported to Gino Ricci.

    Meter production involved three subassemblies: pressure body, flow module, and accessories. The pressure body included machined components, such as the housing, impellers, and head plate. Castings where ordered from local suppliers, with an average lead time of 10 to 12 weeks, and machined in-house. Flow modules measured the volume of gas as it flowed through the meter. Approximately one-half of the electronic modules were purchased from a large supplier with lead times ranging from 10 to 15 weeks at an average cost of approximately $90. Covington also offered its own branded electronic module that was assembled in-house and required the acquisition of component parts that ranged in cost from less than 10 cents each (e.g., resistors and diodes) to more than $100 each (e.g., transducers). Subassemblies for high-volume mechanical modules were sourced from a supplier in Mexico, with the balance of mechanical modules assembled in-house. Lead times from the Mexican supplier were 8 to 12 weeks. Accessories included shields, connectors, and restrictor plates. Machining for most accessories were performed in-house with raw material lead times ranging from six to eight weeks.

    Reorder points for raw material components were set in Covington’s ERP system, using supplier lead times and preestablished safety stock levels. The production schedule was entered into the system, and Alex Dolan, materials planner in the supply chain group, ran a report each week and placed orders with suppliers.

    Covington’s manufacturing strategy was to machine critical components in-house, such as impellers, pressure body housings, and head plates. The machining department included five computer numeric control (CNC) lathes and two CNC grinders. Sondra believed that the current capacity of the plant could support approximately $28 to $30 million in sales.

    **INVENTORY REDUCTION PLAN**

    Sondra received information from the sales department each month outlining pending bids and orders. This information was used to develop a forecast and place orders with suppliers. However, raw material and work-in-progress inventories had remained high, despite Sondra’s efforts to make reductions. Exhibits 1 and 2 provide inventory investments and quantities by category.

    ![A screenshot of a data sheet Description automatically generated](https://www.sweetstudy.com/questions/gscmcs)

    ![A table with numbers and text Description automatically generated](https://www.sweetstudy.com/questions/gscmcs)

    Sondra described the challenges she faced balancing lead times and inventory levels:

    Page 252

    Long raw material lead times require that we place bets on product mix and volumes before we get orders from customers. We do our best to work with sales and production, but it is impossible to predict exactly what our customers will order and when. As a result, we end up with excess and slow-moving inventory. For example, we might expect to get an order for 100 metric 1,500 SCFH meters from a customer, but the order might come in at 85 meters spread over six months. We end up holding the surplus inventory until another order is received for a similar product.

    Another problem is supplier minimum order quantities. All of our orders are built to customer specifications. Every customer has their own unique specifications, requiring special orders for everything from electronics to accessories. Using the same example for a 100-meter order, we might need special mounting plates, with a minimum order quantity of 500 pieces. As a result, we have $1.4 million in slow-moving raw material and work-in-progress inventory, which we define as inventory that has an age of more than 180 days in stock.

    Page 253

    Our finished goods inventory levels are nominal, usually between $150,000 and $200,000. All finished products are assembled to customer order and shipped out almost immediately. We need a plan to get our raw material and work-in-progress inventories under control. With sales increasing, the problem is only going to get worse.

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