9 Box Summary

May, 2015

Proprietary and ConfidentialThe ProAction Group

9 Box Summary• These 9 boxes profile inventory in

segments based on volume and volatility

• ABC Volume Segmentation is calculated based on cost of materials sold (COMS)

– A Items – First 80% of COMS– B Items – Next 15% of COMS– C Items – Final 5% of COMS

• Volatility Segmentation incorporates the standard deviation of weekly shipments• Low Volatility – Ratio of StDev of weekly demand to

average weekly demand < 0.5

• Medium – Ratio is from 0.5 to < 1.0

• High – Ratio is 1.0 and above

Proprietary and ConfidentialThe ProAction Group

ABC Data Low Medium High No Activity TotalsTotal Sales 23,351,261$ 5,188,637$ 3,960,070$ 32,499,968$ % of Sales 53% 12% 9% 74%Transactions 16,407 7,164 4,062 27,633 SKU's 29 16 14 59 GM $ 14,504,901$ 2,712,480$ 1,246,211$ 18,463,592$ Turn and Earn 206 194 77 179 Inventory $ 2,671,972$ 665,783$ 1,108,055$ 4,445,809$ Days of Inventory 118 81 134 111 Total Sales 2,972,038$ 2,594,164$ 1,854,826$ 7,421,028$ % of Sales 7% 6% 4% 17%Transactions 7,823 6,799 4,755 19,377 SKU's 44 21 18 83 GM $ 1,981,142$ 1,689,139$ 1,058,913$ 4,729,195$ Turn and Earn 123 125 44 84 Inventory $ 536,550$ 471,468$ 1,038,706$ 2,046,724$ Days of Inventory 145 90 206 147 Total Sales 1,316,522$ 1,815,299$ 979,552$ 4,111,373$ % of Sales 3% 4% 2% 9%Transactions 7,885 9,887 6,374 24,146 SKU's 243 167 89 499 GM $ 949,380$ 1,242,015$ 499,277$ 2,690,672$ Turn and Earn 39 72 158 68 Inventory $ 673,501$ 542,550$ 154,736$ 1,370,788$ Days of Inventory 354 196 165 238 Total Sales% of SalesTransactionsSKU's 1,733 1,733 GM $Inventory $ $ 370,206 370,206$ Days of Inventory

Total Sales 27,639,821$ 9,598,100$ 6,794,448$ 44,032,369$ % of Sales 63% 22% 15% 100%Transactions 32,115 23,850 15,191 71,156 SKU's 316 204 121 1,733 2,374 GM $ 17,435,423$ 5,643,634$ 2,804,402$ -$ 25,883,459$ Turn and Earn 166 138 72 130 Inventory $ 3,882,023$ 1,679,800$ 2,301,498$ 370,206$ 8,233,527$ Days of Inventory 205 122 168 165

No Sales in 2007 (90% of inventory $ in

new products)

$118,000 of this inventory had no balance on hand in 2006 and relates to new products with no sales through

September, 2007. $252,000 relates to inventory on hand in 2006 with no sales in 2007.

Volatility

A (Top 80% of COGS)

B (Next 15% of COGS)

C (Final 5% of COGS)

Low HighVolatility

Volume

High L

ow

• We profile each segment in terms of:– Total Sales– Number of transactions– Number of SKU’s– Variable Margin– Inventory Investment ($)– Return on Inventory (Turn and Earn)– Days on Hand

9 Box – Differentiated Inventory Strategy Development Make little and often Block scheduling Calculated safety stock Visual / demand triggers

L M HABCU

sage

Demand Volatility

Make / buy bigger batches Automate replenishment

triggers Customer policy

Protection Change the Channel…

Block scheduling for base demand

Minimize response time to demand triggers

Additional safety stock Customer policy

protection

SKU Rationalization Product substitution Pricing / terms Inventory disposition

options Change the Channel…

Proprietary and ConfidentialThe ProAction Group

9 Box Summary Notes• Analysis is based on 2014 sales history and associated inventory values

at the end of 2014.• Labor and Overhead costs by product is not available today. We based

this analysis on a variable margin, i.e., on sales less the cost of materials.• Average demand and volatility are calculated excluding weeks in which

there is no demand (0 demand weeks are not included in the calculation).• “Lines” summarizes the number of lines on which the part was included

during the year.• “Turn and Earn” is a measure of return on the investment in inventory.

The formula used is: – Inventory turns (based on COGS) * Variable Margin %– A turn and earn ratio of 120 (based on Gross Margin) is generally

considered a minimum level for distributors.

Proprietary and ConfidentialThe ProAction Group

9-Box. Volume vs. Volatility – All Facilities

• Costing data shows Variable Margin (no labor or overhead costs are included – only materials)

• Good– High return on Inventory for “A” items– 10 days of Inventory for “A” items – 84.3% of our business is High Volume

and Low Volatility– Overall, we turn our FG inventory

every 15 days.• Opportunities

– Margins go down for higher volatility items

– Margins go down for lower volume sku’s

– Raw material inventory brings total days of inventory to about 58 days.

9-Box: Volume vs. Customer – All Facilities

• Costing data shows Variable Margin (no labor or overhead costs are included – only materials)

• Good– Solid margins with large customers

• Opportunities– Margins go down for smaller

customers compared to large customers

– 75% of lines shipped produce a net $5 million in Variable Margin (less than 10% of the total)

– Variable Margin per line shipped exceeds $1,900 for A customers, and is less than $70 for C customers

Target Inventory Calculation – All Facilities

• $2,073,703 is needed to run the current business

• Reaching that level will not require changes in customer behavior.

• Reaching that level will require components of an effective S&OP process

9-Box Conclusions• Pricing, inventory and approach for “A” customers and “A” sku’s show

that leadership understands where money is made. We got the important stuff right!

• Pricing strategy seems focused on managing “A” customers well. B and C customers get preferential pricing today.– Increasing external customer VM to meet “A” Customer VM would

increase B & C customer revenues and net income by $575,000. Driving B & C pricing to 4 points above A customer would drive $1.2 million in net income.

• B & C customer orders drive $390 & $115 in Variable Margin per line respectively. This may not cover labor, overhead, order management, pick & pack and handling costs.

• About 75% of our line activity drives less than 10% of our variable margin.– Adapt our processes to manage each segment of our business

• Raw material inventory drops Turn and Earn from 1,452 to 458.

8

9-Box. Volume vs. Volatility – CA• Costing data shows Variable Margin (no

labor or overhead costs are included – only materials)

• Good– High return on Inventory for “A” items– 12 days of Inventory for “A” items– 81% of our business is High Volume

and Low Volatility• Opportunities

– Margins go down for higher volatility items

– Margins go down for lower volume sku’s

– Inventory for “B” and “C” items pull down our return on assets

– $291k in inventory relates to one time sales or zero sales SKU’s

– Raw material brings inventory to about 47 days of sales.

9-Box: Volume vs. Customer – CA

• Costing data shows Variable Margin (no labor or overhead costs are included – only materials)

• Good– Solid margins with large customers

• Opportunities– Margins go down for smaller

customers compared to large customers

– 62% of lines shipped produce a net $2.1 million in Variable Margin (less than 14% of the total)

– Variable Margin per line shipped exceeds $2,700 for A customers, and is less than $110 for C customers

9-Box. Volume vs. Volatility – IL• Costing data shows Variable Margin (no

labor or overhead costs are included – only materials)

• Good– High return on Inventory for “A” items– 11 days of Inventory for “A” items – 86% of our business is High Volume

and Low Volatility• Opportunities

– Margins go down for higher volatility items

– Margins go down for lower volume sku’s

– Inventory / Pricing Strategy for “B” and “C” items pull down our return on assets

– Raw materials bring total inventory to about 72 days

9-Box: Volume vs. Customer – IL

• Costing data shows Variable Margin (no labor or overhead costs are included – only materials)

• Good– Solid margins with large

customers• Opportunities

– Margins go down for smaller customers compared to large customers

– 82% of lines shipped produce a net $400k in Variable Margin (less than 5% of the total)

– Variable Margin per line shipped exceeds $1,700 for A customers, and is less than $90 for C customers