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Increased levels of activity within the company assumed to have stemmed from its aggressive growth strategies. Increased spending in research and development and expansion of the sales network backs up increased efforts in product and market development. Now, with the need to augment AMT’s current sources of funds to support operations, the company finds itself in a challenged position with not much track record to leverage on. Analysis of the company’s current operations follows:
Very notable in AMT’s Income Statement is the staggering level of its General, Selling and Administrative (GS&A) Expenses, which is about 46% to 52% of sales. Said cost contribution makes its at par, if not higher, than the actual cost of production inputs. The General, Selling and Administrative Expenses may be further analyzed or broken down into the following components:
a. Inventory Management
The company’s average inventory turnover is around 4x, or it takes the company around 84 to 96 days to convert its inventory to sales. With that sales absorption rate, the company’s practice of keeping ten (10) to twelve (12) weeks worth of finished goods inventory is not reasonable since it induces the company to incur unnecessary storage costs, thereby bloating the GS&A Expense account of the company.
Further, sales networks are rapidly expanded to supposedly to increase the rate of inventory turnover. However, with this strategy, additional GS&A expenses are still incurred in the form of commission and allowances.
b. Processing Time
The company’s production process is an assembly type of operation, which involves several hundred of products and typically small production volumes for each product type. As a result, it takes an average of eight weeks to complete the processing of the medical instruments. While there is no given benchmark for the standard processing time for product types, it can still be inferred that the company’s production strategy...
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