Questions to consider:
1. How would you characterize Steel Works' products? What about Steel Works' customers?
2. What does the coefficient of variation tell us? Can you determine the coefficient of variation for the product lines?
3. How much inventory has Steel Works been holding? How much should they have been holding?
SPECIALTY PRODUCTS DIVISION
Steel Works has a large number of customers for its specialty products - 130 customers for some 120 products. However, majority of these customers (82.3%) are small-sized customers with less than $1million in sales. For example, using data from Spreadsheet S0121958, we see that there is only one major customer, C194, demanding considerable volume of DuraBendTM R12, relatively to other customers.
Given the large number of customers and the large variability in demand (80% of all specialty products had coefficient of variation greater than 0.5), it is comforting to see that Steel Works has made use of risk-pooling to reduce the variability of overall inventory demand for each product.
Therefore, although it is important to concentrate efforts on the big customers that bring in more than $24 million in sales each, it is not advisable that Steel Works neglect the smaller-sized customers.
As seen from Table 1, DuraBendTM R15 & R12 have very high impact on the annual revenue since they have very high demand and medium selling prices. The kink in Chart 1 tells us where products should be classified; in this case, we will divide them into two classes.
Table 1: Percentage of Annual Value for Each Product ($ in thousand)
ProductSelling PriceAnnual DemandAnnual ValueCumulative Value% Annual Value
Chart 1: Distribution of Products by Values
One class consists of DuraBendTM R15 & R12,