The document summarizes an analysis of inventory using a 9-box framework to segment inventory based on volume and volatility. Key findings include: - "A" items which are high volume and low volatility account for over 80% of business and have the highest returns on inventory. - Margins and returns decrease for lower volume and higher volatility items. - Opportunities exist to improve margins for smaller customers which currently have much lower margins per line than large customers. - About 75% of line activity drives less than 10% of variable margin, indicating an opportunity to optimize processes for different segments.

1. 9 Box Summary
May, 2015
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The ProAction Group

2. 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
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Low  High
Volatility
Volume
HighLow
• 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

3. 9 Box – Differentiated Inventory Strategy
Development
 Make little and often
 Block scheduling
 Calculated safety stock
 Visual / demand triggers
L M H
A
B
C
Usage
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 Confidential
The ProAction Group

4. 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.
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5. 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.

6. 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

7. 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

8. 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. 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.

10. 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

11. 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

12. 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