Discussion Questions
1. What would you recommend that Joe Jr. do, assuming he takes control of Southern
Toro?
2. Evaluate the importance of inventory and inventory management of the Southern Toro
distributorship for both irrigation products and spare parts. Should the inventory be cut
back?
3. Evaluate the current inventory management system at Southern Toro. What inventory
management system would you recommend?
This case describes a conversation between Joe Melaney, the owner of the Toro
distributorship in Galveston, Texas, and his son, Joe Jr. The immediate subject of the
conversation is to decide on the spring season order for the entire irrigation line. In the
course of the conversation, other issues emerge, ranging from the proper inventory level
for specific parts to the future ownership of the distributorship.
This case can be used at two levels. At the first level, the case is an exercise in the
development of an effective system for managing independent demand inventory, taking
into account the particular problems faced by a distributorship. At the second level, the
case can be used to demonstrate the importance of inventory management as a policy
variable. Since Southern Toro is a distributorship, profitability depends heavily on
inventory management
Analysis
Joe Jr.’s course of action if he takes control of Southern Toro certainly depends on a
financial analysis of the company. Exhibit TN-1 shows some of the common financial
ratios for the fiscal years 2009, 2010, and 2011.
Southern Toro Distributorship has been steadily increasing in net worth over these years
but the return on invested capital has been low. Furthermore, the future outlook is
potentially disturbing. As Exhibit TN-1 shows, the distributorship is highly leveraged, with
a sharp increase in 2011. This will increase the cost of any future financing. Liquidity is
decreasing, particularly quick liquidity, suggesting that the company may be forced to seek
additional financing unless other action is taken. The company’s activity is decreasing also;
this is particularly noticeable in inventory turnover. As might be expected, the ROA of the
distributorship, never very high, has been steadily declining over the last three years.
The return may be improved with better management, but will probably never become
extremely high. It is for Joe Jr. to decide whether or not the return can be enough to satisfy
him. However, based on the above analysis, it appears that the distributorship is likely to
encounter difficulties if present trends are allowed to continue. Since the sale of irrigation
