THROSEL-TESKEY case analysis
Why the reason the inventory increased so much after merge?
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228 Purchasing and Supply Management
Three years prior, Sedgman had contracted its ware-
housing and transportation services to a third-party lo-
gistics organization, Fehr Logistics Company. Fehr was
responsible for providing inbound and outbound trans-
portation services and managing the 50,000-square-foot
warehouse adjacent to the manufacturing facility.
The contract with Fehr specified staffing levels and
hours of operation and provided the supplier with a profit
based on a percentage of its total costs. After some initial
problems, management was generally satisfied with its
relationship with Fehr.
RAW MATERIAL INVENTORY
Isaak Theissen had become concerned regarding the large
amount of raw material inventory. Inventory records for July
indicated that there was approximately $20 million of inven-
tory on-hand, and on Tuesday he had asked Alice to investi-
gate, commenting that: “Our customers certainly don’t carry
this amount of inventory. Why should we? I want you to look
into the situation and see what we can do to fix it.”
Earlier in the day, Alice decided to pay a visit to the
warehouse and was surprised with what she saw. The
warehouse was completely full with coils of steel and
bundles of raw tubes. Several trailers were parked outside
waiting to be unloaded. In addition, there appeared to be
a shortage of staff at the warehouse. The normal comple-
ment was eight, but Alice only identified five people.
PREPARATION FOR THE MEETING
As Alice prepared for the Friday meeting, she made a list
of issues that she would have to address with Isaak. Based
on what she knew so far, Alice agreed that opportuni-
ties existed to reduce the amount of inventory, but Isaak
would want specific targets and the timing identified. Fur-
thermore, he would also need assurances that the inven-
tory levels could be reduced without affecting operations
or customer service.
Recognizing the importance of the project, Alice had
blocked off the next two days. She wondered what steps
she should take next.
Case 8–2
Throsel-Teskey Drilling
On Wednesday, June 12, Alison Burkett, purchasing man-
ager at Throsel-Teskey Drilling Inc. (Throsel-Teskey) in
Phoenix, Arizona, met with John Dietrich, the company’s
president. He said: “I am getting pressure from the board
to address our inventory variance. It has been more than
seven months since the merger, and we are not getting
the synergies that we expected from purchasing. I know
our sales are slightly higher than we expected, but inven-
tory levels are more than twice what we had forecasted in
our budget. Our new shareholder is irate—they expect a
25 percent return on their capital. I need you to come up
with a plan that I can share with our board at the meet-
ing here in Phoenix next Thursday.” Alison got up from
her chair and responded to John, “I will get you a report
with my recommendations on Monday, so we can review
it before the meeting.”
THROSEL-TESKEY DRILLING
Throsel-Teskey was a mining services company that per-
formed diamond drilling for underground and surface ex-
ploration. Based in Phoenix, Arizona, the company had
more than 600 employees and approximately 145 surface
and underground drilling rigs operating at sites in the Unit-
ed States, Canada, Mexico, and South America. The com-
pany’s customers were top-tier multinational and junior
mining companies involved in the exploration and produc-
tion of copper, zinc, and gold. Approximately 75 percent of
the company’s drilling rigs operated at sites in the south-
western United States.
Diamond drilling was required at each stage of min-
ing operations: exploration, development, and production.
Diamond core drilling utilized an annular drill bit with an
industrial-grade diamond crown to cut a cylindrical core
from solid rock. Core samples were extracted and ana-
lyzed to provide the mine operator with information about
the mineral deposit. Throsel-Teskey paid its drill teams
a base rate and an incentive bonus for achieving produc-
tion targets. Production levels averaged 825 feet per week
for each drill team, but varied substantially depending on
conditions.
In the previous October, Throsel Drilling Inc. merged
with Teskey-Dean Drilling Inc. (Teskey-Dean), which had
its head office in Albuquerque, New Mexico. Both compa-
nies were approximately the same size with respect to total
sales; however, Teskey-Dean specialized in underground
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Chapter 8 Quantity and Inventory 229
drilling while Throsel’s focus had been in surface drilling.
Jongsma Equity Partners (Jongsma), a Chicago-based pri-
vate equity firm, which owned Teskey-Dean, led the merg-
er and financing of the transaction. John Dietrich, who had
been CEO of Throsel, was appointed the president and
CEO of the new company and operations were consoli-
dated at Throsel’s facilities located in Phoenix. Although
Jongsma controlled Throsel-Teskey, John Dietrich main-
tained a substantial equity interest in the company.
Increases in commodity prices during the past two
years had resulted in substantial increases in demand for
drilling services as mining companies expanded output.
As a result, Throsel-Teskey was operating at full capac-
ity. John commented about the current market for his
company’s services: “Our bottlenecks are equipment and
people. However, it is easier for me to buy more drilling
rigs than to find qualified drillers. The pay is good, but
it is hard work and it takes at least a year to get someone
fully trained.”
PURCHASING AND MATERIALS
MANAGEMENT
Alison Burkett headed the purchasing department at
Throsel-Teskey and was responsible for sourcing and ma-
terials management. She had worked for John in a similar
role at Throsel Drilling for approximately three years. Re-
porting to Alison was Ken Jenner, materials manager, and
Emerson Parrish, warehouse manager.
Alison estimated that Throsel-Teskey purchased $25
to $27 million in goods and services each year from ap-
proximately 400 suppliers. Major purchase categories—
rods and casing, drill bits and reaming shells, wireline and
drill parts (collectively referred to as “drilling supplies”)—
accounted for approximately one-half of the company’s
total spend. The Phoenix warehouse carried approximately
800 different stock keeping units (SKUs), across a vari-
ety of purchase categories, such as drilling supplies, tools,
safety supplies, parts and equipment, motors, and hydrau-
lic oil. For example, the company stocked eight different
types of rods and five different types of diamond drill bits.
At the time of the merger the company purchased the
majority of its drilling supplies from three companies.
Subsequently, John and Alison negotiated a strategic sourc-
ing agreement with a supplier, also located in Phoenix, who
became the primary supplier for drilling supplies in return
for a significant price discount. Implementation of the new
sourcing agreement started in April, and the transition was
expected to last six months. However, because of specific
needs for certain equipment and drilling applications,
Alison expected that it would not be possible to standard-
ize completely with one supplier.
The Phoenix warehouse had been expanded and reno-
vated recently to accommodate the increased volume creat-
ed by the merger. Shelving, racks, and bins had been added
to store inventory. Ken Jenner was responsible for receiv-
ing, shipping, and inventory control at the Phoenix ware-
house. Since the company’s inventory system had not been
updated since the merger, he physically reviewed inventory
levels in the warehouse each Thursday and provided Alison
with a written purchase requisition to replenish stock. In re-
cent months Alison had noticed that several suppliers were
experiencing delivery problems and extending lead times
as a direct result of an overall increase in demand for dia-
mond drilling services by mining companies.
Shipments to drilling sites from Phoenix were made
on a five-day schedule by an outside transportation ser-
vice company. Site foremen faxed or e-mailed requests
for materials and supplies to Ken two days in advance of
the scheduled deliver run to their site. Ken supervised two
people whose duties included picking and packing orders
for the sites.
Employees were provided open access to the ware-
house to obtain materials and supplies. Since several of
the drilling sites were within a four hour drive to Phoenix,
it was common for a foreman to arrive unexpectedly at the
warehouse to pick up supplies.
Emerson Parrish supervised the warehouse in Albu-
querque, where the company repaired its drills and equip-
ment. This facility had been the central warehouse for
Teskey-Dean prior to the merger.
CURRENT SITUATION
Completing the merger and integrating the two purchas-
ing and materials management organizations had been an
exhausting process for Alison and the other members of
the organization. The business plan had savings built in
from volume discounts and consolidating purchases with
a limited number of suppliers. Overall inventories were
expected to decline as a result of consolidating inven-
tory management at the Phoenix warehouse. However,
since the merger last October, sales had increased by ap-
proximately 40 percent while inventory levels had more
than doubled from premerger levels of $5.990 million to
$12.584 million in May (see Exhibits 1 and 2).
Alison commented on the current situation: “Our fo-
cus for the past seven months has been to keep the drill
teams running and consolidate inventory in Phoenix.
Part of the problem has been that I haven’t had time to
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230 Purchasing and Supply Management
EXHIBIT 1
Budget versus
Actual Results
Month Inventory Budget Inventory Actual Sales
Jan. 4,976,613 9,643,700 4,616,411
Feb. 5,007,262 10,165,100 5,293,460
March 5,098,347 11,834,900 6,254,323
April 5,090,657 12,040,600 6,212,472
May 5,186,393 12,584,000 6,050,000
scrutinize our purchases and inventory levels. The fact
that our information system is cumbersome and the in-
ventory records are not up to date is also a problem. We
are putting in a new ERP system starting in August, but
I expect it will be early next year before we can start
to rely on accurate, timely data from our system. In the
meantime our new shareholder is putting a lot of pres-
sure on John to do something about the inventory prob-
lem, and I need a plan that will keep them satisfied while
not compromising production.”
EXHIBIT 2
Inventory by
Category and
Location
Category Phoenix Albuquerque Drill Sites Total
Rods and casings 1,149,500 0 2,920,500 4,070,000
Drill bits and reaming shells 275,000 0 1,870,000 2,145,000
Wireline 550,000 0 825,000 1,375,000
Drill parts 1,210,000 671,000 297,000 2,178,000
Parts for equipment 275,000 385,000 165,000 825,000
Other 1,430,000 396,000 165,000 1,991,000
Total $4,889,500 $1,452,000 $6,242,500 $12,584,000
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