C&E Publishing, Inc.

Page 1 of 11
Internal Audit Department Inter-Office Memo
Ref No.

Background:

The review of the inventory level is acted upon by the Internal Audit Dept. in response to the
request of the Office of the SEVP for an inventory report which is essential for the 2014 Strategic
Plan.

Inventory Management is one of the big challenges facing the C&E Publishing Inc. considering the
volume of non-moving stocks that are stored in the C&E Warehouses and Bookshops nationwide.
As of December 31, 2013 there are around 2.8 Million copies of books recorded in the system and
80% of the inventories are stored in the warehouse of Baesa, Quirino and RBC Cebu, while the
20% is shared by the 17 Bookshops.

Based on SAP Inventory record, in 2009 the beginning inventory balance of C&E is approximately
3.1 Million copies. Although a significant number of old and non-moving inventories have been
disposed (by shredding) in the last 2 years, the Inventory level as of Dec 31, 2013 is just 10%
below the 2009 beginning balance or just a matter of 300,000 copies difference.

Inventory is usually one of a publishers two largest assets, the other being accounts receivable.
Every company needs to manage all aspects of their inventoryfrom what titles and quantities to
print to what it costs to carry unsold books. Hence, inventory level must be managed well to
avoid incidental cost such as the storage cost and inventory devaluation due to obsolescence.








DATE : January 10, 2014


FOR




THRU

CC
:




:

:


Candy Gomez - President & CEO
Eugene Eugenio, COO & Group 1 Head
Max Gomez, EVP & Group 3 Head
Nestor Manuel, SVP & Group 2 Head

Bella Montanez, AVP Finance

John Emyl Eugenio, VP Sales & Marketing
Alice Gomez, AVP Logistics Division
Tom Gomez, AVP Panasia Book Exchange
Barbs Pagaddu, AVP Administration
Glendale Roque, Distribution Management Manager
Maricar Cabiente, OIC Operations Division
Wareen Sante, AM Operations Accounting Department


RE : C&E Inventory Level Analysis and Review


C&E Publishing, Inc. Page 2 of 11
Internal Audit Department Inter-Office Memo
Ref No.
Review Objective/s:

o To identify Dead Stock or stocks that are no longer generating Sales for the C&E
o To identify the Titles that has Purchase Orders (P.O) but is not performing
o To identify cause/s of the non-performing inventories with P.O.
o To measure and analyze the trends of the inventories
o To recommend improvement and control in the Inventory Management.


Review Scope:

o The review focuses on the FERT or the Finished Goods Inventories of C&E Publishing Inc.
including the transaction related to the inventory movement such as but are not limited
to:
Sales,
Stock Transfers,
Consignment Delivery,
Pull Out of or return of stocks from customers,
Goods Receipt from vendor and,
Return of Inventories to vendor/supplier


Review Procedures:

o Has gathered/generated inventory data from the C&E information system.
o Has defined the purpose/objective of the review
o Has measure the impact of the inventories to the company based on data gathered
o Has analyzed the cause and effect of the current inventory level of C&E
o Has researched generally accepted and practiced inventory management and control in
the Publishing and related industry.


Review Findings and Recommendation:

Based on the review and data analysis performed, the following are the significant review findings
(Please see Attachment I for the detailed significant review findings):


1. A 5 year Inventory Performance Analysis shows the trend that in every particular
copyright, there are titles that have a sold-out rate of below 40%, and such trend could
lead to inflating old and non-moving inventories.

It is recommended that Inventory Management Department (IMD) will work with the
Accounting Operations Dept (OAD) to monitor the inventory level and the
corresponding sales to produce a Report for the Dying or No Sales Inventory; and
such report will be the basis for management decision for promotion strategy. It is
also recommended that such report will be released twice a year, 2 months before the
peak season and 2 months after the peak season..


C&E Publishing, Inc. Page 3 of 11
Internal Audit Department Inter-Office Memo
Ref No.
2. 36% of the inventory are titles with copyright older than 2007. This is consisting of
approximately 1 Million copies. ( Annex 2) )

It recommended that a strategic promotion will be formulated by the management to
get rid of the non-moving and old copyright books, or to evaluate and adapt methods
that are beneficial to the company such as, but are not limited to selling the
inventories at a higher discount.

3. Significant numbers of Titles with Purchase Orders from 2010 to 2012 are not generating
significant Sales for the company. ( Annex 3)

It is recommended that a monitoring of Inventory Purchases will be implemented to
evaluate the corresponding Sales Performance in a period such as after peak season
or by the end of the year to immediately pinpoint the cause of unsatisfactory sales
performance. In some company they call it HIT report that allows comparison of Stock
on hand of Titles with current purchases against the Sales.

4. It was noted that 25,736 copies of material number 152336 with ISBN 9789810698782
NURSING THEORIES: THE BASE FOR PROFESSIONAL NURSING PRACTICE- 2002 5
th
Ed by
Julia B. George has a new 6
th
Edition published on March 2010.

It is recommended that PEAM will reevaluate the marketability of the 5
th
edition
considering that more than 20,000 copies are with no Hologram requirements from
the publisher.

5. 30% or more than 700,000 copy of the Total Inventory Quantity is composed of the
Medical and Allied Health Titles particularly nursing titles, and a number of these titles are
non-moving.

Considering that the nursing course enrollment has significantly dropped since 2010,
the level of stocks the company has is higher than the demand.

It is recommended to reevaluate the nursing titles, especially those with new edition
such as 9789715843904 NCLEX-RN: Made Ridiculously Simple (2000 edition) by
Andreas Carl published by Med Master where we have 2,200 copies in Quirino
Warehouse, and this book has new 2011 edition.













C&E Publishing, Inc. Page 4 of 11
Internal Audit Department Inter-Office Memo
Ref No.

Review Conclusion:

Each title in the inventory when viewed individually may not warrant concern, but the impact of
all titles in inventory is greater than the sum of the parts. Additional, indirect costs involve in
keeping volume of non-moving stocks includes insurance, storage, damage, obsolescence, write-
offs as well as the hidden costs of inventory such as warehouse personnel, warehouse racking
and forklift repairs.

Based on the data gathered and analyzed by the internal audit as part of the review of the level
of the Finished Goods Inventory (FERT), the following are the main causes of the inflation of Non-
Moving Titles in the Companys inventory:

Causes of Dead Stock/Non- Moving Titles

New Edition has been released
Old Edition has No Market Demand
A number of inventories with P.O. have no significant Sales
Significant drop in Nursing students
Reprint with No appropriate Hologram requirement
A number of Titles are left un-promoted for the last 4 years
There is no constant or year round promotion on the old editions such as a
significant discount to move product out of the inventory and convert them into
cash.

In the later part of 2012 and early part of 2013, EPIC Sale was launch by the company and it has
gained much attention from the students and the buying public in general, because of the
discount that the company gave to as high as 90%. Although it gives us a lower net sales but it
converts our dead stock into cash, such was a wise decision speaking of getting rid of non-
moving inventories.

In the review of the 2013 sales, the data shows that inventories sold are dominated by the titles
with copyright from 2005 to 2013 and consist of the following Top 10 Discipline/Subject:
Mathematics, Language, Chemistry, Nursing, Commerce, Internal Medicine, Human Anatomy,
Physics and Social Sciences.

The review does not necessarily warrant assurance on the improvement of the companys
inventory management by considering management action to address the above mentioned
causes of inflating Non- Moving Inventories due to the limitation of scope of the review.

The review is primarily focused only on the level of Inventories and its related transactions,
specifically sales. The Stock planning, Printing and re-run policy as well as Purchasing policy and
procedures which are deemed important for the coordinated improvement of Inventory
Management are not part of this review.



C&E Publishing, Inc. Page 5 of 11
Internal Audit Department Inter-Office Memo
Ref No.


Prepared by: Reviewed and Checked by:


Jaime Olaer Rannen Darroca
Internal Auditor Internal Audit Manager

Approved by: Noted by:


Bella Montanez Nestor Manuel
AVP Finance SVP & Group 2 Head

Noted by: Noted by:


Glendale Roque Maricar Cabiente
Distribution Management Manager OIC Operations Division

Noted by: Noted by:


Alice Gomez Max Gomez
AVP Logistics Division Senior EVP

Noted by: Noted by:


Eugene Eugenio Candy Gomez
EVP Cluster III President & CEO



















C&E Publishing, Inc. Page 6 of 11
Internal Audit Department Inter-Office Memo
Ref No.

ATTACHMENT I

1. A 5 year Inventory Performance Analysis shows the trend that in every particular
copyright, there are titles that have a sold-out rate of below 40%, and such trend could
lead to inflating old and non-moving inventories.

- Inventories are purchased by the company with the intention that these inventories
will be sold at a profit after a certain period such as after a year or two and not after 4
to five years because with such trend especially in the Printing industry would lead to
an obsolete inventories and dead stock.

- The gray area in the chart below shows that for the past five years certain copyright
have stocks that only 40% or below are sold out, the rest remains in the inventory.









C&E Publishing, Inc. Page 7 of 11
Internal Audit Department Inter-Office Memo
Ref No.


Recommendation:

It is recommended that Inventory Management Department (IMD) will work with the Accounting
Operations Dept (OAD) to monitor the inventory level and the corresponding sales to produce a
Report for the Dying or No Sales Inventory; and such report will be the basis for management
decision for promotion strategy. It is also recommended that such report will be released twice a
year, 2 months before the peak season and 2 months after the peak season.


Management Response:




2. 36% of the inventory are titles with copyright older than 2007. This is consisting of
approximately 1 Million copies.

- In the Publishing and Printing Industry it is a given fact that, generally old copyright
and old edition tend to be left unsold in the shelves due to the availability of new
edition that has updates on certain trends related to a certain subject or discipline.
This is not only true to library titles but even to textbooks.




1,000
340
237
263
312
320
288
100
200
300
400
500
600
700
800
900
1,000
1,100
2007 below 2008 2009 2010 2011 2012 2013 2014
I
n

T
h
o
u
s
a
n
d
s


Inventory Level (Qty) Per Copyright

C&E Publishing, Inc. Page 8 of 11
Internal Audit Department Inter-Office Memo
Ref No.



Recommendation:
It recommended that a strategic promotion will be formulated by the management to
identify and get rid of the non-moving and old copyright books; and to evaluate and
adapt methods that are beneficial to the company such as, but is not limited to
marketing the inventories at a higher discount.
Management Response:


3. Significant numbers of Titles with Purchase Orders from 2010 to 2012 are not generating
significant Sales for the company.

- During the review we generate data such as the beginning balance of inventory since
the inception of SAP in September 2009 and also generate the Goods Receipt recorded
in the system since 2009 until 2012. In the process of comparing the ending balance
of the inventories as of December 31, 2013 against the available inventories which is
the beginning balance plus the purchases, we noted that there are certain stocks
purchased that are not contributing much to the revenue generation of the company.



Material ISBN TITLE
COPY
RIGHT Price P.O. 2011
Ending Bal as
of Dec 31,
2013
Over-ALL Movement
( Sold Out %) since
2009 or from year of
P.O.
176577 9789812728685 A Laboratory Manual to Comprehensive Guide to Mosby's Physical Examination for Students 2011 485.00 2,080 2,030 5%
163801 9789710191017 Science Wonders 4 2011 398.00 2,112 1,984 6%
176165 9781451120943 Pediatric Physical Therapy 2008 948.00 1,102 1,978 8%
164948 9789812725936 Jong's Community Dental Health 2003 698.00 2,060 2,751 13%
176579 9789812728722 Radiology Secrets Plus 2011 698.00 1,080 1,810 15%
176043 9789812728647 Mosby's Dental Dictionary with Companion CD 2008 795.00 2,080 1,785 16%
176580 9789812728715 Physical Therapy Management 2008 395.00 2,080 1,766 16%
176578 9789812728692 Handbook of Mosby's Physical Exam 2011 395.00 2,080 1,788 16%
176487 9789715849609 Empowering Midwives: Ladderized Midwifery (Nursing and Midwifery Jurisprudence) 2010 395.00 2,310 1,962 17%
180512 9789719900719 Drug Discoveries and Inventions: A Global Perspective (Softbound) 2011 445.00 1,560 1,317 18%
176576 9789812728678 Comprehensive Guide to Mosby's Physical Examination 2011 1,498.00 2,080 1,723 19%
176693 9789812729019 The Physiology of the Joints, Volume 3: The Spinal Column, Pelvic Girdle and Head 2008 445.00 2,085 1,739 19%
178118 9789812729514 Physiology of the Joints: Volume 2 Lower Limb 2011 445.00 2,170 1,774 19%
176694 9789812729026 The Physiology of the Joints, Volume 1: Upper Limb 2007 445.00 2,085 1,738 19%

C&E Publishing, Inc. Page 9 of 11
Internal Audit Department Inter-Office Memo
Ref No.


Recommendation:

It is recommended that a monitoring of Inventory Purchased will be implemented to evaluate the
corresponding Sales Performance in a period such as after peak season or by the end of the year
to immediately pinpoint the cause of unsatisfactory sales performance. In some company they
call it HIT report that allows comparison of Stock on hand of Titles with current purchases against
the Sales.


Management Response:






4. It was noted that 25,736 copies of material number 152336 with ISBN 9789810698782
NURSING THEORIES: THE BASE FOR PROFESSIONAL NURSING PRACTICE- 2002 5
th
Ed by
Julia B. George has a new 6
th
Edition published on March 2010.

- A voluminous non-moving stock such as material number 152336 requires a thorough
assessment considering the cost involve in the inventory investment. But then
assessment must be based upon the nature and criteria of which the company
operates.



Item Location History
.January 27, 2014
Item Desc : Nursing Theories: The Base for Professional Nursing Practice
Branch/Location EndBal
TACLOBAN Selling - [B061] 25
RBC-Cebu - [2101] 554
Baesa Whse R&D - [3101] 708
CONSIGNMENT BAL - [BB01] 10
ADPCN SUMM CON09 - [R018] 1
SILLIMAN BF - [R020] 1
THE 29TH MIBF - [R044] 1
CEIRC Warehouse - [B002] -2
Sta Maria COMPLI - [3302] 8
Quirino Whse R&D - [3401] 1
Quirino NO-HOLO - [3412] 23,850
Quirino COMPLI - [3406] 8
Quirino WhseDefe - [3402] 1
Total 25,694
Item No :
000000000000152336/9789810698782

C&E Publishing, Inc. Page 10 of 11
Internal Audit Department Inter-Office Memo
Ref No.



Recommendation:

It is recommended that PEAM will reevaluate the marketability of the 5
th
edition considering that
more than 20,000 copies are with no Hologram requirements from the publisher.

Management Response:






5. 30% or more than 700,000 copy of the Total Inventory Quantity is composed of the
Medical and Allied Health Titles particularly nursing titles, and a number of these titles are
non-moving.

- Considering that the nursing course enrollment has significantly dropped since 2010,
the level of stocks the company has is higher than the demand. Reducing the level of
inventory after a thorough assessment will help in the reduction of warehouse space
requirement for the storage of our inventory. And conversion of the inventory into
cash will help increase the liquidity of the company.


-


Medical & Allied Health 793,327 29.81%
Language 535,261 20.12%
Arts and Sciences 458,585 17.23%
Commerce/Finance/Mngt/Law 187,901 7.06%
Mathematics 182,788 6.87%
General Education 152,548 5.73%
Social Sciences 132,092 4.96%
Computer Educ 54,242 2.04%
Gen Reference 52,366 1.97%
Hospitality and Culinary 35,847 1.35%
Engineering and Architecture 33,572 1.26%
Trade 19,353 0.73%
Others 2,593 0.10%
Agriculture 1,623 0.06%
Naval Education 1,110 0.04%
Aeronautics 1,107 0.04%
Civil/Military Security 27 0.00%
Archeology 9 0.00%
2,644,350

C&E Publishing, Inc. Page 11 of 11
Internal Audit Department Inter-Office Memo
Ref No.



Recommendation:

It is recommended to reevaluate the nursing titles, especially those with new edition such as
9789715843904 NCLEX-RN: Made Ridiculously Simple (2000 edition) by Andreas Carl published
by Med Master where we have 2,200 copies in Quirino Warehouse, and this book has new 2011
edition . (http://www.amazon.com/dp/1935660012/ref=rdr_ext_tmb)


Management Response: