So even though more smaller customers results in a bigger parts catalog, it results in a lot more rational behavior in how we are forced to buy parts and how we can react when those parts do end up being excess for some time period. We have a lot more ability to enforce and I’m not saying that we’re egregiously mean to these smaller customers. I’m just saying that we’re in a lot better position to keep the relationship on an even fair and as anticipated in the contract basis, and we sometimes are with a customer that’s 10%, 20% of our business. That’s part of why we made the dramatic improvements in inventory that we see and we expect to continue to see. And the other part of it is that as COVID came and went, as the supply chain got horrible and now is just kind of horrible a lot of the standard behavior amongst our customers was challenged, and a number of them have made great improvements in how they think about forecasting and inventory because the sequence went along the lines of we’re just going to keep driving, keep trying to buy parts because we know we’re going to use a lot more.
And then parts became available, demand started to shrink after COVID. And the response was, well, we’re just going to not pay Key Tronic because they can’t make us. And then when it turned into that, well, Key Tronic isn’t going to be quiet. We’re going to have to pay them. That drove some of these customers to look at their processes and say, well, wait a minute, if we’re going to have to actually live up to the provisions in our contracts, we need to be a lot more mindful about how we forecast and order. And so that has changed for the better in a number of our customers. And then at the same time, I’ve talked about how we have dramatically improved our material resource planning based upon what happened, which was out of the norm for the past 20 years during COVID.
So those two factors, I think, are going to continue to drive our inventories down, down, down to where we get to some pretty decent turns, which is massively important when money is no longer free like it isn’t today.
George Melas: Right. So maybe can we try to put a number to that. What do you think your inventory turns? What would be your goal in the next 12 months?
Craig Gates: Well, I have a goal, but I’m not making you a promise. So I rarely give you any kind of a forward-looking number, but I’m going to under that proviso. So I’m taking a note, George. So a year from now, if you start badgering me about this, I’m going to say it was only a note. I want to get us to over six turns. We’re at four now. We went from three to four. And that’s my goal.
George Melas: And I don’t know much about how you manage MRPs and inventory turns. But what would enable you to get there? Are you talking about better forecasting from your customers, better MRP outdoors on your part. Because that would be really an improvement in the model than dramatic.
Craig Gates: Yes. And I think both of those things are dramatic. So everything I laid out in the past 10 minutes of me talking, when you add all that up, that is a dramatic change in how all of this works. And we’ve just started to see it really drive things down from January through today. And our projections are that it’s going to continue to do that. There may be some bumps and hiccups as we go, but overall, we continue to see that, I mean there are programs. We’ve got programs, George, big programs that we’ve got running so well. They’re turning over 20 times a year. So mathematically, you should be able to get somewhere better than 4. If you can just keep all the, inventory is kind of a story of one damn thing after another.
You can look at the top 25 customers and everyone that’s not turning at 6. There’s some damn reason why it’s not. And it’s not the math and it’s not the process. It’s something that happened. And so beyond the math and the process, there’s the institutional discipline to look at every one of those damn things that happened and say, all right, we’re never letting this happen again on any of our customers, not just this one customer. And as you start to drive the policing of making sure those one-offs never happen again, that starts to add up as well as all the process changes.
George Melas: And might I add that at the point in time, one of those customer programs continue to be on the list of those that are turning at far less than six turns. That’s also the point in time when we are purposefully looking at, is this a good fit for Key Tronic?
Craig Gates: So we’re going back to customers and saying, you’re turning at two times. That either changes or you need to find somebody different.
George Melas: And that is also, again, drastically different than how we’ve operated in the past.
Craig Gates: And how we could operate in the past.
George Melas: Okay, correct.
Craig Gates: Because we were too desperate to keep every customer we had.
George Melas: Okay. So I think that’s some dramatic changes. It feels like always you have done so much for the customer, you have such breadth of capability, you’ve spent a lot in CapEx to be able to do all the different things. But never we’re quite comped enough by the customer for all that you could do. So maybe now things are changing somewhat…
Craig Gates: I think that’s true.
George Melas: Okay. Not certainly another quick question. You said you’re right that you see gross margin gradually improving. What do you mean by that? Because in this quarter, they didn’t and so I just want to understand what you mean by that?
Craig Gates: Well, this quarter, we didn’t because we got hit by, it was a triple whammy so we got hit by the sudden hack of the power equipment program. We got hit by the peso suddenly getting a lot stronger because our government keeps printing money. And we got hit by the fact that interest rates have gone up dramatically because our customer keeps printing money. So those three unexpected events or not unexpected, the events out of our control. drove the gross margin this quarter down lower to where we wanted it to be. We had to respond quickly with the layoffs. And we took quite a bit of charge for inefficiencies as we had extra people around beyond just the severance cost. So this quarter was a bit of an anomaly in that three things combined without a lot of warning to hammer us.
George Melas: Okay. So where do you see gross margin going in, I don’t know, let’s think far in the future fiscal ’25, what do you think they could be in terms of gross margin?
