1. Body Glove

2. Class Announcements Body Glove Case and
Assignment #2 Due on February 10th
The Service Learning Placements will be posted at 12:00pm on Thursday February 6th at SCHW 396 (First Come First Serve Basis)

3. Class Objectives Case Analysis of Body Glove
Understanding the role of the budgeting process in context

4. Body Glove
Who: Russ Lesser, President and CFO of BodyGlove (part of new management team)
What: Right budgeting processes in place to “respond quickly and in a coordinated fashion to changing market conditions”
When: Current

5. Body Glove: The Company
Business:
a small profitable wetsuit manufacturer
employs 300 people
sales nearly doubled in the last 5 years
goal - #1 wetsuit manufacturer in 9 years
Sales:
$15M in sales and $8M from wetsuit sales ($60M market)
also produces out of season product s(i.e., snow-skiing, snowboarding, orthopedic, etc,)
Ownership:
in 1990 changed from a family owned business with a new management team

6. Body Glove: Success Factors
Competition in industry is fierce
markets were complex with rapid growth, fashion conscious, seasonal demand
requires the ability to respond quickly to changing market conditions and changing trends
Body Glove
ranked #2 in wetsuit industry; desire to become #1 wetsuit manufacturer by 2000
known as fashion conscious high quality producer
manufacturing quality and flexibility
designs that satisfy customers needs
marketed as wholesome “life-style” brand

7. Body Glove: Production
Production cycle:
produced products throughout the year: fall (60%) and spring (40%)
Fall suits were more labour intensive and used more expensive material.
order cycle has three phases 1) pre-book 2) build 3) deliver and informs production cycle
Production processes:
growth put pressure on capacity and production flexibility
production facilities are all domestic and there are storage limitations; production facilities are not large enough
now have two production lines 1) forecast orders 2) custom orders
12% annual cost to carry inventory ($3M in stead of $1.6M)

8. Body Glove: Forecasting
Forecasting Sales:
based on pre-book sales (50-60%)
develop sales forecasts in March (fall) and October (spring)
sales forecasts based on historical sales, trends, gut feeling, etc.
Forecasting Material Purchases:
Materials Requirement Plan (MRP) based on forecasted sales
neoprene usage forecasted was five times as much as any other materials
3 month lead time to purchase material from Japan who were flexible and provided quality (unlike US suppliers)

9. Body Glove: Budget Process
Budget Process Timing:
previously no budget (prior to 1991)
five year strategic plan with no financials
bottom up process discussed with managers
sales by month and by product
budgets finalized by December for January
annual budget not formally reviewed by Board of Directors
annual budget was not revised formally unless significant uncontrollable circumstances arose
each division responsible to project monthly key expenses
CFO reviewed all budgets and consolidated results

10. Body Glove: Budget Process
Budget as Evaluation Tool:
budget used to monitor performance and detect problems
sales representatives were salaried and bonuses based on customer satisfaction and sales levels
performance monitored monthly
budget performance not linked to performance based incentives
profit sharing plan provided rewards of 6-7%
managers’ bonus residual from profit sharing plan
assignment of managers bonus done subjectively

11. 1) Purposes for which Body Glove uses its budgeting system?
Planning - Used for planning purposes
Monitoring - Used to ensure expense levels are low given sales levels to generate profit levels
Evaluation - Budget vs actuals are used to evaluate performance but not formally linked with incentive compensation; compensation is both qualitative and quantitative
Communication - Coordination between divisions occurs outside of budgeting process

12. 1) Purposes for which Body Glove uses its budgeting system?

13. 2) Budgeting process timing?
Body Glove managers do not spend a lot of time with a formal budgeting process
Simplicity of budget process is consistent with informal management style and company size
Budget not provided to Board of Directors only internal usage
Budget is prepared in December for January
“It’s all smoke”

14. 3) Functioning effectively without a budget?
Yes, did so until 1991
Managers accomplished role of budgeting (i.e. communication, resource allocation, evaluation, performance measurement) through exchange of quantitative non financial information and informal communication
Benefits of formal planning grows as companies grow and become more complex
Body Glove is no longer simple organization; it has many profit centres and 300 employees

15. 4) Changes to budgeting and review process?
Reporting frequency adequacy – seasonal, quarterly
Updating the budget more frequently
Evaluation
Usefulness of subjective evaluations should be considered (uncontrollable, departmental interdependency)
Need to link performance evaluations with budgeting process
Strategy
Need quantity information in 5 year strategic plan

16. 5) Body Glove continues to grow?
Body Glove will inevitably grow
Communication:
As company becomes larger and more complex coordination of all the various functions will be more difficult
Informal company culture will likely not satisfy all communication requirements
Formal process:
Budgeting system will have to involve more people and will need to become more formal and elaborate