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Some Tactical Mistakes to look out for:. In Review: In all cases, when a Company makes a tactical blunder, at least two functional managers are responsible.

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Presentation on theme: "Some Tactical Mistakes to look out for:. In Review: In all cases, when a Company makes a tactical blunder, at least two functional managers are responsible."— Presentation transcript:

1 Some Tactical Mistakes to look out for:

2 In Review: In all cases, when a Company makes a tactical blunder, at least two functional managers are responsible.

3 Maintain adequate working capital Keep between 15% -20% of balance sheet assets in Cash plus Inventory

4 Production Rule of thumb – plan for 6 weeks of inventory. -- have enough inventory on hand to meet demand for 6 weeks beyond the sales forecast.

5 Financial Guidelines 1. Match your plant investment w/ a long-term bond. If you do not have sufficient new bond debt capacity, issue stock to cover the shortfall. 2. Pay a dividend between $0.50 and $1.00. 3. Do not issue Short Term Debt.

6 Gross Margin: Gross margin is revenue minus direct labor, raw materials & depreciation — expressed as % of sales. A good minimum benchmark for gross margin is 30%. If below 30% … consider reducing its COG, and/or raising prices.

7 MTBF ratings set too high? Check the MTBF ratings of each product against the "Customer Buying Criteria" … Are they higher than they need to be? If the MTBF range is 12-17,000, and it is the #4 buying criteria (as in the Low segment), there is little benefit in having MTBF set higher than the minimum.

8 Prices too low? Check Income Statement in your company annual report (not the Courier). Compare the price of each product with the cost. Prices must be set high enough to allow reasonable profit w/in the current cost structure. If cost structure too high, work on it thru MTBF rating reductions, investments in automation & capacity, & reductions in overtime.

9 Excessive Emergency Loan: Emergency loans listed on page 1 - Capstone Courier. Every time a cash flow shortfall occurs — "Big Al" steps in to keep you afloat: at a 5% premium… Modest emergency loans are no big deal Emergency loans in excess of 10 million usually indicate serious sales forecast mistakes.

10 Excessive Emergency Loan: … Check inventory status of each product on page 4 of the Capstone Courier. If there is excessive inventory — try and determine why. Were sales forecasts simply too high? Or, was it a matter of having a "lousy" product (in the minds of the customers from that segment) when compared to the competition? You can determine this by comparing products on the Market Segment Report (page 5-9 of the Capstone Courier).

11 Excessive Emergency Loan: Sometimes Companies make big investments in plant but forget to raise the money. Check page 3 of the Capstone Courier (financial analysis). Were there large investments in plant & equipment? If so, how was the capital raised?

12 Excessive Inventory Amounts: It is very costly to carry large amounts of inventory (total unit cost multiplied by a penalty of 12%). Ideal year-end inventory position is one unit in each product line: would know that every potential sale was made, & carry cost would be so small - to be inconsequential. Excessive inventory goes hand-in-hand with less than expected revenue from sales — The "double-whammy." Not only do you experience unanticipated inventory overhead, you also have substantially less income than planned.

13 Overly optimistic sales forecasts. Were the sales expectations unrealistic? ie. if the segment demand ceiling was 3 million units, & there are 6 companies w/ products in the segment, a "fair share" starting point is 500,000 sales / company. If you have a better than average product, your sales will be a little higher.

14 Overly optimistic sales forecasts. Understand that every product that tracks within the "rough-cut" parameters will experience some sales. ( as discussed in Chapter 2 of the Team Member Guide) In other words, customers do not buy all of the "best" product until it stocks out, then begin buying the second "best" product until it stocks out, etc.

15 Overly optimistic sales forecasts. Customers evaluate each product monthly. The "best" products get more sales than less desirable products, but it’s relative. It is possible for less desirable product to stock out, while better product carries inventory.

16 Overly optimistic sales forecasts IE- Andrews team produces 250,000 of a "lousy" product in size segment, - Baldwin produces 750,000 of a great product. In this scenario, it would be feasible for Andrews to stock out while Baldwin ended up with 150 thousand units in inventory.

17 Not understanding how the spreadsheets work Sales Forecasts only affect proformas. They are a tool - not a management "decision." Production Schedule (on the Production spreadsheet) is the actual production for the year.

18 Not understanding how the spreadsheets work Enter the number of units you want to produce. The processing "compiler" program will divide the total production by 12 and produce (and sell) that amount each month. Production Capacity is the size of the factory. If the Capacity is 500 thousand, teams may produce up to one million units. But, all units produced above 500 thousand will be affected by time-and-a-half overtime charges. You may choose to sell capacity, or simply leave it idle and unused.

19 Excessive Stock Price Dip: Stock price is affected by performance, asset base, debt, dividend policy, and #of shares outstanding. In a year of aggressive investment in plant expansion and automation, you would expect that the necessary debt load would cause some uneasiness on the part of shareholders.

20 Excessive Stock Price Dip: But, if the stock price dips more than $15.00, it may be a warning sign of too much debt. The stock price can also suffer in profitable years. For example, liquidation of plant brings in cash, but makes shareholders wonder about the long term competitive ramifications. Also, paying dividends during the same year debt is accumulated has a negative affect on stock price. This is true even if the debt was a "Big Al" emergency loan.

21 Excessive loss in profits: Profits are listed on page 1 of the Capstone Courier. Losses are usually the result of a combination of costs being too high and prices too low. Profit can also suffer from excessive expenditures in selling and advertising, heavy interest payments on debt, and losses on liquidation (scrapping) of inventory when retiring a product line.

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