Body Glove

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)

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

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 http://www.bodyglove.com/

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

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

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)

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)

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

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

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

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

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”

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

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

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