Cyclermate and Short-Term Measures - Assignment Example

Cyclermate Report Executive Summary The aim of this report is to suggest and recommend short term measures the company can take to inhibit cash leakages that further deteriorate the already precarious situation. The report will focus on key management issues, cost cutting and short term efficiency of production lines. The company will need to project short term gains not exceeding three years and should project a confident and positive growth in profits. The company will need to re-organize the factory space to reduce the disuse in operational area. It is now obvious that besides the factory space, the company has additional open area that is not in use. There was a slump in revenues in the year 2010 showing a sharp decline in profits. This resulted from the reduction of selling price for direct and shop sales despite an increase in the material unit costs. All the marginal costs like direct raw materials, indirect materials, administration, selling and distribution as well as wages and salaries have been on the rise. The Cyclermate Company requires re-organization of its factory space to reduce the disuse in operational area. The company should lease out or rent the additional space for £200 per year thus getting a new stream of income. It should obtain a bank overdraft of £250,000 up from the current £177,000 to meet its operating activities. The purchasing department can negotiate with suppliers to offer a 10% discount or meet carriage inward costs when purchases are made in bulk. The actual material unit costs are on the increase and probably supersede the budgeted costs per machine in the following year. The selling and distribution costs can only be minimized through increasing the amount of budgeted shop sales to be a par to direct sales at £780 per unit. Production rate can be increased to 11 by reducing on lag time and also servicing machines to increase their delivery capabilities. It is possible to set a new target of producing one bicycle in every 30 minutes. This will help solve the current challenges facing Cyclermate limited. Introduction Cyclermate Limited is currently facing liquidity problems since it is not able to contain inconsistencies in its cash flow statements. The company requires about £1000 to undertake operational and financial obligations. The aim of this report is to suggest and recommend short term measures; the company can take to inhibit cash leakages, which further deteriorate the already precarious situation. The report will focus on key management issues, cost cutting and short term efficiency of production lines. The company will need to project short term gains in utmost three years. It should project a confident and positive growth in profits. Some of the reeling challenges discussed is upon assessing and evaluating the strengths of the company, opportunities it has at disposal and the internal weaknesses if faces. In addition, the threats to the business need investigation. The hallmark of the evaluation will consider the functional performance of the company within a limited period of less than three years. Therefore, it does not include the income streams or production line efficiencies requiring capital budgeting. Human resourcing and employee performance will also be assessed since this directly impacts on the short term growth of the company. The report is to include trend projections in sales, costs and cash flows within the next one year. They will help to gauge the coming year’s performance and inform the company’s financiers and auditors if the operations are rational sound. The bankers will be eager to know any pillars the company stands on before any support is offered. It is worrying to watch a company run into receivership even though gains are made. Similarly, long term solutions will be recommended as they provide an ultimate direction to Cyclermate limited. The report will also focus on the cash flow statements and critically considers cash flow from operating, investing and financing activities. Analysis Cyclermate limited has a large area in terms of factory space and extra land for expansion totaling to 15,000 square feet. This area is prime but in excess of what they need as factory and office space. Within the warehouse, many operations scatter and not arranged to maximize space. The company will need to re-organize the factory space to reduce the disuse in the operational area. It is now obvious that besides the factory space, the company has additional open area that is not in use. Since selling out the extra space is irrational, the company should lease out or rent it for £200 per year thus getting a new stream of income. a) Financial Performance From a financial perspective, the company will have to undertake break even analysis through a marginal costing statement. So far, the BEA for direct sales is; Fixed costs= £401,046 Marginal costs=variable costs Sales 1,404,520 Variable costs 954896 -954896 Contribution 449,624 Fixed costs 401046 -401046 Net profit 48,578 Break even for Direct Sales and Shop Sales Contribution per unit is 449,624/2504=179.56 Break even in units will be= fixed costs/ contribution per unit=401046/179.56=2234 units Break even in sales=2234*1168=£2609312 Margin of safety is = (break even sales-actual sales)/ actual sales=(£209312- £1,404,520)/£1404520=85.77%. This figure is low and it shows that the company is nearing a loss point. In order for the company to get a target profit of £100,000, then the company should aim at a breakeven of (100000+401046)/179.56= 2790 units The break even on sales at this point will be= 2790*1168=£3258720 Assuming the cost and prices of bicycle s remain constant, the company will need to sell more than 2790 bicycles in the year 2011 to stay safe. Figure 1: Revenue versus cost graph There was a slump in revenues in the year 2010 showing a sharp decline in profits. This resulted from the reduction of selling price for direct and shop sales despite an increase in the material unit costs. This decrease is further elaborated by the graph below. Figure 2: Direct and Shop sales performance since 2006 The cost of sales has been increasing steadily since 2005. However, in the year 2010 selling price for shop and direct sales was £438 and £730 respectively. This did not go well with the increased cost of production and direct material unit cost that has been rising over the last five years. All the marginal costs like direct raw materials, indirect materials, administration, selling and distribution as well as wages and salaries have been on the rise. The company should immediately revise upwards the selling price of its bicycles to £800 for direct sales and £470 for shop sales. Commissions of sales staff should also be reduced from 5% to 3% so as to reduce the wages and salaries to less than £200,000 per year. The company did not pay dividends to share holders thus inferring that it can utilize the retained earnings as a means of short term financing. The retained profits of £205,254 in 2010 should be added £12,724 as use the funds as capital. These should be ploughed back into the business to run operations, purchase raw materials and accessories. In addition, the company can mortgage its freehold land and factory for 10 years at lower interest rate of 5%, which can give an extra £400,000 in terms of shareholders funds. The performance of the company is wanting since 2799 units were produced in 2009 and decreased to 2504. This means that the efficiency of the machines reduced from 80% in 2009 to 70% in 2010 indicating a possibility of obliteration and crankiness. The drop machine in machine efficiency was greatly responsible for the nose dive in shareholder profits. To reverse this position, the management will need to hire mechanics that will thoroughly check and service any loose, worn out and missing parts of machines. The cost of machinery and equipment in the balance sheet is extremely low as £15,000 which if deprecated as £12,200 will be a dismal amount. The resulting figure after depreciation is £2800 which points out to the low quality of machinery being used in the company. The rate of depreciation should also be reasonable at say 10% so that the amount of depreciation can stand at £1500. The shareholders initial investment is £700,118, while the income streams in the last five years shows that Year Income Streams 2006 94,618 2007 112,396 2008 130,306 2009 192,734 2010 12,724 Total 542,778 Within five years, the company has not been able to recover the initial investment. It possibly requires two more years to meet the original investment. The capital structure is weak and should be revised so that the initial investment recovers within a shorter period say two years. b) Other measures to save money and reduce costs The company may decide to drop employees home instead of allocating them transport allowance. Again, lunch and tea expenses can be slashed to two instead of three meals a day. The company will have to focus on sourcing for a secured bank overdraft by providing a security which can be the lease agreement, title or logbooks of company vehicles. The overdraft can be obtained £250,000 up from the current £177,000. To negotiate with suppliers, purchasing department bargains a discount or meet carriage inward costs when purchases are made in bulk. While promoting bulk purchasing, it can negotiate for extension of the credit period from one month to two or three months. There should be a companywide practice to reduce the usage electricity, telephone, water and other fixed costs. The company can also outsource some operations like photocopying and printing. c) Production Methods i) Production costs From the warehouse layout, there is little to believe that production procedures are systematic and orderly. It does not show the raw material entry and inspection. The disorder in process arrangement points out to the inefficiencies in methods and processes. The main inventory section should be in line with welding, saws and presses up to the assembly and finished goods stores. Time wastage lowers when time taken in material handling and processing reduces by half. Work measurement and quantification should be undertaken to determine the cost of labor and unit price of finished materials. Work measurement will gauge value the employee puts into the productivity of his/her work. There is also need to determine material price variance and material usage variance so as to reconcile the variation in actual and planned costs of materials. As indicated in the figures, the actual direct unit cost is £360, which is lower than the planned direct material unit cost £376. The actual material unit costs are on the increase and probably supersede the budgeted costs per machine in the following year. The selling and distribution costs can only be minimized through increasing the amount of budgeted shop sales to be a par to direct sales at £780 per unit. ii) Production Efficiency The operation flow will need reorganization in its processes to be closer to each other. This reduces on labor and time taken in delivering semi-finished goods to the next operational stage. Given the efficiency rate of 80%, an average of 9 bicycles is produced per day. It also indicates that in a normal 8 hour shift, the company produces one bicycle in one hour. This rate can be increased to 11 by reducing on lag time and also servicing machines to increase their delivery capabilities. It is possible to set a new target of producing one bicycle in every 30 minutes. The current production is a process production where a machine part is done in procedures. It involves a lot of manpower and effort to complete. Production systems are tuned to small orders and also offer flexibility in the production system. The company should adopt a mass and production technique where a large volume of bicycles is produced for the mass market, through a series of continuous manufacturing. This will meet the market size and meet customers demand. iii) Quality Management From the warehouse layout, inspection of finished goods is done in the final stage. There is limited information regarding inspection of raw materials, methods, procedures and performance. The management should create measures to assess, determine and evaluate the quality in all its processes in the factory. For plant efficiency to be dismally performing, the company has not paid attention to the quality of these systems. The company could need to adopt the fishbone techniques to inspect raw materials, labor, methods, suppliers and machines in the factory floor. The cost of not doing right is high if customers complaint over the finished product. The indirect costs associated with recalling, re-work and returning of raw materials to suppliers is high. To enter into partnership with suppliers, the company should have elaborate plan to source parts and materials with specifications and description. According to the specification schedule of the company, little is given to show that steel frames, brakes, saddles, woven basket, mudguards and built-in-locks are ordered and made to customers’ specifications. The descriptions should point out the size, color, texture and dimensions of parts. For instance, the woven basket should describe the component it is made of like jute or sisal. Oil-bath chain should describe the make and metallic composition like copper, steel, brass among others. A table describing a bill of quantities should be specified in a request for proposal. The top management should introduce quality classes each week to employees to reinforce and instill the practice of ensuring quality first time. The amount saved in ensuring quality can go up to £15 per bicycle. d) Human Resource Management Relationship, performance and welfare of employees are also a factor to consider in motivating and improving their capabilities. Going by the comments made by some company employees, there is a management failure and lapse in leadership. Some of the concerns to be addressed are; i) Employee Safety, Health and Welfare Though this comes as an additional cost, it does not increase the overall production costs to a larger extent. The management could need to review health and safety concerns of employees. Health insurance should be provided to each employee and their physical as well as psychological wellness addressed. First aid kits should be provided fire exits points clearly marked, and drills carried out once a month to establish employee disaster preparedness. Lewis Llewellyn should be given the responsibility to ensure this sector is streamlined. ii) Staffing As mentioned earlier, the production techniques and work measurements should evaluate the efficiency and quality of operations by determining the additional workforce to be added. Salaries of existing employees should be revised downwards to be commensurate to their reduced work. The employees recruited will balance costs in wages and salaries. Adding 5 more staff in the factory floor will help in the proliferation of packaging and other operations in the factory floor. Dai Armstrong should supervise production and leave much of mechanical work to trained personnel. All employees should have defined roles and responsibilities attached to their employment letters. These should be in the form of writing and signed afresh by every employee. The allocation of duties should be based on education levels, experience and talent. The quality of recruitment should be a priority of human resource department in the company led by Frieda Schlock. iii) Corporate Structure and Culture From the conflict of interest among the main shareholders, employees will get sucked into the wrangles and soon identifies themselves with a volatile and hunger driven work environment. Lewis and Linda should talk their family issues away from the functions of this demanding job. Though they are divorced, Dai Armstrong can persuade her to retain her shares within the company since withdrawing 33% of the company shares is catastrophic and will bring down the organization in a glimpse. Geraint Williams has provided a better deal by investing his redundant settlement as a loan to the business at lower interest of 10%. This should be upheld and respected. The company should also adopt a clear functional organizational structure with reporting and delegating procedures. This should be drafted and placed at the company’s reception for every employee to have a look. The structure should identify production, marketing, human resource, finance, warehouse and distribution as the major departments. In addition, the company should place a mission, vision and charter at the reception to promote company values, philosophy and direction. All employees should fit into the structure depending on their educational achievements, experience and relationships. iv) Training To reduce levels of re-work and recall of finished products, the company should have training sessions once every two weeks. Workers should be helped to know that quality is a requirement in every part of the company, and thus all employees should be trained. Davis, Davies, Jones and Faniente consultants, should be called upon to offer training services on quality and performance in the factory premises. The training should be done on weekends say Saturdays so as not to interfere with the performance of the employees. The training will cover new roles of recruited employees and define what every worker is required to deliver in the factory floor. v) Leadership One of the employees complained that the management does not regard their opinions on the scale of the capabilities. The management should introduce an employee feedback mechanism where they receive and address comments, concerns and complaints of employees. They should give freedom to their employees to suggest and introduce better ways of running functions as long as they meet the objectives and values of the organization. Better leadership will allow employees to express dissatisfaction, channels complaints and identify weaknesses of the company. Responsibility should be delegated based on skills, expertise and experience. The management should own the leadership process and show employees that they are in charge. Proper supervision should be done to avoid pilferage, misuse and destruction of company property. e) Long-term survival and profitability To succeed in the long run, the company will need to invest in machinery and equipment. New machines for welding spray booth and curing oven will have to be purchased. In addition, the assembly line should be fitted with robotics conveyors to move semi-finished materials to the succeeding section. This will increase plant efficiency from the current 70% up to 80%. For employees with work skills nurtured within the company, their motivation will not be in vain. Their salaries should be increased to reflect their increasing levels of expertise. Motivation and satisfaction of employees will have a long term impact on the performance of the company. The company should also focus on making superior goods as those of Harold by investing in new technology and methods. In addition, the company managers may visit China and Taiwan, so as to observe cheaper and quality bicycles and thus considering sourcing materials and accessories from them. Conclusions and Recommendations i) The Cyclermate Company requires re-organization of its factory space to reduce the disuse in the operational area. The company should lease out or rent the additional space for £200 per year thus getting a new stream of income. ii) It should obtain a bank overdraft of £250,000 up from the current £177,000 to meet its operating activities. iii) By negotiating with suppliers, purchasing department can receive a 10% discount or meet carriage inward costs when purchases are made in bulk. iv) The actual material unit costs are on the increase and probably supersede the budgeted costs per machine in the following year. The selling and distribution costs can only be minimized through increasing the amount of budgeted shop sales to be a par to direct sales at £780 per unit. v) Given the efficiency rate of 80%, an average of 9 bicycles is produced per day. This rate can be increased to 11 by reducing on lag time and also servicing machines to increase their delivery capabilities. It is possible to set a new target of producing one bicycle in every 30 minutes. vi) The management should create measures to assess, determine and evaluate the quality in all its processes in the factory. The company could need to quickly adopt the fishbone techniques to inspect raw materials, labor, methods, suppliers and machines in the factory floor. vii) Establish a clear corporate structure, train employees in new machinery for long term survival. viii) The management should introduce an employee feedback mechanism where they receive and address comments, concerns and complaints of employees. They should give freedom to their employees to suggest and introduce better ways of running functions as long as they meet the objectives and values of the organization. Reference list Cameron, RG & Quinn, CS 1999, Organizational Culture and Leadership, John Wiley & Sons. Kahn, H 1990, Handbook of Employee Engagement: Perspectives, Issues, Research and Practice, Edward Elgar Publishing. Katz, EN 1966, Assessing Organizational Effectiveness: Systems Change, Adaptation, and Strategy, SUNY Press. Kitson, M 1996, The Political Economy of Competitiveness: Corporate Performance and Public Policy, Routledge. Simpson, R & Kohers, K 2002, Business Practices and Growth in Emerging Markets, World Scientific. Waterhouse, P 1998, 'Challenge and opportunity for the accounting profession: Strenghthening the public’s confidence', Price Waterhouse, New York. Read More