Consultancy Report for Portsmouth Leather Company - Essay Example

?Consultancy Report for Portsmouth Leather Company EXECUTIVE SUMMARY The report highlights the financial feasibility of an offer made by Eastern Express to Portsmouth Leather, which pertains to a tender for the manufacturing of executive briefcase and travel case. The existing manufacturing capacity of the company does not allow it to manufacture additional units; The management will need to acquire financing facility from any bank in order to fulfill the order. The finance charges are not incorporated in the cash-flow forecast; The company must assess the incremental contribution margin resulting from the acceptance of the tender INTRODUCTION Portsmouth Leather is one of the renowned names when it comes to selling trendy and high fashion executive briefcase and travel case. The company portray strong financial outlook as during the last financial year the profit of the company increased by 10% to an impressive ? 1,800,000. Following its marketing strategy of exploring new market, the company participated in the Frankfurt International Trade Fair. Eastern express, after being impressed by the quality of the company’s commodities in the fair, approached with an offer. The following report identifies the problems which the company is likely to face and the corresponding solutions to such problems. PROBLEMS IDENTIFIED Problem 1 Portsmouth Leather needs to have additional finances in order to be capable of producing additional briefcases and travel cases. As per the cash-flow forecasted by the management, the company requires ? 495,000 to finance the tender. The company has not incorporated, in the forecasted cash flow, the finance charges on the financing. Problem 2 Another problem that the company is likely to face is the fact that it does not have the additional production capacity to cater the tender. The company currently produces 2,000 units per month, but in order to acquire the tender, the company will be required to produce an additional 2,200 units per month for three months. Problem 3 The company needs to extensively evaluate its logistics in order to assess whether it has the capability to complete the order. Portsmouth leather needs to hire additional staff in order to fulfill the order on time, or will require the current workforce to work overtime. The company needs to negotiate the overtime with the workforce. In addition, the company needs to bargain the cost of raw material with the supplier in order to increase its contribution margin. Negotiating the price of the tender is also significant. POSSIBLE SOLUTIONS AND THEIR STRENGTHS AND WEAKNESSES Solution 1 In order to finance the project, the company needs to acquire short term running finance facility from a bank or any other financial institution. Since the project is of a short term nature, obtaining a short terms running finance facility would be much beneficial rather than acquiring a long term facility. The plus point in acquiring a short term financing facility is that the company would be required to pay mark-up at a lower rate as compared to that if a long term facility would have been acquired. The company can also raise finance through issuance of shares in the market. The advantage of raising shares in the public market is that the company will avoid the finance charge, which it would have paid on the financing facility. Issuance of capital significantly improves the gearing of the company and strengths its equity. The disadvantage of raising finances through issuance of share capital is that it takes comparatively longer time for the existing and prospective share holder to subscribe to the shares and transfer their money to the company. Moreover, the statutory requirement regarding the floating of shares in the stock market is far more intricate as compared to the procedure involved in the sanctioning of a financing facility. Solution 2 The company’s current production capacity will not allow it to produce additional units unless it somehow increase its production capacity or shift its resources towards manufacturing items for the offered project. The company is currently manufacturing 500 units per week which is roughly 71 units per day or 79 units per day if the company operates at the full capacity. Assuming that the company operated at the full capacity in the last year, the company generated revenue worth ? 68 per unit it produced. The tender offered by the Eastern Express is for a period of three month i.e. from the month of June till August. Assuming that the production related to the offer commence from 1st June 2008, the company has 62 days to complete the offer. With the existing production capacity, the company can only produce 4,871 units in the 62 days, whereas as per the requirement of the tender, Eastern Express requires 6,600 units to be delivered. The company needs to evaluate whether the revenue contributed by its existing production plan is lower or greater than the one offered if the company shifts all of its sources towards catering the new offer. Considering the prior year figures of revenue, in 62 days with the same production strategy, the company is likely to generate revenue amounting to ? 331, 157 (?68 x 4871 units). Whereas, if the company accepts the proposal offered by the Eastern Express, the company can generate revenue amounting to ? 495,000 (as per the initial price offered in the tender) which is an additional ?163,843. While making this analysis the company should consider the contribution margin offered by both the production strategies, for which it needs to critically analyze the cost structure of the plans. If the company opts for shifting its entire resources towards manufacturing the products for the tender, although in the short run it would be reaping profit, but the strategy would not be beneficial in the long run. By doing so, the company will lose its current customers base. From the point of view of risk management, it would not be prudent to direct all of its resources towards catering a single project. The company needs to diversify its operations in order to save it from unforeseen unfavorable events. Solution 3 Currently the price quoted by the Easter Express is ?75 for both the Executive briefcase and travel case. The company needs to evaluate whether the prices offered in the tender is competitive enough. Portsmouth leather must compare the price offered in the tender with that currently being offered by the existing customers and should make a lucrative choice. It is the responsibility of the marketing director, Bob, to contact the company and negotiate the price. It would be advantageous to the company if it implement a new supply chain management system. It would enhance the logistics of the company and thus the company would be able to finalize the order more effectively and efficiently. However, the upgrading of the supply chain management system would require significant expenditure over long duration, whereas, there is a possibility that the Eastern Express might be looking for a short term association with the company. The company would also be required to hire additional workforce if it requires significantly enhancing its production capability. Hiring additional workforce takes a lot of time in the process. A better solution to the problem would be offering overtime to the existing workforce. Although currently the company plans to offer overtime of ? 2,000, it should consider whether it is apt from cost perspective and from the labor’s incentive perspective. Moreover, as per the initial cash flow forecasted by the management, the closing balance from the month of July to October shows a negative balance. This is due to the fact that the Eastern Express has offered to make the payment one month after the last consignment. In order to improve its cash flows, Portsmouth Leather should negotiate better payment terms with the Eastern Express. RECOMMENDATIONS AND CONCLUSION The company should accept the offer as the revenue offered by the tender is significant and would strengthen the financial outlook of the company. While accepting the offer the company must consider the following: The company should not allocate all of its resources to the project though it provides higher revenue. It should increase its production capacity to cater both the production strategies. The company must raise finance through obtaining running finance facility and should incorporate the finance charge in the cash flow. It is better to provide over time to the existing workforce rather than hiring new from the labor market. APPENDIX  No. Solution Strength Weakness 1 Short term Loan - It takes less time to acquire loan from a bank or financial Institution. - Raising finance through loan is less complex than through issuance of shares. - The company has to pay finance charge on the loan facility. 2 Shifting all of the resources to the new offer - The company will generate additional revenue of ? 163,843. - The company will lose its current customer base. - Riskier to do business with only one customer. 3 Overtime Incentive - The workforce will work more effectively increasing production - Cost of production increases Read More