Company Analysis - Case Study Example

COMPANY ANALYSIS [The of the will appear here] [The of the id will appear here] [The of the will appear here] [The name of the course number will appear here] Executive Summary Owen Precision Machining is a small company dealing with the manufacturing of machine parts. With the US manufacturing industry back on revival, the company has been facing a surge in demand for its products. The company, however, is unable to manage the increase in demand. This is evident in the way that the company has run out of running capital for the second time in two years. The principal reason behind this lack of running capital is the demand of the customers to provide the products at the shortest lead time which in turn requires the company to keep a stock of inventory. This keeps up the cash in the inventory backlog. The company also faces the issue of low bargaining power both from the suppliers and customers. This paper will aim to develop a course of action whereby the company would be able to properly forecast the demand of the products and to gain a stronger position against both the suppliers and the customers. The first theory that would be discussed is strategic planning since the company does not seem to be moving in the right direction. For this, firstly the company would be analyzed under the SWOT analysis and later on a strategy would be developed using the theory of six thinking hats of De Bono. The second theory discussed is demand forecasting and capacity management. Demand forecasting involves getting the information on the predicted demand of the product. This is done through various methods that involve consulting experts and also statistical methods of consulting with previous sales records. Once the demand is properly forecasted, the next step is capacity management which is done either by controlling the capacity or the demand for the product. Another concept used in this paper would be investment appraisal that would help develop a proper course of action for the company for investing its money in future projects and how to appraise those projects. Acknowledgements Chapter1 Owen’s Precision Machining is a machine company owned and operated by Christopher Owen who manages a team of 15 employees. This small machine company undertakes the task of developing machine parts that are later used for robot prototypes and laboratory automation equipment. The company basically operates as a business to business company. In the recent years, OPM has seen changes in the external industry that have wrought changes within the company- leading to both positive as well as negative outcomes. In terms of economic changes, the company like any other company operating in 2007 suffered from the global economic crisis. However, even though a large number of companies were forced to shut down production because of the crisis, OPM was able to remain in operations. Recently, the company has faced a surge in demand and thus in production as companies in the US are turning towards insourced manufacturing. Companies in US, realizing the advantages offered by internal sourcing as compared to outsourcing to developing countries, have started to bring their focus back to US which means more business and growth opportunities for companies like OPM. However, this trend of insourcing has created certain challenges for OPM. The biggest issue that OPM is apparently facing is the shortage of running cash in the company. The company, in order, to decrease lead time for its customers has to buy inventory is bulk amounts. The special needs of the customers require that the company keep a wide variety of specialized raw materials. This adds up inventory in the company and in turn adds inventory costs associated with the additional backlog of inventory. The company, in order to maintain reserves of inventory has to invest a large chunk of its running capital into the company. This holds up the capital for the company and thus the company is running low on running capital for the second time in two years. The issue of running capital has not occurred for the first time in the company. The company previously had enjoyed a good debt standing in the industry. This was perhaps what allowed the company to survive through the recent economic crisis when big companies failed to manage their debt and equity ratio. However, recently in order to expand, the company took up a loan of 100,000 dollars. Again within a year, the company will require another loan of 40,000 dollars. The investor for the company is a friend of Christopher Owen and was interested in investing within a growing company. However, Owen is not sure if Bob Benson, the investor would be willing to invest again within such a short time span. However, additional capital is required for the company to survive. Owen understands that the shortage of cash that is being faced by the company may be due to the inventory costs that the company is bearing. At this point of time, the customers of the company want the products to be supplied at shorter lead times and with specialized needs. This requires that OPM keep a backlog of inventory in order to reduce the lead time for manufacturing the products. The inventory also is not of a standard nature. Rather the inventory caters to diverse needs of the customers and therefore all kinds of inventory need to be kept in stock. This, therefore, consumes a major portion of the running capital of the company. Owen has consulted with supplier in this issue. He has agreed to decrease lead time for supplying the inventory but at the cost of increased markup of 5 percent. Despite these issues, the company is enjoying a favorable position in the industry. The sales record has grown exponentially since the past year as sales have increased by 23 percent from the last year. Furthermore, the company has been able to break the set target for its EBIT which was set for 7.9 but an 8.1 percent increase was experienced. The reason for this record growth is attributed to many factors. The chief factor is obviously the increase in demand for locally manufactured machine parts that OPM is supplying. Also the company is providing great service to its customers by providing the products at the shortest possible lead time. Also the location of the company allows it to take benefit of certain factors. The company is located in the prime hub of manufacturing where the optimal infrastructure is provided for the growth of manufacturing materials. Massachusetts, the place where the company is located, is also the home of universities therefore allowing the company to benefit from a surge of fresh graduates each year. The company therefore is in precocious position right now. It is facing a major issue in the way that the capital is managed. While the company is in a good position right now and the industry seems to be promising, the issues of managing cash and inventory cannot be ignored and therefore steps need to be taken in the right direction. Owen is also presented with the opportunity of selling off his company to two Harvard Graduates at a good offer of 1.1 million dollars or 6.9 times the EBITDA of 2011. If Owen is unable to manage the issues within the company, he can always sell off the company. Chapter 2 Introduction to the case study Owen Precision Machining is a small machine shop that is operating in a vastly growing manufacturing industry. The demand for products developed by OPM is increasing at a rapid pace as companies within the US have realized the importance of insourcing the manufacturing of their technical products, an area where OPM specializes. The company is experiencing record sales in the last two years. However, despite this, the company is facing a big dilemma in the form of dwindling cash reserves. The financial report of the company does not present an entirely pleasing picture and it is expected that the company would run out of running cash in the next year. The owner, Christopher Owen should therefore develop a proactive approach in dealing with this issue, otherwise he has the option of selling his company to investors who have shown interest in buying the company and have presented a good offer to Owen. Statement of the Problem Analyzing the case study, a number of problems are apparent in the company the company is presently being managed. The most apparent issue that the company is facing is that the company’s cash reserves are expected to run out in the next year. This is occurring despite the fact that the company is experiencing record sales. The industry is finally catching up after the recession and the company has been able to survive the recent economic crisis. This was because the company did not rely on debts for financing the operations in the company. However, recently it seems that the company is just doing that. It would have to ask for another investment in the near future. While this may be inevitable, the company needs to analyze the core problems in the operations of the company that are leading to this problem at hand. The decrease in running capital can be attributed to a number of factors. One of these factors is the increase in demand for the product. While increase in demand is favorable for the company but it should be understand that OPM is a small company and is therefore unable to manage the demand of the customers. The company does not have the necessary capital to run operations at the capacity demanded by the customers. In order to meet the demands of the customers, the company is working at its maximum capacity. It is investing most of its cash reserves in continuous operations which is leading to the lack of running capital for the company. The company is unable to also properly manage both its customers and suppliers. Both the customers and suppliers have a high bargaining power over the company. The customers of the company are clear about the fact that if the company is unable to provide products according to their specifications at the shortest provided lead times, they would have no qualms over shifting to another supplier. Since the trend of insourcing is just catching up, OPM does not have a strong bargaining power over its suppliers. Also the suppliers of the company enjoy a strong position over the company. The suppliers demand a higher price for the raw materials if the company request shorter lead times. Furthermore, the company is facing an issue of poor rate of return on its investment. Recently the company received an investment of 100,000 dollars from a willing investor. The company invested this into improving operations and machinery in the company and buying more inventories. However, the company was unable to get a suitable return on its investment and therefore fell into a cash problem so soon. It is obvious that the cash reserve issue was poor planning on the part of the managers since they did not expect to run out of cash so soon and when the company was experiencing a good period of sales. Research Questions The main issue that OPM needs to deal with is to manage its running capital by taking into account the problems that lead to this shortage of cash. Hence, the question is what changes should the owner, Christopher Owen bring about in order to prevent further problems of cash? Aims and Objectives Considering the above research question, the aims and objectives addressed in this paper include: 1. Strategic Planning for the company. Strategic Planning entails properly utilizing the limited resources within the company in order to ensure that the company runs smoothly and brings profit for the company. For this, theories pertaining to strategic planning would be discussed. 2. Project management of the company in order to forecast the demand for the products and then align these with the inventory stock kept in the company to prevent the cash to be stuck up in keeping unused inventory within the company for long. This will also ensure that the company develops an advantage over its buyers and suppliers. 3. Financial Appraisal of the company will be conducted. Investment Appraisal would be conducted to analyze the required finances for the company so that the investor could be approached with the proper plan. Structure of the Rest of the Report With the research question, aims and objectives in mind, the rest of the report would deal with introducing related theories to the case study. The next chapter, chapter 3 would deal with the introduction of the theories. In chapter 4, these theories would be applied with the organization in focus, OPM. Once the problems of the company are understand under the light of the discussed theories, chapter 5 would provide a set of recommendations and an action plan for the company complete with the limitations of the action plan and how to manage these limitations. Chapter 3 Problem Statement OPM is a small machine manufacturing company that is expanding at a rapid rate and the company is unable to manage the increase in production and demand. Plan of Analysis In order to ensure that OPM moves in the right direction, the problems within OPM have been analyzed. In this chapter, the problems will be studied under the light of existing theories and strategies to create a way forward for OPM, one in which OPM has better control over the operations of the company. It is obvious that the company right now needs a strategic plan in order to manage its resources so that the risks within the company are better managed. The company has also been facing issues of managing its demand and capacity, for this project management theories pertaining to demand forecasting and capacity management will be studied. Another issue within the company is the financial management. For this, investment appraisal will be studied. The review of literature would study the above mentioned theories in depth. Review of Literature Strategic Planning Strategic Planning is a management tool which is meant to bring about change or improvement in an organization. Strategic Planning assess the organization’s current strengths and weaknesses and using this assessment develops a plan to move the organization towards a better direction. For the analysis of organization, a myriad of analysis tools are available. However, the most commonly used is the SWOT Analysis for its simplicity and ease of use. SWOT analysis is an assessment of an organization’s internal and external environment in which it operates. The word SWOT is an acronym for Strengths, Weaknesses, Opportunities and Threat. This will allow the company to keep in perspective its position within the industry (Armstrong, 2006). Different kinds of techniques can be employed for strategic planning. One of them is the six thinking hats of De Bono. Each hat provides a different perspective to the issue. The six hats include white hat, yellow hat, black hat, green hat, red hat and blue hat. The white hat takes into account the facts of the problem. The yellow hat them explores the benefits or optimistic side of the situation. The black hat, then takes a complete round about, by pointing out the problems in the situation. The red hat then expresses the emotions regarding the situation and the green hat comes up with ideas and solutions to the problem in a creative way. The blue hat is supposed to be the control mechanism that ensures the thinking moves in the right direction (Bono, 2009). Demand Forecasting and Capacity Management In every business, demand for a product does not remain constant. It differs with seasons, holidays, economic conditions etc. However, companies are in continuous operations; and for them to better manage their resources, they should evaluate the demand for the product. This calls into account the theory of demand forecasting. Demand forecasting allows companies to forecast the demand for their products using different techniques. It is only after demand forecasting is conducted that the company manages its production to optimize the production and sales ratio of its products. This calls into account the theory of capacity management. Demand forecasting is a technique employed for three main purposes: to gauge the profitability of a new market, to manage capacity of existing products and to make pricing decision. Choosing an appropriate technique depends on a number of factors. These include cost, degree of accuracy, quality, lead time available and the time length of the forecast. Techniques of forecasting include historical forecasting, mathematical forecasting, graphical forecasting, initiative forecasting, future-trend forecasting etc. A combination of technique may also be employed. In the recent years, computer aided forecasting has also been made possible where data and statistics are fed into the computer and the computer uses this to forecast the demand. This is usually employed in cases where a myriad of factors influence the sales of the products. Expert opinions such as the Delphi method and nominal group technique are also useful methods but are mostly employed by large corporations. The moving average method is a quantitative method whereby the previous demand of the product for the last three years is analyzed to predict future demand (Sharma, 2009). Once the demand is properly forecasted, the next step is capacity management. There are two methods of capacity management. One is to manage the demand through advertisements and promotions to align with the fixed capacity. The other method is to manage the capacity by adapting to the demand for the product. In most organizations, both the methods are employed together to control capacity (Wright and Race, 2004). Investment Appraisal Investment appraisal is a planning process whereby companies determine the profitability of investing in expanding or improving operations. A firm may be considering opening up a new manufacturing facility. Investment appraisal helps the firm in making an informed decision on whether the new venture would be profitable and how to manage the investment in order to achieve the maximum profitability. Three methods of investment appraisal are generally employed: the pay back method, accounting rate of return and discounted cash flow technique. The pay back method is a traditional method whereby managers evaluate on whether the investment made would be able to pay back within a predetermined period. This method is particularly helpful when comparing one investment decision over another. This method is the most used method when making an investment decision. Accounting rate of return considers the profit that the company will get after undertaking a certain project. An organization can undertake the project if the ARR is equal to or greater than the set target profit. The third investment appraisal method is discounted cash flow. This is a more complex technique where the investor considers the time value of money. Net present value and internal rate of return are techniques employed for this method (McMenamin, 2013). When making an investment appraisal, a company also needs to consider non-financial aspects which include brand image, quality, reputation, human resource management etc. Nowadays corporate social responsibility also plays an important role in making an investment appraisal. Chapter 4 SWOT Analysis The SWOT Analysis of OPM is as follows: Strengths: 1. The company has been able to break its sales record; 2. The company, despite being small, has been able to survive the recent economic crisis; 3. The company is in good hands as the manager is a second generation owner and feels a sense of responsibility for the company; 4. The company has been able to build a strong inventory and provide its customers with a wide range of products. Weaknesses: 1. Despite the high sales, the company is unable to retain running capital for day to day operations; 2. The company is relying more on external investment and is slowly breaking its record of good debt standing; 3. The suppliers and customers both have high bargaining power; 4. The company is unable to properly forecast the demand for its products and is therefore maintain excessive inventory which is taking up excessive capital that would otherwise be utilized more productively. Opportunities: 1. The trend of manufacturing products abroad is decreasing and there has been an increase in demand for locally manufactured products; 2. US is finally overcoming the economic crisis that it faced recently and the economy is reviving which means that industries in general would face a revival; 3. The industry is growing through a phase of growth. Threats: 1. The company is unable to enjoy a strong bargaining power of the customers and the suppliers. The SWOT analysis presents a good picture of the company. It shows that the industry is growing through a good phase and the image that OPM has developed over the years is helping it bring business. However, the internal operations within the company need to be improved so that the company can reap the benefits of the growth phase of the industry. For bringing about the change, the six thinking hats of De Bono would be employed. Six thinking hats of De Bono The white hat shows that the company is experiencing a growth that it is unable to manage. In order to meet the demands of the customers, the company has to run at maximum capacity and invested capital to expand production facility. However, the company is unable to get a good return on its investment as the company is running out of capital for the second time in two years. Donning the yellow hat, we can understand that the company is breaking its targeted sales figures. The company is achieving more than it expected but then donning the black hat, it is evident that this is affecting the capital at hand in the organization. While the company is breaking sales records, it is unable to properly manage its demand and supply. Donning the red hat, it can be said that a potential can be realized in the company since the company is managed by the owner who feels for the problems that the company is facing. The president, Christopher Owen has a proactive approach and there is a good chance that he will be able to steer the organization on the right path if provided with the right direction. Donning the green hat, ideas for improvement would include being able to properly utilize the inventory and to manage the inventory by implementing controls such as demand forecasting and capacity management. Donning the blue hat, the president needs to be a step ahead when he buys inventory. He should take informed decisions so that capital is not tied up in the inventory. For this, investment appraisal is necessary before buying any further inventory. The strategic plan of the company requires that the company manage its inventory properly. This will be managed by properly forecasting demand for the existing products and managing capacity under the forecasted method. Furthermore, in the future, the company would have to properly appraise investment in buying any inventory because making any decisions. Demand Forecasting and Capacity Management In Chapter 3 of this report, a number of methods of demand forecasting were discussed. Computer aided demand forecasting would not be suitable as it would require more investment which would add more challenges for the company given the fact that the company is already running low on capital. Also computer aided techniques are more suited for big companies. For demand forecasting, the company would have to rely on a combination of two techniques: the moving average method and the Delphi Technique. Investment Appraisal 5 Proposed solution to problem Integrated assessment of the analysis - generate ideas or alternative solutions Choose a “best fit” solution from the options  Recommendations  Decide on an action plan of  Limitations of the study, scope for further research 1200 words References Anderson, B., 2007, Business Process Improvement Toolbox, New York: ASQ Quality Press Bono, E. D., 2009, Six Thinking Hats, New York: Penguin Group McMenamin, J., 2013, Financial Management: An Introduction, New York: Routledge Sharma, K., 2009, Logistic Management: A Competitive Advantage for the New Millennium, New Delhi: Global India Publications Wright, J. N. and Race, P., 2004, The Management of Service Operations, Ohio: Cengage Learning EMEA Read More