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Tactical Mistakes

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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.
 Maintain adequate
 working capital

Keep between 15% -20% of
   balance sheet assets in
    Cash plus Inventory
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.
    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.
            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.
     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.
       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.
             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.
        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).
               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?
             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.
          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.
           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.
          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.
          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.
    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.
       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.
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.
       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.
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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posted:8/21/2012
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