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

 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
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
   If cost structure too high, work on it thru MTBF
    rating reductions, investments in automation &
    capacity, & reductions in overtime.
             Excessive Emergency

   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%
   Modest emergency loans are no big deal
   Emergency loans in excess of 10 million
    usually indicate serious sales forecast
        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
   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
   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
   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
   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

   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
          Overly optimistic sales
   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
    Not understanding how
    the spreadsheets work

   Sales Forecasts only affect proformas.
   They are a tool - not a management
   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
       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
    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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