Key Events/Case Synopsis
National Fabricators Inc. is a company that specializes in the manufacturing of lockers, school furniture, toilet partitions, steel shelving, and is now currently owned by Tom Kruger after buying out $75,000 of shares from shareholders in 1992. The industry is very competitive as costs are rising and prices being cut while the economy declines at the same time. As the president of National Fabricators, Tom Kruger needs to bring the company back on its feet in order to generate profits and reduce its losses of $480,315 and outstanding bank loans of $784,000.
Tom Kruger also predicts that sales would fall as much as 10% during the 1994 fiscal year due to government cutbacks on medical and educational spending as well as a sluggish level of consumer confidence. Tom Kruger is now faced with trying to get a 60-day extension for his temporary line of credit in order to get the company to start making profits again.
Problem Statement and Objectives
To save the company, Tom Kruger needs to get an extension of 60 days on his temporary line of credit so that he can keep losses to a minimum and start generating more profits.
At the same time, the economy is declining, competitors are setting low prices, and the government is cutting back on educational spending. Tom Kruger realizes that his plant is not being utilized at full capacity and most of the operations were being primarily financed on bank credit due to insufficient cash at hand. To address these problems, Tom Kruger is now planning on developing a new plant layout for efficiency as well as requesting a line of credit extension in order to finance debt.
Situation Analysis Porters
As we can see from the case, the metal industry is not an attractive industry because of high competition with low bids, an unstable economy, high bargaining power of buyers, and high start-up costs. Since the buyers have very little suppliers to choose from to do business with, it can be concluded that suppliers have bargaining power in this industry. Buyers on the other hand only have power when they are specialized at what they do and offer a very low price. Substitution is quite limited due to the different specifications offered by the major companies.
Barriers to entry on the other hand are very high due to the huge amount of capital needed to get a foot into the industry. All in all, competition is very high in this industry and one must bid aggressively in order to gain a contract. However, this is hard when everyone is giving their lowest bid. SWOT Analysis Overall, for National Fabricators the weaknesses outweigh the strengths due to its failure towards managing both finance and operations for approximately 10 years.
The threats also outweigh the opportunities mostly due to the intense competition which provides a negative trend towards profits for National Fabricators within the industry.
The company has kept all of its old employees at the management level and this will allow them to keep stability while the company is under new ownership.
With a strong sales team being compensated on a commission basis, this will inspire each employee to work harder to make and close sales; which in the long run will increase company profits. National Fabricator has contracted from a purchaser who are very unlikely to default on their payables because the majority of them come from the government.
Mr. Kruger is well experienced for this position mostly due to his education and qualifications
The company lacks insufficient inventory management and cost management system, which impacts profits.
With a deficiency of cash flow, it forced the company to purchase materials from more costly warehouses other than Steelmills which is cheaper, which in return had increased manufacturing cost. Improper scheduling and status reporting for work in progress caused a major ineffectiveness on plant capacity use, which had openly increased operating costs and reduced net profits.
Buying from the Steelmills will result in an increase of operating profit while costs are being decreased.
The company has the opportunity to grow in various markets and acquire new customers such as malls, hotels, offices, and motels not only in Canada but as well as the United States.
Tremendous price and wage competition in a recurring industry will lead to additional losses in profits. The highest risk for National Fabricators is the three companies which are dominating the industry that has the investment ability to control industry standards and requirements, which could lead to a decrease in profits.
Due to the long term contracts from the government, it is impacting the company’s cash flow in a negative trend.
Historical Financial Analysis
Sales fluctuate due to the frequently cyclic nature of the industry but they aim to remain above 3 million annually.
In 1993 the cost of goods sold is 90% of sales and 9. 6% gross profit of sales. Company’s lack of ability to manage inventory and lack of cash forced them to order from more expensive (12-15%more) warehouse than steel mills.
Net profit margin has been negative and no major patterns over the 9 year period on net profit since the trend of the industry is based mostly on economic factors, and whether or not they secure contracts. Due to the high percentage of COGS, they are only left with a net profit of $980 or 0. 024% of sales in 1993. As a result, if the company lower the material cost, the profit margin will improve drastically.
In 1984 current ratio went from 2. 07 to 1. 2 in 1993 which still is at an acceptable level, mainly due to the fact that operations were losing money in the past few years and there was a large cash drain on the company which resulted in the lowering of the current ratio.
Operations were being financed by National Fabricators bank credit which resulted in outstanding bank loans of $784,000; this could cause serious problems on their credit rating from the local bank due to the worse interface coverage ratio.
Their average age of receivables in days is 78. 79 which had been steady around that number except in 1993 with 101 days mainly due to the holdback on large accounts.
Recommendation and Analysis
We have chosen to recommend alternative #1, which will focus on improving their profits because they will be reducing the cost of materials from purchasing directly from Steel Mills rather than buying from the warehouses. By doing so will help them convince Confederation Bank.
Purchasing from producers rather than the warehouses will significantly save us approximate 12-15%. This can help drastically with their profits being made. Another way to improve profit is by increasing profit margins and to do so they need to cut the cost of materials, which will be approximately 68%. By having cut material cost by 13. 5% National Fabricators will have $314,600, which is the amount they saved from the materials and it would increase their gross profits by that amount. Having laid out this plan everything looks very convincing but there are a couple of setbacks, which need to be worked out.
Delivery is three months once purchased from the producers directly rather than one-day delivery from the warehouses, this may cause problems for daily operations. National Fabricators now has to pay off their suppliers in 30 days payments. It used to be 60-90 days but the change requires the need for more cash on hand. National Fabricators will require the financial support of the Confederation Bank in order to solve these setbacks that will take place if they don’t receive the help financial help they require. Being able to execute this plan we believe that National Fabricators would be able to convince the bank to extend the loan.
This will benefit the company because not doing so will increase the financial problems. The reason being we didn’t choose alternative 2 was because it was just too risky and way too costly especially with the risk at hand. Yes, it was to better their sales but factor in that their attempts to migrate in the U. S. market also have the risk of not being successful. Also, the number of other companies already settled there will give a great competitive market and putting all this together would just show that there is much more risk at hand than reward.
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