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Polar Sports Assignment Analysis Solutions
- Number of Words: 2000
1. Which factors should Mr. Weir consider in deciding whether to adopt level of production?
Originally from Japan and known as “Heijunka”, level of production or production levelling is a key contributor to LEAN philosophy – creating higher value for consumers using as less resources as possible and as much as required. Basically, Leveling Production aims at smoothening production adapting the material flows to the customer and in so doing, evening production flow.
Concerns regarding highly seasonal production scheduling are raised by Thomas Johnson in the case. Some of the issues expressed by Thomas during the seasonal production highlight machines staying idle for half a year and being overused resulting in exorbitant operating costs, additional contract-based hiring of sales force and increase in wages during winter season due to the dramatic working overtime (Kester & Wang, 2012).
The key to understanding the current situation lies in the trade-off between the advantages and disadvantages that both seasonal and level production methodologies offer, more specifically, between cost reductions and financial risks. A SWOT analysis is methodologies offer, more specifically, between cost reductions and financial risks. A SWOT analysis is carried out in order to understand better the current situation of Polar Sport.
The main factor to consider in favour of adopting Level Production from an operational perspective is the total cost savings by reducing overtime, maintenance, hiring and training costs, addressing the increasing risk of machines breakage as a result of running long hours under seasonal production. Employees will enjoy normal production schedules and working hours, which will organically reduce mistakes, which translates again into further costs reduction. Another factor for Mr. Weir to have into account is the reduction in COGS (Cost of Goods Sold) to 60% of Sales as a result of the implementation of this production methodology.
All of the above address most of the main weaknesses identified in the SWOT analysis strengthening the company´s current position in the market. Also, under Level Production, the pressure to perform will be transferred from operations and purchasing to finance, marketing and sales.
However, there is a flipside to that coin. A number of new risks arise from the adoption of Level Production and these are to be considered as follows. As identified under the threats in our SWOT analysis, one of the most notorious risks is the unpredictability of the design trends that could turn a well-demanded product into obsolete relatively quick. This could lead to carry with increased inventory costs for months as a result of sitting on our unsuccessful product and finally, having to sell it at a deep discount at the end of the selling season.
The increase in inventory is not only more costly ($300k extra costs), but also presents the new risk of damaging the goods in the warehouse due to excessive handling and storage. Even though COGS is reduced by 6% as mentioned above, there will be a monthly inventory increase of an average of 8%, especially due to the greater quantity of finished goods during the months of low demand, leading to an increase in operating expenses.
Furthermore, even though level production is supposed to be more efficient, a certain amount of inefficiency at the beginning is to be expected due to the lack of expertise following this this strategy. Moreover, while a relaxation in the operational side of the business is to be expected, an impact on the financials of the firm is also foreseen affecting profits, accounts receivables, cash flows, interest expenses and notes payable. If not properly addressed, this could lead to exceeding credit limits and experiencing illiquidity issues. As mentioned above, the pressure to perform would turn on finance and a new plan may have to be devised in order for the financial side of the business previously used under seasonal production to be adapted to the new strategy.
2. What are the total savings from adopting level of production?
Some of the direct savings prior to the financial impact can be extracted directly from the case such as $480k as a result of eliminating overtime wages and lower maintenance costs or $600 due to less hiring and training expenses (Kester & Wang, 2012).
However, as argued in the previous question, the new strategy comes at a cost. Level production will increase storage and handling costs (inventory) by estimated $300k (Kester & Wang, 2012). This has an impact in the operating costs needed to run the business, affecting the interest expenses and adding additional interest expense to the already existing ones, presenting a difference of $xx. Since the cash will be negatively affected by the impact on the financing activities, and interest income (2% annualized rate of return on monthly cash balances according to the case) is dependent on the cash available, this type of interest will decrease as well by $xx. As a consequence
3. Prepare pro forma IS, BS, and CF to estimate the amount of funds required under level production. Does Polar Sports need more than $4 million in short-term financing in any given month?
4. As the banker, would you be willing to extend the line of credit to more than $4 million to finance level production? Why or why not?
5. What other sources could substitute in part for bank lending if the lender is not willing to extend the present line of credit?
6. Compare the liability patterns feasible under the alternative production plans. What implications do their differences have for the risk assumed by the various parties?
7. What would be the impact of unsold inventory on cash flows and projected cost savings?
- What is interest income for Polar Sports?
- Tax payments March 15 of the tax payable in 2011. Rest oayment 25% of tax liability for 2012. 25% of total income taxes?
- What is the role of the 120-day payment
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