Berkshire Threaded Fasteners Case Essay

Berkshire thread FastenersBerkshire Threaded Fasteners Company has recently lost their president, John Magers. The resulting appointment of his inexperienced parole Joe Magers has lead to the companionships holdiness of confidence. Brandon restore is the recently constitute general manger who was hired to turn the company some after a loss of $70,000 in a good business year. As a member of an outside consulting firm I realize been called in to give advice on the problems the company is facing. The sequence period has been up visitd to the present meters.Manu detailuring ProcessSee appendix A for the detailed manu positionuring serve well. In short, fasteners begin as wires, rods and bars which atomic effect 18 then cut to length, headed and finally threaded. What should be noned is that this particular manu facturing process called cold forming is gamey-speed, superior- sight, economical and has low wastage. Such economies of scale will fall by the wayside Berkshi re to offset the actually high cost of cold-forming equipment.Business StrategyA wide-awake analysis is needed in drift to determine Berkshires business strategy. At freshman one would think it was harvest-time differentiation beca function of the inelastic pauperism in the short running game. But one thing that should likewise be remark is the fact that for most goods, pauperism is much more mo sack upary value elastic in the long run than in the short run. This social unite with the fact that Berkshire is convinced that it could non individually raise bells without suffering unquestionable volume declines, and that all the intersections of the different set offrs in the industriousness are rattling similar, prove that their business strategy is in fact cost leadership. other piece of evidence that also supports this strategy is the fact that the major concentrate on of their accounting system seems to be on cost reduction.Place in the EconomyThe industrial fas tener industriousness has been experiencing modest catchth since the 1990s with an come per annum r neverthelessue growth rate of 3.6% though the number of employees confound remained comparatively the same. The North Ameri shag fastener patience is hushed expected to grow by roughly 4% annually despite the competition from unusual countries. How constantly this number represents a decline from the 9% growth contrive which occurred in 1998.The North Ameri pot fastener issue is strongly trussed to the harvest-tideion of automobiles, aircraft, appliances, agricultural machinery and equipment, and the construction of commercial buildings and infrastructure. The more these industries prosper, the greater the demand and prospects for the fastener will there be. There has been as ever expanding commercializeplace for fasteners in the 21st century in the aerospace industry. In fact a 9% annual growth in fasteners for this industry squirt be expected. Motor vehicle gross sal es invite also increased by 9.6% from 2005 to 2006. Unfortunately housing starts devour only increased by 0.7% from 2005.In the in store(predicate) analysts expect metal fasteners to face competition from the adhesives industry as more products are being made with plastic, a product top hat joined together by adhesives. Also buyers study now been demanding advance(a) and diverse fasteners which are also more environmentally friendly- fasteners that maintain lubricity without the use of cadmium, a suspected carcinogen. So the industry is slowly shifting its management to more highly engineered, technologically advanced fasteners.SWOTStrengths1) Newly appointed Brandon Cook has wide executive experience in manufacturing products similar to that of Berkshire.2) Berkshire operates in a capital intensive industry. But as a percentage of entire sales, Berkshires labour cost are 24.69%. This suggests that they either still go for their employees even when they could have done with out them or that they profit precise high salaries to a hardly a(prenominal) workers. This shows that Berkshire has either very loyal employees or very skilled employees- both being assets. Weaknesses1) Joe Magers is not very experienced and the company is facing losses in the production of the 200 and ccc serial publication.2) As a percentage of kernel sales, Berkshires unyielding costs are 47.37%. This is much higher(prenominal) than what a wrong competitive manufacturer like Berkshire should have had.3) Berkshire pays 49% of all its wages and salaries to administrative and sales employee, when the industry average is 27% . This shows poor decisionmaking processes of the firm.Opportunities1) If product lines are discontinued, with the excess capacity and skilled labour force they can branch out into the production of more diverse fasteners. This ties in with the fact mentioned previously that buyers are now demanding more specialized products. Threats1) Berkshire operates in an industry where a few of its competitors are much larger.2) The industry is dominated by Bosworth who dictates the termss that are charged for fasteners.3) Buyers are slowly demanding more specialized fasteners.ProblemWhat is very evident is that the company is losing money on its products. In the previous time period they had noticered a loss of $70,000. Berkshire is unsure if it is the result of the production of the lead hundred serial or the pricing decisions of the vitamin C serial publication. These alternatives need a careful analysis in order to doctor propounded decisions that will stand by turn the company some.Alternative 1 Status QuoQuantitative AnalysisIn order to determine if the company should do nothing, is to predict the future silver flows and boodle income (loss) for the second one-half of the year. See appurtenance B for this enumeration. The predicted pay income is in fact a loss of 1134. Yet, last income may not be a faithful representation, so cash in flows have also been calculated. The predicted cash flow is a negative come of 388. These measurements while disclose than alternative 3 (drop the 300 series) is not as good as the cash flow and net income amounts for alternative 2 (reduce price directs of the atomic number 6 series).One very chief(prenominal) thing that needs to be notable is the fact that inconstant costs are indeed relevant. Fixed costs remain constant even after the production is stopped, but variable costs increase and decrease with production. Therefore the total division marge for this alternative was calculated to be 1504 which does show this alternative in a better lightespecially when in comparison to its net loss and cash flow figures.Qualitative AnalysisThe rock-bottom production of the blow series as a result of the price level remain the same will have a earthshaking impact on Berkshire. The reduced production may lead to employees worrying about the fact that they may be laid o ff to such an extent that their productivity is significantly lowered. Berkshire could also develop a reputation of charging higher prices than the industry standard and they could end up loosing more and more buyers to competitors.Alternative 2 Change price level to $2.25 for the 100 seriesQuantitative AnalysisIn order to determine if the price level needs to be dropped a few calculations are needed. eldest a prediction of its impact on the net income and cash flows for the second half of the year is needed. These calculations are shown in Appendix C. The predicted net income figure is a loss of 1035. The predicted cash flow is a negative amount of 289. While these figures do seem abysmal, what should be illustrious is that in comparison to the other alternatives, these figures are much better. Both the net loss and negative cash flow amounts in this alternative is 99 lower than the status quo alternative and 338.58 lower than the drop 300 series alternative. This hints to the f act that maybe the price should in fact be dropped. some other fact that backs this assertion up is in the calculation of the Contribution strand (CM) for both price levels, based on data from the first half of the year. Table 2 in Appendix A shows this calculation. While the CM of the new price level is lower than that of the original level (0.96 vs. 1.16), the fact that they will sell 250,000 units more (and hence a higher total CM for the new price) clearly makes up for this difference. The success of the new prices level will be contingent on the number of units sold. What is very knockout about this alternative is that if in the future the demand in the commercialize for this product line slumps, only a very small amount of money will be available to be used to pay off the contumacious costs.Qualitative AnalysisThe change in price level will not have much of an effect on the employees of Berkshire because they would still be producingaround the same amount of units (1000000 vs. 996859). They would not have to worry about being laid off. What will be affected is Berkshires reputation. If they had not changed they would have developed a reputation of charging high prices. The reduction of the price would put them at par with Bosworth.Alternative 3 Drop 300 seriesQuantitative AnalysisIn order to determine if the 300 series needs to be dropped a few calculations are needed. First a prediction of the impact of its removal on the net income and cash flows for the second half of the year is needed. The predicted net income figure is a loss of 1373.58 and the predicted cash flow is calculated to be a negative amount of 627.70. The net loss figure calculated is the highest loss of all trio alternatives and the negative cash flow amount is also much higher than the alternatives as well. This hints to the fact that maybe the 300 series line should not be dropped. Also, if the 300 series had been dropped at the beginning of the year it can be seen that there wo uld have been a loss of -183. See the calculations for these numbers pool in Appendix D.Another aspect that backs up this assertion is the calculation of the Contribution bounds for all three product lines based on first half information. Even though Berkshire incurred a loss of .22/unit in the first half for series 300, when you calculate the CM it is a entire new story- the CM of 300 is a positive number- 1.15/unit, this means that Berkshire would in fact incur an even greater loss if they chose to halt production. The 1.15 per unit would no longer be available to cover some of the fixed costs. What is also surprising is the fact that the 300 series Contribution Margin is not far behind from that of the 100 series (the most useful product line) and equal to that of the 200 series.A few other very important observations also need to be channeln into account. First, since many products do cover all their variable costs, no product line would ever be dropped if only a contributi on margin analysis were conducted. Second, even though the 300 series covers its variable costs and part of its fixed costs, it proves to be below par when considering full costs. Finally, in the long run all costs are variable, so the 300 series in this time frame is in fact a poor product line.Qualitative AnalysisIf the 300 series was dropped it would have a significant qualitative impact on Berkshire and its employees. All the employees who were involved in the production of this line would either have to be laid off (which would have a negative impact on the reputation of the firm), or they could still be retained (which would lead to them obtaining a deep sense of maintain and loyalty to the firm). Also the employees who would be shifted around would gain a greater skill set and hence become very valuable assets to the company. valuation of the alternativesComparison Table1) Profitability2) seasonableness3) Consistency with Strategy.Alternative 1-$11347 daysNot as muchAlterna tive 2-$10354-7 daysYesAlternative 3-$137410-14 daysNot as much1) ProfitabilityThe primary accusatory of all businesses, no matter how big or small, is profit. That is why as a criterion, Profitability was given the number one rank. The three alternatives can easily be evaluated on this criterion by comparing the net income figures. Alternative 2 easily wins in this criterion. Despite the fact that it does have a net loss, the loss was not as great as that of Alternative 1 and 3. One important thing that should be noted is the fact that perhaps the second half of the season is always a slow period and that is why the net income figures are so low.2) TimelinessBerkshire operates in a business environment where if firms that lag behind in decision making, implementation of policies etc, they will be left behind with no profits. That is why Timeliness was given the rank of two.Surprisingly Status Quo would have an implementation time of around 7 days. Since keeping the price level of the 100 series the same at 2.45/unit would result in them producing 385332 less number of units (See Appendix E for the calculation), time would be need to shift employees around to new jobs in the firm, possibly close ingest a warehouse or even convert the machines used to produce the 100 series to now produce a different product line.Alternative 2, reduce price level would probably only take 4-7 days to implement. The only thing Berkshire would need to do would be to inform their current buyers of their new price level and perhaps also to tell the lower price in a specialized fastener industry journal.Alternative 3, drop the 300 series would probably take around 10-14 days. Not only would Berkshire need to shift employees around, close down a warehouse etc, as a result of producing a lower number of 100 series units, but they would also have to announce the displace of the 300 series line to its buyers, move even more employees around (or possibly lay them off), close even more warehouses down, move machinery around the manufacturing space etc. This would be a very time consuming process.Overall Alternative 2 would win in this criterion as it would have a less time consuming implementation time and process.3) Consistency with StrategyThis criterion was given a rank of three because while necessary in the evaluation, Profitability and Timeliness do have a greater importance. In the short run Alternative 2 had the greatest consistency with strategy. Berkshire is a cost leader, and reducing the prices of the 100 series ties in very well with this strategy. Alternative 1 and 3 chose not to reduce the price and this decision conflicts with their cost leadership strategy.ConclusionOverall I would preach that Berkshire implement Alternative 2- reduce the price level of the 100 series, as it did win in all three criteria. But one important thing needs a re-mention. The CM per unit of the reduced price level was lower than that of the higher price level. It was only because of the higher volume of sales did it manage to have a higher total contribution margin. In the future if sales volumes drop, despite the price change Berkshire would incur heavy losses. At this present time Alternative 1 and 3 are both very unprofitable and will still be in the future. At least Alternative 1 is not as unprofitable at this present time but what happens in the future will all depend on sales.Recommendations for Specific Action1) Chose a date when the price change will come in to effect and make sure all current buyers are aware of this well forrad of time.2) Advertise in newspapers, journals etc to get the message across to new buyers that Berkshire has reduced its prices.3) All forms, documentation, accounting systems etc should be changed to take into account the new price level.4) Make sure that there are people at roll to research the market and evaluate whether demand is going to decline for the 100 series.5) Make sure that there are researches ava ilable to study the market for new trends and new types of fasteners that could be produced in the future.