Berkshire Threaded Fasteners Case Essay

Berkshire Threaded FastenersBerkshire Threaded Fasteners Company has recently lost their president, John Magers. The resulting appointment of his inexperienced son Joe Magers has lead to the companys pass of confidence. Brandon elude is the recently appointed 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 knocked out(p)side consulting potent I have been c wholeed in to give advice on the problems the company is facing. The time period has been updated to the present times.Manu concomitanturing ProcessSee addendum A for the detailed manu accompanimenturing process. In short, fixtures begin as wires, rods and bars which ar then cut to length, headed and at last threaded. What should be observe is that this musical compositionicular manufacturing process called cold forming is high-speed, high-volume, economical and has low wastage. Such economies of scale allow allow Berkshire to offset the very high be of cold-forming equipment.Business schemeA cargonful analysis is needed in coiffure to determine Berkshires business dodge. At first iodin would think it was product specialty beca physical exercise of the inelastic demand in the short string. But one thing that should overly be noned is the fact that for most goods, demand is much more wrong elastic in the long run than in the short run. This combined with the fact that Berkshire is convinced that it could not individually raise bells without suffering real volume descents, and that all the products of the different manufacturers in the industry are very similar, prove that their business strategy is in fact cost leadership. Another piece of evidence that as substantially as supports this strategy is the fact that the study focus of their history system seems to be on cost reduction.Place in the EconomyThe industrial fastener industry has been experiencing modest growth since the 1990s with an average per annum revenue growth rate of 3.6% though the image of employees have remained relatively the same. The North American fastener industry is even-tempered expected to grow by around 4% annually despite the competition from foreign countries. However this number represents a decline from the 9% growth spurt which occurred in 1998.The North American fastener toil is strongly fix to the production 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 bequeath on that point be. There has been as ever expanding market for fasteners in the 21st century in the aerospace industry. In fact a 9% annual growth in fasteners for this industry can be expected. Motor vehicle sales have also change magnitude by 9.6% from 2005 to 2006. Unfortunately housing starts have barely increased by 0.7% from 2005.In the futurity ana lysts expect metal fasteners to face competition from the adhesives industry as more products are being made with plastic, a product best joined together by adhesives. in addition buyers have now been demanding innovative 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 focus 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 total sales, Berkshires force cost are 24.69%. This suggests that they either still retain their employees even when they could have done without them or that they be very high salaries to a few workers. This shows that Berkshire has either very loyal employees or very adroit employees- both being ass ets. Weaknesses1) Joe Magers is not very experienced and the company is facing losses in the production of the 200 and three hundred series.2) As a percentage of total sales, Berkshires fixed be are 47.37%. This is much higher than what a footing 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 decision reservation 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 narrow 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 scathes 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 meetred a loss of $70,000. Berkshire is unsure if it is the result of the production of the three hundred series or the pricing decisions of the one hundred series. These options need a careful analysis in order to make informed decisions that volition help turn the company around. pick 1 Status QuoQuantitative abbreviationIn order to determine if the company should do nothing, is to predict the future capital flows and last-place income (loss) for the southward half of the year. See Appendix B for this deliberateness. The predicted enlighten income is in fact a loss of 1134. Yet, meshing income may not be a faithful representation, so cash flows have also been work out. The predicted cash flow is a negative nub of 388. These amounts while better than alternative 3 (drop the 300 series) is not as good as the cash flow and net income amounts fo r alternative 2 (reduce set levels of the 100 series).One very important thing that needs to be renowned is the fact that variable costs are indeed relevant. Fixed costs remain constant even after the production is stopped, only when variable costs increase and decrease with production. Therefore the total contribution margin for this alternative was calculated to be 1504 which does show this alternative in a better lightespecially when in equivalence to its net loss and cash flow figures.Qualitative AnalysisThe decreased production of the 100 series as a result of the price level remaining the same will have a significant trespass on Berkshire. The reduced production may lead to employees worrying about the fact that they may be laid off to such an extent that their productivity is significantly lowered. Berkshire could also stop a reputation of charging higher prices than the industry standard and they could end up loosing more and more buyers to competitors. alternate(a) 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. First a prediction of its reach 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 noted 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 fact that maybe the price should in fact be dropped.Another fact that backs this assertion up is in the calculation of the Contribution Margin (CM) for both price levels, based on data from the first half of the year. Table 2 in Appendix A shows this calcu lation. 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 dodgy about this alternative is that if in the future the demand in the market for this product line slumps, only a very small amount of money will be available to be apply to pay off the fixed 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. pick 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 three 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 would have been a loss of -183. See the calculations for these numbers in Appendix D.Another aspect that backs up this assertion is the calculation of the Contribution Margins 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 whole 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 make out some of the fixed costs. What is also surprising is the fact that the 300 series Contribution Margin is not far hindquarters from that of the 100 series (the most profitable product line) and equal to that of the 200 series.A few other very important observations also need to be taken into account. First, since many products do cover all their variable costs, no product line would ever be dropped if only a contribution 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 poo r product line.Qualitative AnalysisIf the 300 series was dropped it would have a significant soft 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 respect and loyalty to the firm). Also the employees who would be shifted around would gain a greater skill set and hence become very of import assets to the company.Evaluation of the alternativesComparison Table1) Profitability2) timeliness3) Consistency with Strategy. selection 1-$11347 daysNot as muchAlternative 2-$10354-7 daysYesAlternative 3-$137410-14 daysNot as much1) ProfitabilityThe primary objective of all businesses, no matter how big or small, is profit. That is why as a standard, Profitability was given the number one rank. The three alternatives can easily be evaluated on this criter ion 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) seasonablenessBerkshire 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 memory the price level of the 100 series the same at 2.45/unit would result in them producing 385332 slight 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 down a store or even convert the machines used to wee the 100 seri es to now produce a different product line.Alternative 2, reduce price level would likely 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 advertise 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 dropping 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 superlative 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 urge on 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 dispense 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 ahead 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) unsex sure that there are flock at hand to research the market and evaluate whether demand is going to decline for the 100 series.5) Make sure that there are researches available to study the market for new trends and new types of fasteners that could be produced in the future.