Carter Company (B) Dubuque, Iowa In December 2008, Robert Carter, president of C
ID: 2763395 • Letter: C
Question
Carter Company (B)
Dubuque, Iowa
In December 2008, Robert Carter, president of Carter Company (CC), finalized a new sales contract with John Deere Company (JDC). With his one and one-half years of experience in managing CC and his father’s 40 years of close, personal relationship with JDC, Robert was able to acquire an early extension of a five-year contract that held price steady.* CC was a single product, family owned company producing high quality cast iron gizmos only for JDC’s Dubuque Plant, which was located across the street from CC’s production facility. Gizmos, although large, very heavy and bulky, are a critical element in JDC’s automatic transmissions. CC had been providing JDC with 50% of its need for gizmos. The new contract anticipates a significant downturn in the market for JDC products in 2009-10 and JDC has asked CC to eventually supply 100% of its need for gizmos.
Last year the Board of Directors of CC (which consisted of all of its owners, i.e., Robert, his father, mother, and three sisters) made it clear to Robert that the primary purpose of the company was to provide a good income for the Carter family. Robert had struggled initially with the management of the company but had eventually gotten everything under control. Under the close guidance of his father in 2007, Robert had rehired the old plant manager and purchasing agent and went back to an assembly line, rather than job enrichment, environment. Production immediately returned to acceptable levels of quality and quantity, since the assembly line was specifically designed to manufacture exactly $720,000 gizmos per week. The workers liked these changes and morale rose. After his first disastrous year as president (2007), Robert’s next year (2008) had been a valuable learning experience. His father died last month and Robert is now in absolute control of CC. He believes that he is ready to try some new ideas that could increase the revenue and profits of CC. He has given up his dream of developing an international company.
A recent article in the Harvard Business Review suggested that a company should diversify its product line and customer base. A company that makes only one product and sells to only one buyer, provides that buyer with significant bargaining power over contract negotiations—as Robert learned in his last negotiation with JDC. Robert is convinced that he should look toward expansion of CC’s product line and customer base.
In the past year, Robert contracted with the Business Research Center of the College of Business, University of Iowa (a university of 30,000 students located in Iowa City, which has a population of 65,000) to explore new product development ideas. The Research Center developed an interesting new product idea: custom-made, high quality oak wood furniture for young children ages 1 month through 6 years. The Research Center had surveyed 500 of the 25,000 homeowners available in Iowa City. The survey concluded that a market existed for custom-made, high quality oak wood baby furniture. Almost 10% of the home owners surveyed said, “They would like to have custom-made, high quality oak wood furniture for their young children.” With almost 75 million home owners in the United States, Robert believed he has discovered a “sure-fire” new product that could make a significant difference in CC’s future. “Just think about it,” Robert would say, “with 75 million home owners of which 10% want this furniture, CC could sell over 7 million rooms of baby furniture!” Robert also believed the baby furniture product fit the other important criteria mentioned in the HBR article, that of synergy. The Marketing Department study pointed out that the key to success in the custom-made baby furniture market was “a high quality product and a discerning customer.” Robert was quick to point out that CC had 40 years experience selling gizmos to JDC. Gizmos were a high quality product and JDC was certainly a discerning customer.
_________
*The new contract stipulates that by mid-2009, CC will produce all of the gizmos required by JDC for the next five years. In the past CC supplied JDC with one-half of their need for gizmos (i.e., $36,000,000 of gizmos per year), which required the production of exactly $720,000 of gizmos each week for 50 weeks per year. Beginning in mid-2009, CC will be required to adjust its production to meet weekly increases or decreases in demand for JDC products. Thus, CC would be required to produce from $1,300,000 to $700,000 of gizmos per week depending upon demands of the JDC market.
Carter Company
Financial Statements
Balance Sheet
(x $1,000)
Dec. 2006 Dec. 2007 Dec. 2008
Assets
Cash 2,000 1,000 4,000
Accounts Receivable 750 2,000 1,000
Inventories 250 3,000 1,000
Fixed Assets 3,000 12,000 8,000
Total Assets 6,000 18,000 14,000
Liabilities & Equity
Accounts Payable 500 4,000 2,000
Short-term Notes Payable 500 2,000 2,000
Long-term Debt 1,000 6,000 2,000
Capital Stock 1,000 1,000 2,000
Retained Earnings 3,000 5,000 6,000
Total Liabilities & Equity 6,000 18,000 14,000
Income Statement
(x $1,000)
FY 2006 FY 2007 FY 2008
Sales 12,000 36,000 36,000
Labor 3,000 15,000 10,000
Materials 1,400 8,000 4,500
Factory Overhead 1,000 3,000 3,000
Marketing 3,000 5,000 6,000
Research & Development 0 0 2,900
General Administrative 1,200 3,800 1,600
Profit Before Taxes 2,400 1,200 8,000
Taxes 960 480 3,200
Profit 1,440 720 4,800
Questions:
1. How would you assess the current financial situation of Carter Company? Has it changed much over the past year?
2. How would CC’s marketing situation change if they added custom-made, high quality oak wood baby furniture?
3. How would CC’s production/operations change if they added custom-made, high quality oak wood baby furniture?
4. What is the major issue facing Carter Company over the next year?
5. Which of the following strategies would you recommend Robert pursue over the next year? Choose only one and fully support your choice.
_____ Continue the present strategy of producing only for JDC.
_____ Continue producing for JDC, but also aggressively pursue manufacturing and selling high quality oak baby furniture.
Explanation / Answer
1. The company's sales in 2008 witnesses no growth over 2007.
It was steady at $36,000,000.
Its profit margin is (4800/36000) = 13.33%.
In 2007 it was (720/36000) = 2%.
So there is a substantial increase in profitaility. Thus increase has been achieved due to control of labor and materials costs.
ROA for 2008 = net income/average total assets.
net income = 4800. average assets = (14000+18000)/2 = 16000
So ROA = 4800/16000 = 30%.
In 2007 it was, 720/(average of 18,000 and 6,000) = 720/12000 = 6%. Thus the ROA has also increased substantially.
Thus, the company has grown in 2008 with regards to its profitability.
The company needs to focus on increasing and growing its topline in the future years i.e its sales revenue.
2. Currently the company has only one customer i.e JDC. So there is virtually no need for marketing its products. If the company decides to add the line of baby furniture to its product portfolio, it will need a proper marketing department. It will have to formulate marketung strategy for its baby furniture portfolio for market entry, brand development and advertisments.
3. Yes, CC's production and operations will change if they add the baby furniture line to their product portfolio. The company is currently making cast iron gizmos. The plant and equipment, manpower skillsets etc for this product will be different from the plant and equipment and manpower skillsets required for the baby furniture.
Secondly, the company's production and operational structure is designed to make a non-customized product throughout the year. By deciding to produce the baby furniture items, the company will have to redesign its operational structure to make custom made products. The operational and production struture will now have to be more agile as well as flexible. The company will have to optimize its production schedule for a year so as to decide how much of each type of furniture will be produced in a year, taking into account the constraints of labor and materials cost.
4. Carter Company will now be catering to 100% of JDC's requirement. Now, the fortunes of CC is entirely tied to JDC's fortunes. Any decline in demand of JDC's products will have a direct impact on CC and CC will have to decrease its weekly production estimate to adjust for the decline in JDC's products. On the upside, CC will benefit, if demand for JDC's products increases.
Thus, the element of risk and the quantum of variability will increase for CC from next year onwards.
5. Robert should pursue the 2nd strategy - continue producing for JDC, but also aggressively pursue manufacturing and selling high quality oak baby furniture.
By only catering to JDC, CC is putting all its eggs in one basket only. This is a highly risky situation as all its revenues are tied to the JDC. If, in the future, JDC faces a tough business environment, the business of CC will also suffer.
CC should diversify and add different set of consumers. Producing custom made baby furniture will help CC earn higher margins in future. As it will be selling to various households, it is expanding its customer base and thus decreasing its risk exposure.
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