enterprise risk management

 

Assignment:

Read Chapter 19 scenario, and address the following question, “What are the main financial risk management issues that Cathy and the rest of the management team at Kilgore need to focus on?”

Instructions for Initial Posts:

After reading the scenario, start a new discussion thread. Points are deducted if your submission: 

• Although you should use multiple references, the required course textbook must be the primarily reference source.
• Does not adhere to the University’s academic dishonesty and plagiarism policies.
• Does not answer the question(s) thoroughly meaning with more than 3 paragraphs
• Contains contractual phrases, as an example “shouldn’t” “couldn’t” or “didn’t,” or similar
• Uses vague words such as “proper,” “appropriate,” “adequate,” or similar to describe a process, function, or a procedure.

  As an example, “proper incident response plan,” “appropriate IT professional,” “adequate security,” or similar. These words are subjective because they have a different meaning to different individuals.

Instructions for Responses:

Respond to ONE peer posting. Evaluate the pros and cons of the student’s proposed strategy. Points are deducted if your response: 

Although you should use multiple references, the required course textbook must be the primarily reference source.
• Does not adhere to the University’s academic dishonesty and plagiarism policies.
• Does not address the pros and cons of the student’s proposed strategy.
• Is not a substantive comment that extends the conversation. Meaning about a paragraph – not just “I agree” statements.
• Contains contractual phrases, as an example “shouldn’t” “couldn’t” or “didn’t,” or similar
• Uses vague words such as “proper,” “appropriate,” “adequate,” or similar to describe a process, function, or a procedure.

  As an example, “proper incident response plan,” “appropriate IT professional,” “adequate security,” or similar. These words are subjective because they have a different meaning to different individuals.

School of Computer & Information Sciences

ITS 835

Chapter 19, “Kilgore Custom Milling”

This is a narrated presentation.

Overview

• Background

• Kilgore Custom Milling

•

The Management Team

•

The Company

•

The New Contract

• The Financial Risk Management Meeting

Background

• “Hope is not a risk strategy!” Wishful thinking is not the best we can do, and furthermore

we can’t repeat the mistakes of the past if we want to move to the next level. We need to

think this through more carefully!”

• Kilgore Custom Milling was a small private manufacturer of power window assemblies for

automobile manufacturers’ plants based in southern Ontario, Canada.

• A five-year contract, with an option to extend to eight years, could potentially mean the

difference between a supplier such as Kilgore staying in business or it failing.

• In 1990’s Canadian manufacturers such as Kilgore could rely on the relatively weak

Canadian manufacturers such as Kilgore could rely on the relatively weak Canadian dollar

to help them win price-based contacts. That advantage was now gone with the Canadian

dollar near parity to the U.S. dollar.

Kilgore Custom Milling

• Kilgore Custom Milling began in the late 1980’s. The first few years the company

struggled and relied on heavy levels of bank debt and personal loans to stay in

business. When the company started to eke out a very modes profit, its long-term

viability was far from guaranteed.

• The company caught a break when a small fire broke out at a competing company.

Kilgore stepped in and secured a contract to become a short-term supplier of parts

required for power windows in automobiles.

• Competitive factors: (1)power window assemblies were low-tech and considered a

commodity, (2) quality, and (3) the company philosophy of “sticking to its knitting.”

The Management Team

• Led by Steve MacLinden (owner and chief executive officer), participate in all major decisions

of the company. Left the day-to-day operation of the company to the rest of the management

team, while he focuses on customer relationship and company profile.

• Rory Sullivan has an engineering background and worked his way up to plant manager.

Responsible for all manufacturing and plant operations.

• Casey Dobbelstyn has a background in international heavy equipment sales, was in charge of

sales and client relationships.

• Cathy Williams was the treasurer and de facto chief financial officer. Built up the treasury team

from two to five people. One major decision in this role was to implement a cash management

system that significantly helped to reduce, but not eliminate, the chronic cash flow problems.

The Company

• Kilgore is a private company 100 percent owned by Steve MacLinden. Steve’s long-term plan is

to exit the business when he is ready to retire. His heir has not desire to take over the company

so the company must either be sold to one of the large publically traded OEM manufacturers

or be floated as a public company as a way for him to exit the company profitably.

• The main focus of the company had always seemed to be cash flow management. While the

business had managed to be profitable on an accounting basis over the past five years, it

seemed that Kilgore was always short of cash at critical times of the year.

• Management of cash flow was a key function for Cathy Williams and her treasure team to focus

on. Industry observers felt that the overall market conditions were still shaky and the recent

increase in automobile sales and profits might be a consequence of necessary replacement of

aging vehicles.

The New Contract

• The technical specifications of the contract seemed highly complex and exacting, which laid out

the design specifications for power window assembly. Complex aspects of the contract dealt

with unexpected, but potential, implications of significant design and production changes. In

terms of operational risk, it was felt that the contact was of low risk.

• The troubling aspect of the contact were financials, more specifically risk management. Under

the terms of the contract, all proceeds to Kilgore were to be in U.S. dollars, even through

virtually all of Kilgore’s expense were in Canadian dollars.

• Cathy’s concern was the potential profitability of the contract, particularly when the embedded

options were considered. Second concern was the potential for any inflation differentials

between Canada and the United States. The contract had a built-in quarterly pricing

adjustment based on the U.S. Producer Price Index (PPI).

The Financial Risk Management Meeting

• Kilgore did not have to concern itself much with currency hedging. With sales and expenses

almost exclusively in Canadian dollars, there was little need for it. The low Canadian dollar from

the mid-1990 through 2004 had meant that the threat of U.S-based suppliers entering the

Canadian OEM was minimal.

• There was also the issue of how to structure a swap to account for the embedded options in

the manufacturing contract. If the options in the manufacturing contact were exercised by the

customer, a standard swap could leave Kilgore exposed at unfavorable rates.

• An alternative to the swap would be to use short-term forward contracts. This would have to

be rolled over on a frequent basis due to their shorter term; provide a more flexibility and

would not lock in the company for more than a year, or even less if shorter-term contracts

were utilized.

End