Discussion
Discussion
Read Chapter 6 scenario, and address the following question
“What kind of a financial risk management strategy would you create to solve the issue in Kilgore?”
Instructions for Initial Posts:
After reading the scenario, start a new discussion thread to address the discussion topic.
Discussion Requirements:
Must:
- Be 4 paragraphs in length
- Be supported by the required textbook and at least two additional references
Points deducted if the submission:
- Does not use the required textbook as one of the two reference sources
You CANNOT use Wikipedia, LinkedIn articles, blogs, paid vendors, certification websites, or similar sources in academic writing. You CAN use reputable industry articles from publications similar to ComputerWeekly, PCMag, Wall Street Journal, New York Times, or similar sources. Academic journals and popular industry articles are accessible in the university’s library databases and Google Scholar. All references should not have a publication date older than 2005.
- Does not respond to the question(s) thoroughly meaning with at least 4 paragraphs
- Primarily consists of bullet points
- Uses statements such as “I have gone through your post,” “I have gone through your discussion,” “adding a few more points,” “based on my knowledge,” “according to me,” “as per my knowledge,” or similar
- Contains contractual phrases, as an example “shouldn’t” “couldn’t” or “didn’t,” or similar
- Uses vague words or phrases such as “proper,” “appropriate,” “adequate,” “it is obvious,” “it is clear,” “in fact,” or similar to describe a process, function, or procedure
- *As an example, “proper incident response plan,” “appropriate IT professional,” “adequate security,” or similar. These words are subjective because they have different meanings 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