10 Advice to Struggling Teams

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10.1 Low Contribution Margin

Contribution margin is revenue minus labor, material and inventory carrying cost. - expressed as a percentage of sales. It is reported on page 1 of The Courier /FastTrack as an aggregate average of each company's product portfolio. A good minimum benchmark is 30%. If contribution margin is below 30%, the company should consider reducing its cost of goods, and/or raising its prices.

Typical Problems


10.2 Emergency Loan

Emergency loans are listed on page 1 of the Courier /FastTrack . Every time a cash flow shortfall occurs, an Emergency Loan with a 7.5% premium above the current debt interest rate is issued. Modest emergency loans are no big deal. Emergency loans in excess of 10 million indicate serious problems.

Typical Problems


10.3 Excessive Inventory

It is very costly to carry large amounts of inventory (total unit cost is multiplied by a 12% inventory carrying charge). The ideal year-end inventory position is one unit in each product line: one would know that every potential sale was made, and the carry cost would be so small as to be inconsequential. Excessive inventory goes hand-in-hand with less than expected revenue from sales - a double-whammy. Not only did the team experienced unanticipated inventory overhead, it also had substantially less income than planned.

Typical Problems

Overly Optimistic Sales Forecasts: Previous year customer demands (and segment growth rates) are listed on each market segment analysis. Compare the company's sales forecast figures (found in the Decision Audit, see 3.7.3 Decision Summaries) - against segment demand. Were their sales expectations unrealistic? For example, if the segment demand ceiling was 3 million units, and there are six teams with products in the segment, a "fair share" starting point is 500 thousand sales per team. If the company had a better than average product, its sales will be higher. The opposite is true for less than average products. However, companies should understand that every product that tracks within the rough-cut parameters will experience some sales. In other words, customers do not buy all of the best products first, and when it stocks out, then begin buying the second best product, etc. Instead, customers evaluate each product monthly. The best products get more sales than less desirable products, but it is relative. It is possible for less desirable products to stock out, better products carry inventory. For example, say the Andrews team produces 250 thousand of a lousy product in the Capstone® Size segment, and Baldwin produces 750 thousand of a great Size segment product. In this scenario, it would be feasible for Andrews to stock out while Baldwin ended up with 150 thousand units in inventory.

Not Understanding How The Spreadsheets Work: Sometimes participants get confused about the relationship between sales forecasts, production schedule, and production capacity:


10.4 Stock Price Drop

Stock price is a function of:

Book value is equity divided by shares outstanding. Equity equals the common stock and retained earnings values listed on the balance sheet. Shares outstanding is the number of shares that have been issued. For example, if equity is $50,000,000 and there are 2,000,000 shares outstanding, book value is $25 per share.

EPS is calculated by dividing net profit by shares outstanding.

The dividend is the amount of money paid per share to stockholders each year. Stockholders do not respond to dividends beyond the EPS, they consider them unsustainable. For example, if an EPS is $1.50 per share, and the dividend is $2.00 per share, stockholders would ignore anything above $1.50 per share as a driver of stock price.

Stock price generally drops in years where profits are less than previous years or losses occur.

10.5 Excessive Loss

Profits and losses are listed on page 1 of the Courier/FastTrack. Losses are usually the result of overproduction resulting in excessive inventory, a combination of costs being too high and prices too low. Profit can also suffer from excessive expenditures in Sales and Promo budgets (entered in the Marketing area) heavy interest payments on debt, and write-offs when products are discontinued.