Aurora Textile Case
Essay by halcyon278 • November 1, 2015 • Case Study • 5,241 Words (21 Pages) • 1,870 Views
TABLE OF CONTENTS
Case Context
Case assumptions
General
Sales volume and cost projections
Option 1: Existing Ring Machine
Option 2: Zinser 351
Inventory projections
Analysis
Framework for Analysis
Discounted Cash Flow Analysis
Option 1: Existing Ring Machine
Option 2: Zinser 351
Decision
To replace or not
When to replace
Risks and recommendations
Risks
Source of funding
Effect of price cut
Other risks
Recommendations
Management Actions
Invest or Pay Dividends
Case Context
Established in the 1900s, Aurora Textile Co. (“Aurora” or “Company”) is one of the oldest yarn manufacturers in the United States, with operations spanning domestically and across the globe. Major apparel and industrial good manufacturers are the company’s main customers. In particular, Aurora caters to four major customer segments. This is presented in Table 1.1 below. It can be noted that almost 80% of Aurora’s revenue come from the Hosier and Knitted Outerwear segments.
Customer Segment | % of Revenue | Description |
Hosier | 43% |
|
Knitted Outerwear | 35% |
|
Wovens | 13% |
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Industrial & Specialty | 9% |
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Table 1.1 Customer Segments of Aurora
During the past couple of years, the US textile-mill industry suffered from a huge drop of demand for its products. This forced Aurora to retain only four of its facilities to reduce manufacturing costs so that the company can continue its operations. The major causes for the decline of the US textile-mill industry are described in Table 1.2 below.
Cause | Effect |
Globalization |
|
Consumer preferences and fads |
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Improvement in IT |
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Trade policies |
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Table 1.2 Factors that Contributed to the Decline of the US Textile Industry
The four plants of Aurora that remain in operation are Hunter, Rome, Barton, and Butler. Aurora relies on the rotor spinning technology to manufacture its yarns in the Rome, Barton and Butler plants. Only the Hunter plant makes use of the ring spinning technology. Table 1.3 shows the main differences between the rotor and ring spinning technologies. In a nutshell, the former focuses on efficiency while the latter technology focuses on the quality of the yarn being developed.
Ring | Rotor |
|
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Table 1.3 Advantages of the Rotor and Ring Spinning Technologies
In order to remain competitive, a project was initiated to update the ring technology in the Hunter plant to increase its efficiency. The Chief Financial Officer (CFO) of Aurora is evaluating two possible options: to continue using the current ring technology machine or replace it with the more efficient Zinser 351 technology. Table 1.4 summarizes the main financial considerations when choosing from the aforementioned options.
Current Ring Machine | Zinser 351 |
|
|
Table 1.4 Main financial considerations of the two options
The primary advantage of Zinser 351 is its ability to produce higher quality and higher margin products. The efficiency of the new technology would also reduce operating costs by $ 0.03 lb. On the other hand, the primary disadvantage of Zinser 351 is that, compared to the existing ring technology, the company will generate a 5% lower revenue as well as shoulder higher customer liabilities from returns. In addition to that, a huge investment is necessary for Zinser 351 to operate. Given these inputs, the CFO must decide which between these two options is better, given that both options have its costs and benefits.
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