Benchmark Lawarence

Working capital management involves cash, accounts receivable, and inventory. Too much working capital is costly, reducing profitability and return on capital. Too little, however, can also be costly in terms of lost opportunities. A company may suffer increases in cost of capital due to too little cash if it cannot pay its bills on time.

Lawrence Sports (LS) is a manufacturer and distributor of protective sports gear. LS obtains its raw materials from two primary vendors: Gartner Products (GP) and Murray Leather Works (MLW). GP supplies LS with 70% of its raw materials while MLW supplies the remaining 30%. Mayo Stores is the world's leading retailer of sporting goods and accounts for 95% of LS's sales (University of Phoenix, 2002).

In recent weeks, Mayo has defaulted on 80% of its outstanding payments and LS expects additional delays of two more weeks. LS is forced to negotiate payment deferrals to GP and MLW as its outstanding loan and interest burden have increased. This paper benchmarks short-term financing options for LS and explores alternative solutions from the perspective of the Financial Manager (FM). The FM has been tasked with keeping the loan burden minimal, negotiating short-term payment and collection arrangements, and maintaining good relationships with vendors and customers.

Synopses of Comparison Companies

Caterpillar Inc. Ð'- Pulak Chaudhary

Caterpillar, Inc., a rising leader in the construction equipment industry, realized the need to increase production of vehicles by 50%. Due to increasing demand the firm faced tremendous challenges and drawbacks. A cross-functional teamÐ'--Six SigmaÐ'--was created to maintain the same factory floor-space, avoid capital expenditures, eliminate process roadblocks, and modify workflows. The company stated that more than 30,000 employees helped to shape Caterpillar through involvement in Six Sigma (Owens, 2005).

The 2004 annual report stated, "At Caterpillar, Six Sigma represents a much broader cultural philosophy to drive continuous improvement throughout the value chain. It is fact based, data driven, methodology that we are using to improve processes, enhance quality, cut costs, grow our business and deliver greater value to our customers through Black Belt-led project teams." (Owens, 2005)

Caterpillar made the decision to deploy Six Sigma at an August 2000 strategic management conference of top managers. The company launched an aggressive corporate wide rollout starting in January 2001. The initial effort included the training of 700 Black Belts. The effort produced a rapid payback, with first-year gains exceeding first-year deployment costs.

The results were tremendous following the launch of this successful team. Maximum production capability improved by 67% (exceeding the firm's target) while cost per unit produced was decreased by 25%. Some of the other Six Sigma results have included improved forecasting, optimization of inventory levels for a complex mix, and adoption of the lean approach for distribution.

As a conclusion, the company stated, "Six Sigma goes beyond mere process improvement; it has become the way we work as teams to process business information, solve problems and manage our business successfully. The long term payoff of Six Sigma will be seen as we develop future leaders who are prepared to address the increasingly complex issues that face us as an industry leader" (Owens, 2005).

Chrysler Corporation Ð'- Pulak Chaudhary

Supplier partnerships helped revive Chrysler. The corporation's leaders had been made keenly aware that their research and development process was inadequate. Newly launched programs were running a projected $1million over budget and the company was in dire financial straits. Its losses were deepening and after closing three plants in 18 months, Chrysler hit bottomÐ'--reporting a record loss of $664 million in the fourth quarter of 1989. Its investments in pre-production plants, equipment, training, and its piece costs during production often ran 25% to 50% over budget.

Chrysler's executives knew they had to do something fast and changes in top management helped. Chrysler adopted Japanese-style supplier partnerships. With the help of its partnerships with suppliers, the company saved 12 months of investment in hard tools. Given that 40% to 45% of program costs are in tools, Chrysler saved approximately $60 million by delaying the purchase of hard tools. Chrysler also saved money by reducing the number of changes in hard tools after they had been cut. "Chrysler now has suppliers that take responsibility for both the prototype and the volume production, reducing time, communication problems, and incompatibility of parts" (Chrysler, 1996).

Since 1989, Chrysler has reduced the time it takes to develop a new vehicle by more than 40%. Chrysler's productivity also increased during the 1990s. "Partnerships with suppliers have helped Chrysler improve performance significantly by speeding up product development, lowering development costs, and reducing procurement costs, thereby contributing to increases in Chrysler's market share and profitability" (Chrysler, 1996).

In the end, Chrysler's ability to produce more new models has contributed to its increased share of the U.S. car and truck markets. The company also has dramatically improved its profits.

Toyota Motor Company Ð'- Kit Dockery

Just-in-time (JIT) manufacturing is a concept that was started by the Toyota Motor Company (Toyota) in Japan after World War II. Japanese automakers needed to find a way to compete with American automakers. After the war, the Japanese industry dealt with shortages in space, materials and financial resources. Taiichi Ohno was the Toyota executive that created a system of production based on the elimination of waste. Through this system, materials only moving through production as and when they were needed eliminated waste.

"Ohno regarded waste as a general term including time and resources as well as materials. He identified a number of sources of waste that he felt should be eliminated:

Ð'* Overproduction - waste from producing more than is needed

Ð'* Time spent waiting - waste associated with a worker being idle while waiting for another

worker to pass him an item he needs

Ð'* Transportation - waste associated with transporting items around the factory or to the

customer

Ð'* Processing