Lawrence Sports

Scenario One Problem Solution: Lawrence Sports

Abstract

Lawrence Sports (LS) is a $20 million revenue manufacturer and distributor of protective sports gear who sources material from two primary vendors, Gartner Products and Murray Leather Works (MLW). Gartner supplies LS with 70% of its raw materials. Mayo Stores is the world's leading retailer and accounts for 95% of LS's sales.

In recent weeks, Mayo has defaulted on 80% of its outstanding payments and LS suspects payment cannot be expected for two more weeks. LS are forced to negotiate payment deferrals to Gartner and MLW as the 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), tasked with keeping the loan burden minimal, negotiating short-term payment and collection arrangements, and maintaining good relationships with vendors and customers.

Scenario One Problem Solution: Lawrence Sports

This paper will explore and discuss the working capital management of the hypothetical sports equipment manufacturer, Lawrence Sports (LS), introduced as a case study in the University of Phoenix MBA program. This paper will discuss how this author benchmarked solutions for LS' problem and end-state goals, analyzed the alternative solutions found through benchmarking and assessed the risks found with those solutions.

Situation Background

Lawrence Sports (LS) is a $20 million revenue manufacturer and distributor of protective sports gear. LS are receiving material from Gartner Products and Murray Leather Works (MLW). Gartner is a $200 million revenue producer of precision testing equipment, cured leather and fabric for sports accessories and provides LS with 70% of its raw materials. MLW is a $10 million revenue company and supplies LS with semi-finished leather products accounting for 75% of MLW's revenue. LS's primary customer is Mayo Stores and is the world's leading retailer with nearly 3,000 stores in the US and Canada with operations in South America and Europe. Mayo accounts for 95% of LS's sales (Apollo, 2004).

In recent weeks, Mayo has defaulted on 80% of its outstanding payments and LS suspects payment cannot be expected for two more weeks. LS are forced to negotiate payment deferrals to Gartner and MLW as the outstanding loan and interest burden has increased. As the newly hired Financial Manager (FM), this author is tasked with keeping the loan burden minimal, negotiating short-term payment and collection arrangements, and maintaining good relationships with vendors and customers (Apollo, 2004).

LS' problem is defined as: LS needs to implement a cash management strategy that incorporates additional banking solutions to better address short term financing issues and negotiate payment and collection arrangements that promote vendor and customer relations. LS's end-state goals are as identified in its problem definition. This author used each end-state goal as an umbrella for research topics as follows: 1) LS needs Mayo to pay its debts on time; 2) LS needs to negotiate fair and acceptable payment arrangements with Gartner and Murray in order to retain key relationships; 3) LS needs to keep the loan burden minimal and identify alternative sources of short term financing solutions; and 4) LS needs to create a successful working cash management strategy and will allow LS to address its issues and opportunities.

Issue Identification

LS's issues are as follows. Mayo Stores wants to delay payments on an already overdue account. Mayo has already defaulted on 80% of its outstanding payments. The request to defer payment for an additional two weeks places an undue financial burden on LS. LS would like to defer payment to Gartner and MLW. Based on Mayo's default, LS is unable to honor its outstanding debts to Gartner and MLW without acquiring considerable debt. LS's outstanding loan balance and interest payments can easily become cumbersome. LS have a $1.2 million Line Of Credit (LOC) at Central Bank with a tiered interest rate based on the loan balance. The rate is 10% up to $450,000 and jumps 2% for each additional $200,000. LS are lacking a broad customer and vendor base.

Mayo accounts for 95% of LS's business, however, LS is not an important vendor for Mayo. The relationship discrepancy places LS in a precarious bargaining position. LS sources 70% of its materials from Gartner, however LS is not a major customer for Gartner. Again, LS is in a poor bargaining position. LS is MLW's primary customer which places LW in a better bargaining position, however, pressuring MLW may cause undue financial hardship on MLW. Additionally, a damaged consignment was delivered to Mayo and the transport company, Gersen Warehousing (GW) refused to take responsibility. LS need $350,000 to cancel its contract with GW and to replace the damaged shipment to Mayo. LS are lacking a cash management strategy that can weather adverse market conditions. The cash crisis that has occurred in the short amount of time and with minimal stimulus indicates LS needs a better cash management solution strategy.

Opportunity Identification

LS's opportunities are as follows. LS need's to negotiate optimal collection arrangements with Mayo. If Mayo paid its debts on time, LS and subsequently Gartner and Murray, will not have an immediate cash flow problem. LS also need's to negotiate optimal payment arrangements with Gartner and Murray. Extending payments as long as possible allows more time to collect receivables and delays the need to use the LOC, but ultimately, LS needs to create and implement a short term financing strategy and develop a better banking strategy. The LOC is an excellent safety net, but sourcing additional short term financing solutions, such as commercial paper and mid term bonds. By creating a successful strategy, LS will be able to weather difficult cash flow periods.

Alternately, LS needs to maximize inventory efficiency. By implementing a Just-In-Time ordering system, LS can minimize the amount of capital tied up in inventory. LS can also leverage its relationship with customers to implement an automatic reorder system. In addition, LS needs to source alternative vendors and customers. By sourcing additional vendors and customers, LS will be in a better position to negotiate payments terms because of the contingency built into a large customer/vendor base. Although