BODY GLOVE

Class Announcements

Body Glove Case and Assignment #2 Due on February 10th

The Service Learning Placements will be posted at 12:00pm on Thursday February 6th at SCHW 396 (First Come First Serve Basis)

Class Objectives

1. Case Analysis of Body Glove2. Understanding the role of the budgeting

process in context

Body Glove

Who: Russ Lesser, President and CFO of BodyGlove (part of new management team)

What: Right budgeting processes in place to “respond quickly and in a coordinated fashion to changing market conditions”

When: Current http://www.bodyglove.com/

Body Glove: The Company Business:

a small profitable wetsuit manufacturer employs 300 people sales nearly doubled in the last 5 years goal - #1 wetsuit manufacturer in 9 years

Sales: $15M in sales and $8M from wetsuit sales ($60M

market) also produces out of season product s(i.e., snow-skiing,

snowboarding, orthopedic, etc,) Ownership:

in 1990 changed from a family owned business with a new management team

Body Glove: Success Factors

Competition in industry is fierce markets were complex with rapid growth, fashion

conscious, seasonal demand requires the ability to respond quickly to changing

market conditions and changing trends Body Glove

ranked #2 in wetsuit industry; desire to become #1 wetsuit manufacturer by 2000

known as fashion conscious high quality producer manufacturing quality and flexibility designs that satisfy customers needs marketed as wholesome “life-style” brand

Body Glove: Production

Production cycle: produced products throughout the year: fall (60%) and

spring (40%) Fall suits were more labour intensive and used more

expensive material. order cycle has three phases 1) pre-book 2) build 3)

deliver and informs production cycle

Production processes: growth put pressure on capacity and production

flexibility production facilities are all domestic and there are

storage limitations; production facilities are not large enough

now have two production lines 1) forecast orders 2) custom orders

12% annual cost to carry inventory ($3M in stead of $1.6M)

Figure 1 Timing of Order Cycle Phases

Order Phase Fall Line Spring Line

Pre-book Oct-Nov May-June Build Nov-Dec June-July Deliver Jan-June Sept-Dec

Body Glove: Forecasting Forecasting Sales:

based on pre-book sales (50-60%) develop sales forecasts in March (fall) and October

(spring) sales forecasts based on historical sales, trends, gut

feeling, etc. Forecasting Material Purchases:

Materials Requirement Plan (MRP) based on forecasted sales

neoprene usage forecasted was five times as much as any other materials

3 month lead time to purchase material from Japan who were flexible and provided quality (unlike US suppliers)

Body Glove: Budget Process

Budget Process Timing: previously no budget (prior to 1991) five year strategic plan with no financials bottom up process discussed with managers sales by month and by product budgets finalized by December for January annual budget not formally reviewed by Board of

Directors annual budget was not revised formally unless

significant uncontrollable circumstances arose each division responsible to project monthly key

expenses CFO reviewed all budgets and consolidated

results

Body Glove: Budget Process

Budget as Evaluation Tool: budget used to monitor performance and

detect problems sales representatives were salaried and bonuses

based on customer satisfaction and sales levels performance monitored monthly budget performance not linked to performance

based incentives profit sharing plan provided rewards of 6-7% managers’ bonus residual from profit sharing

plan assignment of managers bonus done

subjectively

1) Purposes for which Body Glove uses its budgeting system? Planning - Used for planning purposes Monitoring - Used to ensure expense levels

are low given sales levels to generate profit levels

Evaluation - Budget vs actuals are used to evaluate performance but not formally linked with incentive compensation; compensation is both qualitative and quantitative

Communication - Coordination between divisions occurs outside of budgeting process

1) Purposes for which Body Glove uses its budgeting system?

Current Month YTD

Actual Budget Difference Actual Budget Difference

Dive Shop – Redondo .............. $ 36,873 $ 49,050 $ (12,177) $ 249,745 $ 290,350 $ (40,605) Del Amo.................................... 27,464 6,700 20,764 60,312 3,900 56,412 Classes ..................................... 4,874 5,000 (126) 25,239 16,400 8,839 Charters.................................... 3,139 1,000 2,139 (13,804) 7,000 (20,804) Rentals & Repairs .................... 6,275 7,500 (1,225) 23,705 21,000 2,705 Royalties................................... 223,920 175,632 48,288 1,087,871 1,092,792 (4,921) BGWT ....................................... 4,167 (12,167) 16,334 (69,166) (85,167) 16,001 BGAD ....................................... 5,170 5,655 (485) (28,936) (41,660) 12,724 BGTS ........................................ 45,490 32,500 12,990 32,108 75,500 (43,392) Factory ..................................... 37,448 9,500 27,948 281,967 66,500 215,467 BG Wetsuits ............................. 48,609 151,200 (102,591) 1,205,368 1,500,150 (294,782) SAS .......................................... 24,334 35,675 (11,341) 228,629 292,825 (64,196) DNS .......................................... 6,456 3,000 3,456 33,470 21,000 12,470 ORTHO .................................... 34,281 36,750 (2,469) 213,031 215,063 (2,032) Accessories .............................. (7,534) 25,800 (33,334) 29,453 189,100 (159,647) Shoes ....................................... (2,468) (2,468) (5,005) (5,005) BGSM ....................................... (6,024) 400 (6,424) (46,657) 63,175 (109,832) Sales Support ........................... (27,991) (27,000) (991) (185,930) (189,000) 3,070 Art & Design ............................. (14,469) (11,800) (2,669) (88,736) (82,600) (6,136) G&A .......................................... (244,210) (204,100) (40,110) (1,492,467) (1,452,700) (39,767) Corp. O/H ................................. (55,750) (74,400) 18,650 (474,900) (520,800) 45,900 Other Income ........................... 14,174 7,500 6,674 89,705 52,500 37,205 Other Expenses ....................... (45,735) (35,000) (10,735) (603,203) (561,250) (441,953)

Net ............................................ $ 118,492 $ 188,395 $(69,903) $ 551,799 $ 974,078 $(422,279)

2) Budgeting process timing? Body Glove managers do not spend a lot

of time with a formal budgeting process Simplicity of budget process is consistent

with informal management style and company size

Budget not provided to Board of Directors only internal usage

Budget is prepared in December for January

“It’s all smoke”

3) Functioning effectively without a budget?

Yes, did so until 1991 Managers accomplished role of budgeting (i.e.

communication, resource allocation, evaluation, performance measurement) through exchange of quantitative non financial information and informal communication

Benefits of formal planning grows as companies grow and become more complex

Body Glove is no longer simple organization; it has many profit centres and 300 employees

4) Changes to budgeting and review process?

Process Reporting frequency adequacy – seasonal, quarterly Updating the budget more frequently

Evaluation Usefulness of subjective evaluations should be

considered (uncontrollable, departmental interdependency)

Need to link performance evaluations with budgeting process

Strategy Need quantity information in 5 year strategic plan

5) Body Glove continues to grow? Body Glove will inevitably grow Communication:

As company becomes larger and more complex coordination of all the various functions will be more difficult

Informal company culture will likely not satisfy all communication requirements

Formal process: Budgeting system will have to involve

more people and will need to become more formal and elaborate