Body Glove

1. Body Glove

2. 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)

3. Class Objectives • Case Analysis of Body Glove • Understanding the role of the budgeting process in context

4. 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/

5. 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

6. 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

7. 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)

8. 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)

9. 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

10. 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

11. 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

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

13. 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”

14. 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

15. 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

16. 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