Reference no: EM131017776

NikoTech Case Analysis

ASSIGNMENT GOAL:

This case assignment is designed to illustrate the interplay of income statements, balance sheets and ratio analysis as a way to evaluate the effectiveness of supply chain initiatives. Almost all modern firms (including all companies I have been involved with) utilize these items or some variation of these performance metrics. Additionally we will assess aspects of working capital--a key metric within the supply chain world.

ASSIGNMENT INTRODUCTION:

This case assignment is designed to help students evaluate the use of various financial and accounting metrics to assist in evaluating the performance of a supply chain You will critically analyze those metrics and "dive deep" into exploring the underlying meaning of the numbers...you will be asked to get behind those numbers! By understanding "the numbers" you will be in a better position to improve the outcomes.

ASSIGNMENT DIRECTIONS: 

You are to answer all of the following questions. Please make sure that you show all of your work. Just giving a numerical answer without showing your calculations is not enough to obtain full credit.

The following statements are provided as some "Helpful Hints and Advices" on the NikoTech Individual Assignment:

1. Please double-check your work when making calculations using the income statements and balance sheets for NikoTech (Tables 11.1 and 11.2). When reading from left to right on both statements, Y2 data are reported first and Y1 data second in the columns of financial data. It is very easy to reverse the chronological order of the data when making calculations--that is to assume that Y1 data is reported first followed by Y2 data.

2. Remember that for the purposes of calculations for this exercise, we are assuming that the data reported on NikoTech's balance sheet for Y1 and Y2 are average values for the year. Thus, the value for inventory in Y2, $660M, should be considered the average value of inventory held by NikoTech during Y2. In actual practice, balance sheet data are values for a given point in time. To obtain average values in practice, it is common to take the average of the previous year and current year values. We are not following that practice on this exercise because we only have two years' worth of financial data for NikoTech.

3. Be sure to use COGS, not net sales, in the denominator when calculating DOI and DPO. For DRO, use net sales, not sales, in the denominator.

4. The words "profit" and "income" are often used interchangeably in the readings.

5. When you are asked to calculate a ratio such as net profit margin, the word "margin" indicates that you should report your results in percentage terms, such as 10.4% or 10.4 percent. If on the other hand, you are asked to calculate net profit or net income, then you should report your results in dollar terms, such as, $104.5M

6. Gross profit is the difference between net sales and COGS, while net income is the difference between gross profit and operating expenses, taxes, depreciation, and interest expense.

7.  Note that in Table 11.4 of "Measuring Results: NikoTech, Inc.," that Return on Investment is defined as Net Income / Total Assets. However, in other areas covering the Strategic Profit Model, the ratio of Net Income (Profit) / Total Assets is defined as Return on Assets. For our purposes, we will use Return on Assets as the label given to the ratio Net Income (Profit) / Total Assets.

8. Note that both Net Profit Margin and Asset Turnover in some Strategic Profit Models are calculated using net sales, not sales, unless the latter is all that is available.

9. Several questions in the assignment ask you to determine whether the numerator or denominator of a measure, such as DOI, is the primary driver of the measure between Y1 and Y2. To assess this type of question, you should first calculate the percentage change in the measure from Y1 to Y2. Then you should calculate the percentage change in both the numerator and denominator of the measure. Using data from below, the following calculations and statements can be made:

Inventory turnover is calculated as COGS / Average Inventory. From an inventory management performance perspective, ideally this ratio increases over time, indicating that a firm is generating higher levels of sales for each dollar held in inventory. 

	Y1	Y2	Difference
COGS (cost of sales)	$3,266	$5,426	$2,160 (66.1%)
Avg. Inventory	$495	$789	$294 (59.4%)
Inventory Turnover	6.6 times/yr.	6.9 times/yr.	.3 (4.5%)

Inventory turnover increases a moderate 4.5% from Y1-Y2, indicating improved asset utilization. The increase is driven by COGS rising 7% points faster than average inventory. This is a positive trend, particularly in light of the fact that COGS growth nearly mirrors sales growth (65%).

Comments on Inventory and Financial Statements:

On page 165 of "Measuring Results: NikoTech, Inc.," reference is made to "matching," whereby as a result of a sales transaction, inventory values are drawn down from the balance sheet and reported as COGS on the income statement. This matching process works as follows:

1. When a manufacturer purchases materials to be used in the production of the manufacturer's finished product, the cost of those materials are carried on the balance sheet as inventory, a category of current assets.

2. As the materials are subsequently converted to work-in-process and finished goods, their dollar value remains on the balance sheet, although their value rises due to the cost of direct labor and indirect manufacturing costs used in the conversion process.

3. When the finished goods are sold, the value of inventories on the balance sheet is reduced by the cost (not the sales price) of the goods sold. At the same time, the cost-of-goods sold line is increased by the same amount. In other words, inventory on the balance sheet is reduced by the cost of the finished product and cost-of-goods sold is increased on the income statement by the same amount.

4. If the buyer of the goods purchases the goods on credit, then accounts receivable on the balance sheet increases by the dollar value of the sale.

5. When the buyer pays the bill for the goods at the end of the credit period, then accounts receivable is reduced and the cash account is increased in the balance sheet.

ASSIGNMENT DELIVERABLES:

The following assignment questions address the financial performance of NikoTech, Inc. presented in "Measuring Results: NikoTech, Inc.," Chapter 11 in Supply Chain Vector, pp. 157-172, by Daniel L. Gardner.  For the purposes of this assignment, assume that the data shown for NikoTech's balance sheet in Table 11.2 are AVERAGE values for each year (Y1 and Y2).

ASSIGNMENT FORMATTING:

1. Please include a cover page that includes your name, email address, assignment name, and date.

2. Please use an 8.5 by 11 portrait type document for this assignment.

3. Please use a Word Document format (NO PDF or Excel files).

4. Please use citations as necessary--do not plagiarize.

5. Points will be deducted for not following formatting directions!

ASSIGNMENT QUESTIONS:                                                                                                                                    

Note: The instructor reserves the right to change the points for this assignment and these questions at his discretion. Points shown below are only approximate and may change.

Please answer the following questions in your presentation:

Question 1. Calculate the following three measures for both Y1 and Y2 for NikoTech (24 points).

1. Days of inventory (DOI)
2. Days of receivables (DRO)
3. Length of the operating cycle

Please be sure to clearly show your calculations so that partial credit can be awarded if necessary. Also, for the purposes of this question, please assume that the inventory and receivables data shown in the NikoTech balance sheet are average values for each year.

Question 2. Calculate the following two measures for both Y1 and Y2 for NikoTech (16 points). 

1. Days of payables (DPO)
2. Length of the cash-to-cash cycle

Please be sure to clearly show your calculations-assume that the accounts payable data shown in the NikoTech balance sheet are average values for each year.

Question 3. Days of inventory (DOI) can be reduced by reducing average inventory or by increasing cost-of-goods sold (COGS).  However, because COGS is a cost, a firm desires COGS to be increasing only for the "right" reasons (20 points).  

a. Do COGS appear to be increasing for the right reasons for NikoTech between Y1 and Y2? 

b. Please clearly explain why or why not. 

c. If you believe COGS is not increasing for the right reasons, what value for COGS in Y2 would make you believe COGS is increasing for the right reasons? 

d. Please be sure to explain how you derived this value.

Question 4. Is average inventory or COGS primarily responsible for driving the Y1-Y2 trend in DOI for NikoTech?  (12 points)

Please be sure to explain your response, using data and calculations where appropriate to enhance your explanation.

Question 5. This question has two parts.  Both parts concern the change in days of receivables (DRO) that you calculated in Q1 (24 points). 

1. Are net sales or average receivables primarily driving the Y1-Y2 change in DRO?  Please be sure to explain your response, using data and calculations where appropriate to enhance your explanation.
2. Describe the impact on DRO of the change in returns and allowances between Y1 and Y2.  Be sure to use data and calculations to enhance your response.  Note that returns occur when customers return defective, damaged, or otherwise undesirable products to the seller.  Sales allowances occur when customers agree to keep such merchandise in return for a reduction in the selling price.

Question 6. From the data provided, is days payable outstanding (DPO) contributing significantly to the change in value of NikoTech's cash-to-cash cycle between Y1 and Y2? (12 points)

Please be sure to explain why or why not, using data and calculations where appropriate to enhance your explanation.

Question 7. This question has three parts (24 total points):

1. Calculate inventory turnover for Y1 and Y2, again assuming that the values in the balance sheet are average values for each year.
2. Mathematically express inventory turnover in terms of days of inventory, being sure to show how you derived your mathematical expression.  In other words, write an equation such as: Inventory turnover = expression, where "expression" contains the DOI term.
3. Would you consider the change in inventory turnover from Y1-Y2 a positive or negative indication of inventory management performance for NikoTech?  Please explain.

Question 8. Calculate the following Strategic Profit (du Pont) Model measures for Y1 and Y2 for NikoTech: (24 points)

1. Net profit (income) margin (%)
2. Asset turnover
3. Return on assets (%)

Please be sure to clearly show your calculations and, as in questions 1 and 2, assume the balance sheet data are averages for each given year.

Question 9. NikoTech's return on assets deteriorates between Y1 and Y2 despite a 23% increase in sales and a nearly 18% increase in net sales from Y1 to Y2.  Identify the financial reasons or drivers of this deteriorating performance by answering the following two questions (28 total points):

1. Is net profit margin or asset turnover primarily driving the Y1-Y2 change in NikoTech's return on assets?  Please be sure to explain your response, using data and calculations where appropriate to enhance your explanation.
2. For the primary driver (net profit margin or asset turnover) identified in part a, what are the 2-3 principal financial factors that account for the deteriorating trend in this measure? Please be sure to explain your response, using data and calculations where appropriate to enhance your explanation.

Question 10. Are measures of NikoTech's supply chain velocity improving or deteriorating between Y1 and Y2? The two principal measures of velocity are the operating cycle and the cash-to-cash cycle.  You calculated both of these items in Q1 and Q2. (16 total points):

1. Describe the impact of this change in supply chain velocity as represented by the operating cycle on asset utilization and the flow of cash. Please be sure to explain your response, using data and calculations where appropriate to enhance your explanation.
2. Describe the impact of this change in supply chain velocity as represented by the Cash-to-cash cycle on asset utilization and the flow of cash. Please be sure to explain your response, using data and calculations where appropriate to enhance your explanation.