Letsgo Travel Trailers
Letsgo manufactures travel trailers bought primarily by young families and retirees interested in a light, low-cost trailer that can easily be pulled by a mid-sized family car. The market for travel trailers has expanded nicely over the past few years due to the number of families seeking a relatively low-cost, outdoor vacation experience. But in the view of Letsgo's president, Mark Newman, the real growth in the future is in the retiree market. Newman believes the vigorous health of the average retiree, coupled with the national trend toward a return to nature, will translate into continuing sales growth for Letsgo. As Newman loves to say, "camping recently moved from number seven to number six on the list of top 10 leisure activities in the United States, and the baby boomers are getting older every day."
The Retiree Market
Baby boomers (born between 1 / 1 /46 and 12/31 /64) carry a lot of consumer clout. Research indicates that for an organization to meet the needs of the senior market, including baby boomers, the following must be addressed:
Independence and control,
Intellectual stimulation and self-expression,
Security and peace of mind,
Quality and value.
According to the National Opinion Research Center at the University of Chicago, 78% of boomers (aged 33-51) own their own home, 45% are satisfied with their financial situation, 67% have not been hospitalized in the past five years, 73% are married, and 69% of their households have two wage earners. By the year 2000, boomers are expected to have an estimated $1 trillion to spend. By 2010, the United States will be home to 53 million people 55 and older, with eight states expected to double their elderly population: Alaska, Arizona, California, Colorado, Georgia, Nevada, Utah, and Washington. Seniors respond to benefit-driven messages; to attract them, advertising has to communicate tangible benefits rather than features and amenities.
Marketing and Sales
The forecasted increase in Letsgo's sales can be seen in the company's sales projections presented in Exhibit 3-1(actual for the years 1992 through 1997 and projected for the years 1998 though 2002). Although the weather can have a significant impact on the travel trailer industry (i.e., hurricane season, flooding, and even droughts have had negative effects on the sales and rentals of travel trailers), Letsgo's management believes these problems will be mitigated in the future by global warming. All sales projections are done by Mark Newman in his role as Letsgo's president.
To keep from losing sales, the company maintains finished goods inventory on hand at
Trailer Production
Sheet aluminum represents the company's single most expensive raw material. Each travel trailer requires 30 square yards of sheet aluminum. The wholesale cost of sheet aluminum varies dramatically by time of year. The cost per square yard can vary from $13 in the spring, when new construction tends to start, to $6 in December and January, when demand is lowest. In September 1997, the Department of Energy and the aluminum industry launched a collaboration to pursue technologies to improve energy efficiency and production processes. "This pact will increase global competitiveness and enhance the environmental performances of a key manufacturing sector by applying advanced scientific know-how to day-to-day industry needs" (Secretary of Energy Hazel R. O'Leary, September 1997). This collaboration will increase the aluminum industry's competitiveness and thus help businesses that rely on aluminum to reduce costs. Manufacturers requiring aluminum as a raw material potentially should be able to negotiate better purchase prices from suppliers.
Aluminum promises to be the construction material of the future. The use of aluminum in vehicles, including travel trailers, is increasing rapidly due to a heightened need for fuel-efficient, environmentally friendly vehicles. Aluminum can provide a weight savings of up to 55% compared to an equivalent steel structure, improving gas mileage significantly. The aluminum industry and suppliers are dispersed across four-fifths of the country, yet they are largely concentrated in four regions: the Pacific Northwest, industrial Midwest, northeastern seaboard, and mid-South. Although this is a broad geographic presence, Letsgo Travel Trailers will be affected by distribution costs.
Vicky Draper, Letsgo's vice president of purchasing and materials handling, is eager to implement just-in-time as a way of lowering Letsgo's aluminum cost, to offset the expense of distribution-Letsgo is located in Pennsylvania. Vicky's projected 20% bonus, recently announced by Mark and effective for year-end 1998, is based on her ability to lower total material cost. Initially enthusiastic about her job and ability to earn a significant bonus, Vicky has become discouraged and angry. She is unable to convince Letsgo's current aluminum supplier to sign a prime vendor contract, and her efforts to locate an alternative vendor willing to accept the conditions of a just in-time contract have similarly failed. She blames Tom Sloan. Letsgo's current aluminum vendor refuses to sign a just-in-time prime vendor contract due to Tom's uneven production schedule and his refusal to pay on time. Tom has been seen reading the help wanted ads, and Vicky overheard him talking to an employment agency.
In keeping with the policy set by Tom as Letsgo's production manager, the amount of sheet aluminum on hand at the end of each month must be equal to one-half of the following month's production needs for sheet aluminum. The raw materials inventory on December 31, 1997, was budgeted to be 39,000 square yards. The company does not keep track of work-in-process inventories. Total budgeted merchandise purchases (of which the sheet aluminum is a significant part) and budgeted expenses for wages, heat, light and power, equipment rental, equipment purchases, depreciation, and selling and administrative for the first six months of 1998 are given below:
Merchandise purchases are paid in full during the month following purchase. Accounts payable for merchandise purchases on December 31, 1997, which will be paid during January, total $850,000.
Competition
All forms of vacation and leisure activities, including theme parks, beach or cabin rentals, health spas, resorts, and cruise vacations compete with Letsgo Travel Trailers for the consumer dollar. Other recreational purchases such as automobiles, snowmobiles, boats, and jet-skis are indirect competitors.
Travel trailer manufacturers such as Rexhall Industries, Coachman Industries, Winnebago Industries, Foremost Corporation of America, and Thor Sales Industries also offer a moderate-to-low-priced trailer. Manufacturers that offer more diverse product lines such as high-end trailers with luxury accommodations could compete for the fairly affluent senior market.
Coachman Industries, a direct Letsgo competitor, has become a leader in the recreational vehicle, motor home, and travel trailer industry through a commitment to quality and value based on excellence in engineering and attention to detail. Creative engineering, combined with high-accuracy analysis, reduced material costs at Coachman by more than 60% and labor costs by 78%.
Budget Preparation
To minimize company time lost on clerical work, Letsgo's accounting department prepares and distributes all budgets to the various departments every six months. Per Mark Newman, "Freeing departmental managers from the budgeting process allows them to concentrate on more pressing matters." In keeping with the recently announced bonus plan for the vice president of
purchasing and materials handling, Newman has instructed the accounting department to budget aluminum at $6 per square foot. The accounting manager recently received a 20% bonus for having prepared the budgets on time with little or no help from the other functional areas.
Cash
Letsgo's vice president of finance, Becky Newman, has requested a $800,000, 90-day loan from the bank at a yet to be determined interest rate. Since Letsgo has experienced difficulty in paying off its loans in the past, the loan officer at the bank has asked the company to prepare a cash budget for the six months ending June 30, 1998, to support the requested loan amount. The cash balance on January 1,1998, is budgeted at $100,000 (the minimum cash balance required by Letsgo's board of directors).
Human Resources
To accomplish the company's corporate strategic goals, Letsgo Travel Trailers encourages upward communication among all its employees, from senior management to line employees. Decision-making, although not an entirely democratic process, is based on a team approach. Newman, as Letsgo's president, encourages managers to think in terms of the marketplace and to look at the business of travel trailers as a whole rather than as functional department successes and decisions. In fact, Newman is so committed to the idea of cooperative management and teamwork that he has hired three separate human resource consultants in the past six months to lead the company's managers through team-building exercises.
1. Discuss the validaty and reasonableness of Letgo's sales projections
2. Prepare production, purschasing, and cash budgets for Letsgo for the first six months of 1998
Discuss the advantages and disadvantages of the budgets you have prepared. Whom in the company does the budget help and whom, potentially, does it hurt. Does the budget help or hurt the sales department? What about production and finance? How are the various functional areas affected and why?
3. Andy Baxter, newly hired by Letsgo from a competitor, suggests preparing the production budget assuming stable production. Prepare a second and third set of production, purchasing, and cash budgets with production held to a constant 3,000 trailers per month for the second set of budgets and 3,500 trailers per month for the third set of budgets, using the following approach for the production budget (the purchasing and cash budget format remain as presented in question 2):
Discuss the advantages and disadvantages of the second and third sets of production, purchasing, and cash budgets you have prepared. Whom in the company do these budgets help and whom, potentially, do they hurt? Do these budgets help or hurt the sales department? What about production and finance? How are the various functional areas affected, and why?
4. What should Letsgo use to measure performance for each of the managers in the case? What bonus system would you suggest that incorporates these measures and also encourages the managers to work as a team?