Eagle Machine Company

2 February 2017

EAGLE MACHINE COMPANY The Eagle Machine Company has fallen on bad times. Eagle, a maker of specialty restaurant equipment, has sales totaling $72 million, but sales are declining while costs continue to increase.

If things continue in this direction, Eagle soon may have to close its doors. At a special management meeting, the president lays it on the line! He demands that the firm break even in the remaining quarter of the year. For next year, he calls for profits of 5 percent, a 20 percent increase in sales, and deeper cuts in labor, material, and overhead.Later in the day, the president calls Sally Stone, director of supply management, in for a discussion. “Sally, I want your supply management people to carry the ball at the start of the game. We can’t get sales moving for six months. But you can improve your housekeeping—and Eagle’s profits—right away.

Just think what you can do to that chart! Every penny you save is profit! So take a close look at what you buy. I don’t care how you make your savings—by negotiations, inventories, imports, anything. But put the screws on tight—right away! “Start with inventories, they’re sky-high. So get together with manufacturing on a 10 percent cut!We’ve got $12 million worth of materials stashed away around here, and a 10 percent cut would save at least $300,000 a year in carrying charges. At the same time, get your payroll and operating expenses down 10 percent. That is in line with our companywide cutback. I know this hurts, Sally, because you’ve got some mighty fine people here in supply management, but we can’t be sentimental these days.

Our overhead has got to come down—or we’re dead! “I’m having an executive committee meeting in one week. Have your plans ready by that time! We’re betting on you, Sally. Sally reports to the president, as do other department heads. Sally learns from inventory control that raw stock inventory is $12. 2 million. The marketing manager controls finished goods stocks. Sally wonders how she can deliver the cost reduction and still keep her department and supplier relations in shape for the long pull.

1. What actions should Sally take to reduce inventories by 10 percent? 2. What dangers, if any, are there in reducing inventories? 3. In what ways could the cost of goods purchased be reduced? 4. What position should Sally take on the president’s plan to reduce the supply management payroll by 10 percent?

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