2 - Introduction Ms Pundir the managing director and...

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Introduction Ms. Pundir, the managing director and principal owner of Kota Fibres, has come to a difficult decision in the direction of her company. She must find a way to reconcile Kota Fibres’ new found cash and liquidity problems. Kota Fibres is a textile company located in Kota India, about 100 miles south of New Delhi. The company main product is the synthetic fiber yarns used in the production of saris (a traditional Indian woman’s dress). The textile market for saris has been growing at a rate of 15% per year and is projected to continue at that rate for the foreseeable future. However fast the market for saris is growing it will always be a seasonal sales business. This is due to the many festivals in mid-autumn that saris are traditionally worn to. The spike in mid-autumn demand for saris in turn causes a peak for synthetic yarn fibers in the late summer. Thus Kota Fibres typically has its best month in July. Due to thin profit margins Pundir has adopted policies that do not allow Kota to carry large amounts of finished goods inventory. Because of this policy Kota follows a seasonal production schedule. The seasonal production schedule means that the plant runs at about full capacity for two months of the year and then scales back to a minimal production schedule for the remainder of the year. One of the major problems with Kota’s seasonal production schedule is that there is an annual hiring crunch shortly followed by mass layoffs. Several labor rights groups have begun to protest this practice by Kota. Background Facts Kota Fibres has been a historically profitable company and based on projections and forecasts should continue to be. However, sliming profit margins from increased price competition have driven down net profit even with increased sales. Net Profit as a percentage of sales has significantly declined as seen in the following chart (Exhibit 31). [pic] For year ended December 31st, 1999 Net profit was 5.58% of gross sales. For 2001 the Net Profit is projected at 1.47% of gross sales, which is a reduction of four percentage points over just a two year time line.
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Much of the reason profitability is down is that Cost of Goods Sold percentage has been rising as a function of sales price declining due to competition. Moreover the interest expense line has also increased over the years. More interest expense has been caused by Kato needing more cash to operate the quickly growing business. The increase in CoGS percentage also has a ballooning effect on interest expense; as less profit/cash is brought in through sales more cash is needed to operate the business. Another driver in the CoGS mix is that Kato has always had to worry about suppliers making deliveries on time. The roads in India are not like those in the United States. Most roads outside of the cities are only one lane. When traffic comes from the other direction one of the cars or trucks would have to pull off the road to let the other by. Accidents are also frequent in nature. Because of the infrequent nature of supplier shipments Kato has a policy of having 60 days worth of inventory on hand at any given time.
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