Carter Company (B)

Dubuque, Iowa

In December 2008, Robert Carter, president of Carter Company (CC), finalized a new sales contract with John Deere Company (JDC). With his one and one-half years of experience in managing CC and his fathers 40 years of close, personal relationship with JDC, Robert was able to acquire an early extension of a five-year contract that held price steady.* CC was a single product, family owned company producing high quality cast iron gizmos only for JDCs Dubuque Plant, which was located across the street from CCs production facility. Gizmos, although large, very heavy and bulky, are a critical element in JDCs automatic transmissions. CC had been providing JDC with 50% of its need for gizmos. The new contract anticipates a significant downturn in the market for JDC products in 2009-10 and JDC has asked CC to eventually supply 100% of its need for gizmos.

Last year the Board of Directors of CC (which consisted of all of its owners, i.e., Robert, his father, mother, and three sisters) made it clear to Robert that the primary purpose of the company was to provide a good income for the Carter family. Robert had struggled initially with the management of the company but had eventually gotten everything under control. Under the close guidance of his father in 2007, Robert had rehired the old plant manager and purchasing agent and went back to an assembly line, rather than job enrichment, environment. Production immediately returned to acceptable levels of quality and quantity, since the assembly line was specifically designed to manufacture exactly $720,000 gizmos per week. The workers liked these changes and morale rose. After his first disastrous year as president (2007), Roberts next year (2008) had been a valuable learning experience. His father died last month and Robert is now in absolute control of CC. He believes that he is ready to try some new ideas that could increase the revenue and profits of CC. He has given up his dream of developing an international company.

A recent article in the Harvard Business Review suggested that a company should diversify its product line and customer base. A company that makes only one product and sells to only one buyer, provides that buyer with significant bargaining power over contract negotiationsas Robert learned in his last negotiation with JDC. Robert is convinced that he should look toward expansion of CCs product line and customer base.

In the past year, Robert contracted with the Business Research Center of the College of Business, University of Iowa (a university of 30,000 students located in Iowa City, which has a population of 65,000) to explore new product development ideas. The Research Center developed an interesting new product idea: custom-made, high quality oak wood furniture for young children ages 1 month through 6 years. The Research Center had surveyed 500 of the 25,000 homeowners available in Iowa City. The survey concluded that a market existed for custom-made, high quality oak wood baby furniture. Almost 10% of the home owners surveyed said, They would like to have custom-made, high quality oak wood furniture for their young children. With almost 75 million home owners in the United States, Robert believed he has discovered a sure-fire new product that could make a significant difference in CCs future. Just think about it, Robert would say, with 75 million home owners of which 10% want this furniture, CC could sell over 7 million rooms of baby furniture! Robert also believed the baby furniture product fit the other important criteria mentioned in the HBR article, that of synergy. The Marketing Department study pointed out that the key to success in the custom-made baby furniture market was a high quality product and a discerning customer. Robert was quick to point out that CC had 40 years experience selling gizmos to JDC. Gizmos were a high quality product and JDC was certainly a discerning customer.

_________

*The new contract stipulates that by mid-2009, CC will produce all of the gizmos required by JDC for the next five years. In the past CC supplied JDC with one-half of their need for gizmos (i.e., $36,000,000 of gizmos per year), which required the production of exactly $720,000 of gizmos each week for 50 weeks per year. Beginning in mid-2009, CC will be required to adjust its production to meet weekly increases or decreases in demand for JDC products. Thus, CC would be required to produce from $1,300,000 to $700,000 of gizmos per week depending upon demands of the JDC market.

Carter Company

Financial Statements

Balance Sheet

(x $1,000)

Dec. 2006 Dec. 2007 Dec. 2008

Assets

Cash 2,000 1,000 4,000

Accounts Receivable 750 2,000 1,000

Inventories 250 3,000 1,000

Fixed Assets 3,000 12,000 8,000

Total Assets 6,000 18,000 14,000

Liabilities & Equity

Accounts Payable 500 4,000 2,000

Short-term Notes Payable 500 2,000 2,000

Long-term Debt 1,000 6,000 2,000

Capital Stock 1,000 1,000 2,000

Retained Earnings 3,000 5,000 6,000

Total Liabilities & Equity 6,000 18,000 14,000

Income Statement

(x $1,000)

FY 2006 FY 2007 FY 2008

Sales 12,000 36,000 36,000

Labor 3,000 15,000 10,000

Materials 1,400 8,000 4,500

Factory Overhead 1,000 3,000 3,000

Marketing 3,000 5,000 6,000

Research & Development 0 0 2,900

General Administrative 1,200 3,800 1,600

Profit Before Taxes 2,400 1,200 8,000

Taxes 960 480 3,200

Profit 1,440 720 4,800

Questions:

1. How would you assess the current financial situation of Carter Company? Has it changed much over the past year?

2. How would CCs marketing situation change if they added custom-made, high quality oak wood baby furniture?

3. How would CCs production/operations change if they added custom-made, high quality oak wood baby furniture?

4. What is the major issue facing Carter Company over the next year?

5. Which of the following strategies would you recommend Robert pursue over the next year? Choose only one and fully support your choice.

_____ Continue the present strategy of producing only for JDC.

_____ Continue producing for JDC, but also aggressively pursue manufacturing and selling high quality oak baby furniture.