Creative Toys Inc. - Operational issues

Excerpt from board meeting regarding operational issues:

Lorraine: Given that sales have been declining and we are thinking of selling the doll division, we need to determine whether the goodwill for SDL on our consolidated balance sheet has been impaired and whether a loss should be recognized in 2022, assuming we don't sell SDL. I think we have all of the information gathered to do this; we just need to know the amount of what the impairment loss might be. Steven: With respect to that sale, my understanding is that if we have a capital gain, we can pay out capital dividends on a tax-free basis. I would like to understand more about these types of dividends and how much might be received. I know the other employees and I would really like to receive some dividends from CTI, since we never have. Krystal: Another item I would like to have some guidance on is implementing a full corporate social responsibility (CSR) policy at the company. As you know, the company started this by moving to use organic materials where possible in our products. But I think we are now ready to take the next step to implement a full CSR mandate across the entire company and have this become a fixture in the culture of the company. I would like some guidance on what steps need to be taken to ensure that this would be a successful CSR program. I really believe that this is a natural step for a toy company such as ours, which is trying to make life better for children through toys. We can now make it better from an environmental perspective also. I need some specific guidance on what we might look at to be more environmentally responsible across the company and how we could incentivize employees to adopt this mindset. Thomas: I think that is a terrific idea, Krystal. One item I have become concerned about is our inventory levels. I know that we have some unique issues, but I would like to understand what it costs CTI to hold the inventory and what steps we could take to reduce the levels. In addition, how much could we save in finance costs if CTI's holding period of inventory was at least the industry average? I'm also wondering, with all the strategic expansion opportunities that we are considering, whether it might be a good idea to improve our performance measurement system overall. I think we should ask HCG to provide a framework we could use for performance management and the key metrics that should be tracked. Steven: More importantly, what is going on with the R&D department? I am really concerned that we are simply throwing our money away with no new successful products in quite a few years. And yet, this department is vitally important! I think we need some help in determining what, if anything, is wrong and what it takes to have a successful R&D department. Lorraine: I was going to bring up the same issue, since Andrew, our VP for this department, came to me asking what could be done. I have another issue I would like to discuss that relates to using data analytics. As you know, I have attended a variety of seminars on collecting and using data analytics. I would like us to look at using data analytics to help us better plan our production schedules. By accumulating data gathered about prices and sales volume, including peak periods of demand, CTI could have better market research to determine what new production development should focus on. Currently, this data is collected at the retail level, so we need to see what data our trade association was able to provide and how we might use this data to predict R&D and production schedules. I think we should hire HCG to assess the four strategic proposals and provide us with a recommendation, as well as help us with these data analytics, and address the operational issues we mentioned, along with any other concerns they notice. Thomas: I think that those are both great ideas to implement some data analytics and to obtain some assistance from HCG. Lorraine: Yes, and since data analysis will become a greater part of our decisionmaking process, I would also like HCG to identify areas of concern related to data acquisition and privacy, and to discuss some best practices that CTI could consider implementing. Krystal: I agree! Before we leave today, there is one more issue that just arose yesterday. In my discussions with Anna, I found out that Greenhaven had used a product for manufacturing the dolls from a supplier that was not on our approved list. Apparently, Greenhaven ordered too late from our normal suppliers, who were not able to ship the materials in time, and therefore, they had to go with another supplier so that production would not be stopped. They thought that the material they purchased was organic, but later found out that it did not meet our specifications for organic materials because it also contained some non-organic material. In total, 150,000 dolls have been manufactured with the wrong materials. About 100,000 of these have already been shipped to retailers, but I have not yet been able to determine if they are still in inventory or have been sold to final customers. We discovered this issue when CTI performed some periodic quality control testing in our own labs. The CTI staff requested that a test sample of 10 dolls be sent to us, and during this testing, it was noticed that the material used to make the dolls was different. Steven: How did this happen? I thought we had all kinds of policies in place to prevent something like this. Krystal: We do. There were all sorts of policies and processes that were not followed. First of all, the procedure should have been for Greenhaven to immediately contact us when they realized they would be short on material and ask what we wanted done. We should also have approved the new supplier. I also cannot understand how Greenhaven's own quality control missed this. And finally, they never informed us of any of these changes or issues. All of this will have to be investigated to see what changes we might need to make. The more urgent question is: what do we do now? Thankfully, there is not a safety or health issue, but we have advertised that these dolls are organic and now these ones are not. I don't think the average consumer will be able to notice any difference. But.... Thomas: This is a serious matter and one we definitely need some help with. Let's ask HCG to outline what we need to consider in deciding what action to take on this matter, if any. One more thing. It is likely that CTI is going to require some additional financing. In my discussions with the bank, they are reluctant to extend us any more credit given the poor financial results lately. However, I am prepared to invest up to $8,000,000 for the purchase of either common shares or preferred shares. I have already spoken to Lorraine about this, so she is aware that I have made this offer. Lorraine: Although I am not very keen on this, these are the only alternatives that we have right now. In forecasting what our results might be, we can decide how much and what type of financing we will accept. HCG can address all the issues that have been discussed at this meeting, including financing, and incorporate this analysis into their report. Krystal: I agree. We have been very pleased with the work that HCG has done for us in the past on other financial, tax, and strategy matters. I will make the motion that we hire HCG to review these proposals, financing alternatives, and the other issues identified and provide us with a comprehensive report. Requirement: Please provide me only a summary of operational issues to be addresses based on above details.