In March 1991, Russ Lesser, president of Body Glove, a small wetsuit manufacturer, reviewed the progress his company had made, as well as the problems it had encountered, in the nine months he had been president. The company was performing well: it was profitable and was ranked number two in market share in the wetsuit industry. But Russ knew that he and his newly appointed management team could not afford to be complacent. The wetsuit industry was highly competitive and the markets were complex, with rapid growth, fashion conscious customers, and seasonal demand. Much of Body Glove?s success depended on its ability to respond quickly and in a coordinated fashion to changing market conditions. These responses should be facilitated by the company?s management processes, and Russ wondered if the company had the right processes in place. Wetsuits are form-fitting, insulating suits made of neoprene, a rubber-like material. The suits are designed to 747748protect water sports enthusiasts, divers, surfers, windsurfers, kayakers, distance swimmers, and whitewater rafters, from cold water temperatures. The suits are called wetsuits because they let a layer of water in between the skin and the suit, and this water, warmed by body heat, provides a layer of insulation. It was difficult to determine the precise size of the wetsuit market because most of the firms in the industry were privately held, but it was believed that the U.S. domestic industry generated over $60 million in revenues in 1990. It was clear that the wetsuit industry had grown rapidly since its beginning in the early 1950?s because of two main factors: One was the emergence of a multitude of sport-specific as well as ?fashion? wetsuits which created the consumer desires to purchase a different wetsuit for each sport. The wetsuit manufacturers had also influenced consumer preferences and brand awareness with increased advertising and sponsorship of water sport athletes. Another contributing factor was the growth in participation in water sports activities, fueled by greater television coverage of water sports competitions. The industry was founded by small entrepreneurs, but by 1990 it was dominated by a small number of larger companies. O?Neill, the largest company in the industry, with approximately a 50 percent market share, had the reputation for producing high quality ?basic? wetsuits. Body Glove, number two in the industry, was known as a fashion-conscious, high quality producer. O?Neill and Body Glove competed directly against each other in all market segments; the remaining manufacturers specialized. For example, Rip Curl, the third largest firm in the industry, focused on the surfing market. Competition in the industry was fierce, as the firms sought to increase their market shares at the expense of their competitors. Since the differences among wetsuit brands were subtle, most specialty surf and dive shops carried only two or three brands of wetsuits and made changes in their offerings only infrequently. General sporting good stores, such as Oshman?s and Sport Chalet, typically carried lines of lesser quality suits to satisfy their less experienced clientele and were more apt to make brand changes. Most buyers of wetsuits were very image and quality/comfort conscious. Switching costs involved in buying different wetsuit brands were low, making it imperative that Body Glove personnel take care to ?earn each sale? and not become complacent. The company marketed itself as a wholesome ?life-style? brand, while O?Neill had a ?bad boy? image. Maintaining this image required Body Glove managers to approve everything sold with the company?s brand name on it for image and quality. Wetsuits were made of closed-cell neoprene of various thicknesses (1.5 mm to 6 mm). The thickness of the wetsuit depended on its design and its intended use. For example, deep sea diving required a very thick suit because of the extremely cold temperature of the water. Various techniques such as glued and taped seams, glued and blind stitched seams, overlocked seams, and flatlocked seams were used to seal the wetsuit. The change from the basic, multi-use, black wetsuit to more fashion-oriented, sport-specific wetsuits had altered the manufacturing environment. To remain competitive, manufacturers had to provide a large array of styles and colors to meet consumer demands, and their ability to react quickly to changing trends determined their success. The large product line required manufacturers to carry significant amounts of raw materials and a large finished goods inventory. In 1953, two former lifeguards, twin brothers Bob and Bill Meistrell, opened Dive ?n Surf, a retail water sports store in Hermosa Beach, California. Later that year they developed a wetsuit made of neoprene that ?fit like a glove? in order to protect surfers and divers from the cold ocean temperature. They began manufacturing the wetsuits with the ?Body Glove? logo and selling them both within their shop and to other retailers. In its first 30 years of existence, the Body Glove division of Dive ?n Surf Inc. developed a small but loyal customer base in California with a dependable product, fair prices, and superior customer service. In 1983, Robbe Meistrell, son of co-founder Bob Meistrell, became president and led the company through a period of rapid growth. Body Glove?s sales nearly doubled in the period 1986?1991. The company capitalized on the demand for its new line of bright colored, uniquely designed beachwear and sportswear bearing the Body Glove logo. The company successfully gave its name a fun life-style image, in part through its sponsorship of the Professional Surfing Association of America (PSAA), the Professional Snowboarding Tour of America (PSTA), and the National Scholastic Surfing Association (NSSA). In 1986 the company licensed the Body Glove logo to American Marketing Works for the sale of its beach and 748749sportswear lines. (This license was retracted on January 28, 1991.) Total 1990 revenues for Body Glove?s parent, Dive ?n Surf, Inc., were approximately $15 million, with nearly $8 million coming from wetsuits.1 In 1990, Body Glove broke from its ?family-only? management policy. Kurt Rios, previously a Body Glove sales representative, accepted the position of national sales manager in April. In July, Russ Lesser was recruited from the company?s audit firm to fill the position of president and chief financial officer, and Mark Malinski took over the responsibilities of director of manufacturing when Body Glove acquired his previous employer, Sub-Aquatic Suits, in January 1991. The cofounders, Bob and Bill Meistrell, and other family members remained active primarily in promotional events, and the new management team took over the day-to-day operations. In 1991 Body Glove employed approximately 300 people. The company was organized functionally, as is shown in Exhibit 1. EXHIBIT 1: Body Glove: Organization of Dive?n Surf, Inc. Body Glove produced a full line of neoprene wetsuits and accessories designed to meet the needs of all water sport enthusiasts. Demand was highly seasonal, so to smooth out the workload and cash flows the company started producing snowskiing and snowboarding apparel and orthopedic products, such as knee braces and pads. Exhibit 2 shows a full product listing. Body Glove sold its products through sports and specialty retail stores, including its own Dive ?n Surf retail stores in Redondo Beach and Del Amo, California. EXHIBIT 2: Body Glove: Product Line Overview The company?s goal was to dethrone O?Neill and become the No. 1 wetsuit manufacturer by the year 2000. But the growth the company had experienced in the last five years had put pressure on the manufacturing operations. The manufacturing areas not only had to increase capacity, but also had to maintain flexibility to meet the highly segmented and changing consumer demands. Order Cycle Body Glove produced products for two seasons, fall and spring. The fall line, which was produced from thicker neoprene than the spring line, consisted of full suits, jackets, legsuits, hoods, and hooded vests, as well as skiing and snowboarding products. The spring line consisted of springsuits, warm water wetsuits, trunks, vests, and water ski suits. Fall suits were more labor intensive and used more expensive material. The cost of a full fall suit averaged about $100; for the spring line the average was about $60. Each season had its own formal order cycle with three phases: (1) pre-book, (2) build, and (3) deliver. In the pre-book phase, salespeople visited the retail stores to show samples of the upcoming lines. At this time, the retail stores gave the salespeople preliminary estimates of their ordering decisions. Body Glove gave its dealers an incentive to order during the pre-book phase; they received volume discounts (approximately 5 percent) and free freight. Body Glove used the pre-book estimates and orders, and information from additional orders received during this period, to build stock. Delivery involved completion of production and delivery to the retail outlet. The time frame for each order cycle is shown in Figure 1. Customers began buying the fall line in retail outlets in August/September and the spring line in February/March. FIGURE 1: Timing of Order Cycle Phases The company produced all product lines throughout the year, but the majority of each line was sold during the season the wetsuit was intended for. Body Glove?s revenues were derived approximately 60 percent from its fall line and 40 percent from its spring line. Marketing Strategy Body Glove had increased its market share over the past few years because of its quality product line and firm commitment to dealer and customer service. Body Glove?s marketing strategy was to provide excellent service and products not available elsewhere to the ?image accounts,? the windsurfing, surf, and ski shops that catered to hard core sports enthusiasts. Individually these shops had low sales volume, but Body Glove?s reputation with the image accounts affected the acceptance in other sales outlets. In total, Body Glove sold its wetsuits in 1,500 retail stores in 33 countries. Body Glove?s competitive advantage came from its manufacturing quality and flexibility and its designs that satisfied customer needs. The company maintained its commitment to service by rewarding its sales representatives based on customer service goals, not the number of units sold. The sales representatives were salaried employees who were not on commission. They were given the opportunity to earn bonuses based on 749750 750751both the amount of sales made during the year and their clients? satisfaction. Production Processes The mission of Body Glove?s production department was to manufacture quality products efficiently while maintaining the production flexibility necessary to satisfy constantly changing customer demands. Body Glove was the only major U.S. wetsuit company that did all of its production domestically; its wetsuits were manufactured in a single facility in Hermosa Beach, California. Manufacturing consisted of six steps: cutting, sewing, gluing, screening, finishing, and repairs. The neoprene was cut to pattern, and the suit pieces were either sewn or glued together. The logos and designs were screened on each suit. Finally, each suit was finished, inspected, bar tagged, and pinned with a warranty card. Suits failing inspection were returned for repairs. The company?s ideal was to produce at constant rates, but that was not always possible. One important constraint was the size of the Hermosa Beach production facility. It was not large enough to store the desired levels of inventory. All wetsuit and accessory manufacturing had been performed on a single production line. But in July 1991 the company was in the process of moving to two production lines, one to produce large and forecast orders and one to produce the so-called ?weird suits??custom orders, special orders, and reworks. During slack time, it was planned that this second line would build wetsuits out of obsolete neoprene colors, such as pink, yellow, and chartreuse, still held in inventory. Demand Forecasting and Production Policies Andrew Coulter, manager of international sales, and Kurt Rios, national sales manager, developed sales forecasts in March and October of each year. The March forecast was for the fall line, and the October forecast was for the spring line. The forecasts were based on historical sales data, inventory levels, fashion trends, customer demands, product life cycles, Body Glove?s marketing strategy, and the manager?s ?market feel.? From this forecast, Andrew developed a Materials Requirement Plan (MRP) based on the Bill of Materials (BOM) for a standard mix of colors and sizes for each wetsuit style. Andrew also developed a forecast 751752of neoprene usage, the major item of expenditure, costing five times as much as any other material purchased. Three months? lead time was necessary for delivery because Body Glove purchased virtually all of its neoprene from Japan. The company had found that the one U.S. supplier lacked flexibility and quality. Body Glove?s neoprene purchases were not designed to match projected needs exactly. Despite the approximately 12 percent annual inventory carrying cost, Andrew ordered extra quantities in anticipation of custom orders and/or changes in the market. Body Glove managers estimated that in 1990, they lost $1 million in sales due to a shortage of the material. They were convinced that the neoprene carrying costs were much less than the value of the lost sales opportunities. The company now carried $3 million worth of neoprene, rather than the $1.6 million it carried before 1990. In 1990, the company changed its basic production planning policy. Kurt Rios explained: Prior to 1990, we used to live and die by the prebook number. We based our business on the prebook, which was normally 50 percent?60 percent of the total sales for the season, and didn?t build any inventory until an order was received. Consequently, we were constantly delivering one month late and operating completely by the ?seat of our pants.? Our reputation in the industry was that we would do a terrible job in the spring. We?d get yelled at, so we did a great job in the fall. We?d fall asleep again in the spring and the cycle would start all over again. The new management team, believing that the costs of inventory stockouts were greater than the inventory carrying costs, decided to stock more finished goods inventory. In addition, company managers began basing their forecasts for production scheduling purposes on a combination of the pre-book and historical data. The primary forecasting steps were the same as before, but the managers began to re-evaluate the forecast based upon the pre-book as well as other outside information. They knew that historically the pre-book number represented 50?60 percent of Body Glove?s total sales for the season so they began building 50 percent of their forecast early as Russ Lesser was confident that ?half was safe because we shouldn?t be off by 50 percent.? The early results of these production changes were encouraging. The company was able to turn its inventory two times a season, and spring 1991 sales increased by 45 percent over spring 1990. Prior to fiscal year 1991, Body Glove had never prepared a budget. In 1991, its financial planning systems still consisted only of a simple, bottom-up budgeting process. Russ Lesser wanted a bottom-up process because, as he said, ?It?s not right for me to pick a number out of a hat and tell Kurt, ?You have to meet this number.? ? The budgeting process for 1991 began in November 1990. The management team estimated that they could generate 25 percent sales growth for 1991, and Kurt broke the total sales figure down by month and by product. Russ also requested that each department develop monthly projection of key expenses (e.g., materials, salaries, legal expenses) for the upcoming fiscal year. After the preliminary budgets were prepared, Russ consolidated, reviewed, and discussed them with his managers, sometimes suggesting changes. Russ thought that most of his managers were too optimistic in forecasting revenues but that their expenses projections were ?amazingly accurate.? The budgets were finalized by the end of December, in time for the start of the new fiscal year beginning January 1. Russ approved the budget himself as he was not required to submit it to the Board of Directors for approval. The projections were not used for obtaining lines of credit and loans. Body Glove had a 20-year relationship with its bank, and the bank did not require projections since the small loans the company had were fully secured with assets. (The company?s goal was to be entirely debt free as soon as possible to increase operating flexibility.) During the year, the budget was used to monitor performance as well as to detect early warning signals of problem areas. Russ compared actual performance on a monthly basis. (Exhibit 3 shows an aggregated budget-vs.-actual income statement comparison for July 1992 and 1992 year-to-date.) If a department did not achieve its budget targets, the department head?s performance evaluation could be affected, but Russ would first try to isolate the reason(s) behind the department not making its budget and then assess whether the department head had any control over the problem. For example, in July 1991 the company?s sales were below budget, but Russ concluded that the variance was not a real problem. Production efficiency had improved in June. That enabled the company to 752753ship most of its July orders during June and to recognize the revenues and profits early. EXHIBIT 3: Body Glove Income Statement Actual versus Budget Comparison for Dive ?n Surf, Inc., July 1992 and 1992 Year-to-Date ? Key: BGWT = Body Glove World Trade ? BGAD = Body Glove Advertising ? BGTS = Body Glove Trade Shows ? SAS = Surf ?n Ski DNS = Dive ?n Surf ? BGSM = Body Glove Sales and Marketing ? The annual budget was not revised formally unless significant uncontrollable circumstances existed because Russ wanted to see at the end of year ?how we did vs. what we thought we?d do.? However, Russ did revise the 1991 budget numbers because of the Persian Gulf war. After he reviewed actual results for the January through March period, he adjusted the budget numbers for the second quarter of the year downward, but he adjusted the second half numbers (July?December) upward so that the totals for the year were unchanged. ? Budget-related performance was not explicitly linked with any performance-based incentives. Body Glove had a profit sharing plan for all employees employed for more than two years that, in a normal year, provided awards of 6?7 percent of base salary. If the profit sharing monies totalled less than 10 percent of corporate income, then the remainder was set aside for management bonuses. Thus in Body Glove, contrary to the practice followed in many firms, managers earned their bonuses last. ? In a normal year, bonuses for effectively functioning managers were approximately 10?12 percent of salary, although in 1991, a relatively bad year, no management bonus monies were available. Assignment of management bonuses was done totally subjectively. Top-level managers assigned the bonus pool based on a number of indicators relevant to each individual?s job, including 753754customer service and satisfaction, sales levels, factory productivity, and expense control. ? Body Glove had a five-year strategic plan, the focus of which was on marketing. This plan had few numbers in because of the high uncertainty in the market. Russ said, ?If the bank ever wants numbers, I can give them to them. In fact, I can give them any set they want. It?s all smoke.? ? CONCERN FOR THE FUTURE ? As Russ Lesser considered the future of Body Glove, he wondered if the company should do anything differently. Should he implement more formalized planning and performance evaluation processes? Many people thought that the company?s informal culture had been a key to its success over the years, but the company was now larger and its operations significantly more complex than they had been in the past. Should he break out the Body Glove operations as a separate financial entity? This might require allocating some of the shared expenses, such as corporate overhead. Should he prepare separate financial reports for each product line? ? Questions ? 1. For what purposes does Body Glove use its budgeting system? Which purposes are emphasized? ? 2. Trace the steps in the development of the budget at Body Glove. What are the key events that relate to the timing of the steps in the budgeting process? ? 3. The case says that Body Glove never prepared a budget prior to fiscal year 1991. How can a company like Body Glove function effectively without a budget, or can it? ? 4. What changes to Body Glove?s budgeting and review processes would you recommend, if any? ? 5. If Body Glove continues to grow and, perhaps, diversifies, what changes will have to be made to the budgeting and review processes?

In March 1991, Russ Lesser, president of Body Glove, a small wetsuit manufacturer, reviewed the progress his company had made, as well as the problems it had encountered, in the nine months he had been president. The company was performing well: it was profitable and was ranked number two in market share in the wetsuit industry. But Russ knew that he and his newly appointed management team could not afford to be complacent. The wetsuit industry was highly competitive and the markets were complex, with rapid growth, fashion conscious customers, and seasonal demand. Much of Body Glove's success depended on its ability to respond quickly and in a coordinated fashion to changing market conditions. These responses should be facilitated by the company's management processes, and Russ wondered if the company had the right processes in place. Wetsuits are form-fitting, insulating suits made of neoprene, a rubber-like material. The suits are designed to 747748protect water sports enthusiasts, divers, surfers, windsurfers, kayakers, distance swimmers, and whitewater rafters, from cold water temperatures. The suits are called wetsuits because they let a layer of water in between the skin and the suit, and this water, warmed by body heat, provides a layer of insulation. It was difficult to determine the precise size of the wetsuit market because most of the firms in the industry were privately held, but it was believed that the U.S. domestic industry generated over $60 million in revenues in 1990. It was clear that the wetsuit industry had grown rapidly since its beginning in the early 1950's because of two main factors: One was the emergence of a multitude of sport-specific as well as \"fashion\" wetsuits which created the consumer desires to purchase a different wetsuit for each sport. The wetsuit manufacturers had also influenced consumer preferences and brand awareness with increased advertising and sponsorship of water sport athletes. Another contributing factor was the growth in participation in water sports activities, fueled by greater television coverage of water sports competitions. The industry was founded by small entrepreneurs, but by 1990 it was dominated by a small number of larger companies. O'Neill, the largest company in the industry, with approximately a 50 percent market share, had the reputation for producing high quality \"basic\" wetsuits. Body Glove, number two in the industry, was known as a fashion-conscious, high quality producer. O'Neill and Body Glove competed directly against each other in all market segments; the remaining manufacturers specialized. For example, Rip Curl, the third largest firm in the industry, focused on the surfing market. Competition in the industry was fierce, as the firms sought to increase their market shares at the expense of their competitors. Since the differences among wetsuit brands were subtle, most specialty surf and dive shops carried only two or three brands of wetsuits and made changes in their offerings only infrequently. General sporting good stores, such as Oshman's and Sport Chalet, typically carried lines of lesser quality suits to satisfy their less experienced clientele and were more apt to make brand changes. Most buyers of wetsuits were very image and quality/comfort conscious. Switching costs involved in buying different wetsuit brands were low, making it imperative that Body Glove personnel take care to \"earn each sale\" and not become complacent. The company marketed itself as a wholesome \"life-style\" brand, while O'Neill had a \"bad boy\" image. Maintaining this image required Body Glove managers to approve everything sold with the company's brand name on it for image and quality. Wetsuits were made of closed-cell neoprene of various thicknesses (1.5 mm to 6 mm). The thickness of the wetsuit depended on its design and its intended use. For example, deep sea diving required a very thick suit because of the extremely cold temperature of the water. Various techniques such as glued and taped seams, glued and blind stitched seams, overlocked seams, and flatlocked seams were used to seal the wetsuit. The change from the basic, multi-use, black wetsuit to more fashion-oriented, sport-specific wetsuits had altered the manufacturing environment. To remain competitive, manufacturers had to provide a large array of styles and colors to meet consumer demands, and their ability to react quickly to changing trends determined their success. The large product line required manufacturers to carry significant amounts of raw materials and a large finished goods inventory. In 1953, two former lifeguards, twin brothers Bob and Bill Meistrell, opened Dive 'n Surf, a retail water sports store in Hermosa Beach, California. Later that year they developed a wetsuit made of neoprene that \"fit like a glove\" in order to protect surfers and divers from the cold ocean temperature. They began manufacturing the wetsuits with the \"Body Glove\" logo and selling them both within their shop and to other retailers. In its first 30 years of existence, the Body Glove division of Dive 'n Surf Inc. developed a small but loyal customer base in California with a dependable product, fair prices, and superior customer service. In 1983, Robbe Meistrell, son of co-founder Bob Meistrell, became president and led the company through a period of rapid growth. Body Glove's sales nearly doubled in the period 1986-1991. The company capitalized on the demand for its new line of bright colored, uniquely designed beachwear and sportswear bearing the Body Glove logo. The company successfully gave its name a fun life-style image, in part through its sponsorship of the Professional Surfing Association of America (PSAA), the Professional Snowboarding Tour of America (PSTA), and the National Scholastic Surfing Association (NSSA). In 1986 the company licensed the Body Glove logo to American Marketing Works for the sale of its beach and 748749sportswear lines. (This license was retracted on January 28, 1991.) Total 1990 revenues for Body Glove's parent, Dive 'n Surf, Inc., were approximately $15 million, with nearly $8 million coming from wetsuits.1 In 1990, Body Glove broke from its \"family-only\" management policy. Kurt Rios, previously a Body Glove sales representative, accepted the position of national sales manager in April. In July, Russ Lesser was recruited from the company's audit firm to fill the position of president and chief financial officer, and Mark Malinski took over the responsibilities of director of manufacturing when Body Glove acquired his previous employer, Sub-Aquatic Suits, in January 1991. The cofounders, Bob and Bill Meistrell, and other family members remained active primarily in promotional events, and the new management team took over the day-to-day operations. In 1991 Body Glove employed approximately 300 people. The company was organized functionally, as is shown in Exhibit 1. EXHIBIT 1: Body Glove: Organization of Dive'n Surf, Inc. Body Glove produced a full line of neoprene wetsuits and accessories designed to meet the needs of all water sport enthusiasts. Demand was highly seasonal, so to smooth out the workload and cash flows the company started producing snowskiing and snowboarding apparel and orthopedic products, such as knee braces and pads. Exhibit 2 shows a full product listing. Body Glove sold its products through sports and specialty retail stores, including its own Dive 'n Surf retail stores in Redondo Beach and Del Amo, California. EXHIBIT 2: Body Glove: Product Line Overview The company's goal was to dethrone O'Neill and become the No. 1 wetsuit manufacturer by the year 2000. But the growth the company had experienced in the last five years had put pressure on the manufacturing operations. The manufacturing areas not only had to increase capacity, but also had to maintain flexibility to meet the highly segmented and changing consumer demands. Order Cycle Body Glove produced products for two seasons, fall and spring. The fall line, which was produced from thicker neoprene than the spring line, consisted of full suits, jackets, legsuits, hoods, and hooded vests, as well as skiing and snowboarding products. The spring line consisted of springsuits, warm water wetsuits, trunks, vests, and water ski suits. Fall suits were more labor intensive and used more expensive material. The cost of a full fall suit averaged about $100; for the spring line the average was about $60. Each season had its own formal order cycle with three phases: (1) pre-book, (2) build, and (3) deliver. In the pre-book phase, salespeople visited the retail stores to show samples of the upcoming lines. At this time, the retail stores gave the salespeople preliminary estimates of their ordering decisions. Body Glove gave its dealers an incentive to order during the pre-book phase; they received volume discounts (approximately 5 percent) and free freight. Body Glove used the pre-book estimates and orders, and information from additional orders received during this period, to build stock. Delivery involved completion of production and delivery to the retail outlet. The time frame for each order cycle is shown in Figure 1. Customers began buying the fall line in retail outlets in August/September and the spring line in February/March. FIGURE 1: Timing of Order Cycle Phases The company produced all product lines throughout the year, but the majority of each line was sold during the season the wetsuit was intended for. Body Glove's revenues were derived approximately 60 percent from its fall line and 40 percent from its spring line. Marketing Strategy Body Glove had increased its market share over the past few years because of its quality product line and firm commitment to dealer and customer service. Body Glove's marketing strategy was to provide excellent service and products not available elsewhere to the \"image accounts,\" the windsurfing, surf, and ski shops that catered to hard core sports enthusiasts. Individually these shops had low sales volume, but Body Glove's reputation with the image accounts affected the acceptance in other sales outlets. In total, Body Glove sold its wetsuits in 1,500 retail stores in 33 countries. Body Glove's competitive advantage came from its manufacturing quality and flexibility and its designs that satisfied customer needs. The company maintained its commitment to service by rewarding its sales representatives based on customer service goals, not the number of units sold. The sales representatives were salaried employees who were not on commission. They were given the opportunity to earn bonuses based on 749750 750751both the amount of sales made during the year and their clients' satisfaction. Production Processes The mission of Body Glove's production department was to manufacture quality products efficiently while maintaining the production flexibility necessary to satisfy constantly changing customer demands. Body Glove was the only major U.S. wetsuit company that did all of its production domestically; its wetsuits were manufactured in a single facility in Hermosa Beach, California. Manufacturing consisted of six steps: cutting, sewing, gluing, screening, finishing, and repairs. The neoprene was cut to pattern, and the suit pieces were either sewn or glued together. The logos and designs were screened on each suit. Finally, each suit was finished, inspected, bar tagged, and pinned with a warranty card. Suits failing inspection were returned for repairs. The company's ideal was to produce at constant rates, but that was not always possible. One important constraint was the size of the Hermosa Beach production facility. It was not large enough to store the desired levels of inventory. All wetsuit and accessory manufacturing had been performed on a single production line. But in July 1991 the company was in the process of moving to two production lines, one to produce large and forecast orders and one to produce the so-called \"weird suits\"custom orders, special orders, and reworks. During slack time, it was planned that this second line would build wetsuits out of obsolete neoprene colors, such as pink, yellow, and chartreuse, still held in inventory. Demand Forecasting and Production Policies Andrew Coulter, manager of international sales, and Kurt Rios, national sales manager, developed sales forecasts in March and October of each year. The March forecast was for the fall line, and the October forecast was for the spring line. The forecasts were based on historical sales data, inventory levels, fashion trends, customer demands, product life cycles, Body Glove's marketing strategy, and the manager's \"market feel.\" From this forecast, Andrew developed a Materials Requirement Plan (MRP) based on the Bill of Materials (BOM) for a standard mix of colors and sizes for each wetsuit style. Andrew also developed a forecast 751752of neoprene usage, the major item of expenditure, costing five times as much as any other material purchased. Three months' lead time was necessary for delivery because Body Glove purchased virtually all of its neoprene from Japan. The company had found that the one U.S. supplier lacked flexibility and quality. Body Glove's neoprene purchases were not designed to match projected needs exactly. Despite the approximately 12 percent annual inventory carrying cost, Andrew ordered extra quantities in anticipation of custom orders and/or changes in the market. Body Glove managers estimated that in 1990, they lost $1 million in sales due to a shortage of the material. They were convinced that the neoprene carrying costs were much less than the value of the lost sales opportunities. The company now carried $3 million worth of neoprene, rather than the $1.6 million it carried before 1990. In 1990, the company changed its basic production planning policy. Kurt Rios explained: Prior to 1990, we used to live and die by the prebook number. We based our business on the prebook, which was normally 50 percent-60 percent of the total sales for the season, and didn't build any inventory until an order was received. Consequently, we were constantly delivering one month late and operating completely by the \"seat of our pants.\" Our reputation in the industry was that we would do a terrible job in the spring. We'd get yelled at, so we did a great job in the fall. We'd fall asleep again in the spring and the cycle would start all over again. The new management team, believing that the costs of inventory stockouts were greater than the inventory carrying costs, decided to stock more finished goods inventory. In addition, company managers began basing their forecasts for production scheduling purposes on a combination of the pre-book and historical data. The primary forecasting steps were the same as before, but the managers began to re-evaluate the forecast based upon the pre-book as well as other outside information. They knew that historically the pre-book number represented 50- 60 percent of Body Glove's total sales for the season so they began building 50 percent of their forecast early as Russ Lesser was confident that \"half was safe because we shouldn't be off by 50 percent.\" The early results of these production changes were encouraging. The company was able to turn its inventory two times a season, and spring 1991 sales increased by 45 percent over spring 1990. Prior to fiscal year 1991, Body Glove had never prepared a budget. In 1991, its financial planning systems still consisted only of a simple, bottom-up budgeting process. Russ Lesser wanted a bottom-up process because, as he said, \"It's not right for me to pick a number out of a hat and tell Kurt, 'You have to meet this number.' \" The budgeting process for 1991 began in November 1990. The management team estimated that they could generate 25 percent sales growth for 1991, and Kurt broke the total sales figure down by month and by product. Russ also requested that each department develop monthly projection of key expenses (e.g., materials, salaries, legal expenses) for the upcoming fiscal year. After the preliminary budgets were prepared, Russ consolidated, reviewed, and discussed them with his managers, sometimes suggesting changes. Russ thought that most of his managers were too optimistic in forecasting revenues but that their expenses projections were \"amazingly accurate.\" The budgets were finalized by the end of December, in time for the start of the new fiscal year beginning January 1. Russ approved the budget himself as he was not required to submit it to the Board of Directors for approval. The projections were not used for obtaining lines of credit and loans. Body Glove had a 20-year relationship with its bank, and the bank did not require projections since the small loans the company had were fully secured with assets. (The company's goal was to be entirely debt free as soon as possible to increase operating flexibility.) During the year, the budget was used to monitor performance as well as to detect early warning signals of problem areas. Russ compared actual performance on a monthly basis. (Exhibit 3 shows an aggregated budget-vs.-actual income statement comparison for July 1992 and 1992 year-to-date.) If a department did not achieve its budget targets, the department head's performance evaluation could be affected, but Russ would first try to isolate the reason(s) behind the department not making its budget and then assess whether the department head had any control over the problem. For example, in July 1991 the company's sales were below budget, but Russ concluded that the variance was not a real problem. Production efficiency had improved in June. That enabled the company to 752753ship most of its July orders during June and to recognize the revenues and profits early. EXHIBIT 3: Body Glove Income Statement Actual versus Budget Comparison for Dive 'n Surf, Inc., July 1992 and 1992 Year-to-Date Key: BGWT = Body Glove World Trade BGAD = Body Glove Advertising BGTS = Body Glove Trade Shows SAS = Surf 'n Ski DNS = Dive 'n Surf BGSM = Body Glove Sales and Marketing The annual budget was not revised formally unless significant uncontrollable circumstances existed because Russ wanted to see at the end of year \"how we did vs. what we thought we'd do.\" However, Russ did revise the 1991 budget numbers because of the Persian Gulf war. After he reviewed actual results for the January through March period, he adjusted the budget numbers for the second quarter of the year downward, but he adjusted the second half numbers (JulyDecember) upward so that the totals for the year were unchanged. Budget-related performance was not explicitly linked with any performance-based incentives. Body Glove had a profit sharing plan for all employees employed for more than two years that, in a normal year, provided awards of 6-7 percent of base salary. If the profit sharing monies totalled less than 10 percent of corporate income, then the remainder was set aside for management bonuses. Thus in Body Glove, contrary to the practice followed in many firms, managers earned their bonuses last. In a normal year, bonuses for effectively functioning managers were approximately 10- 12 percent of salary, although in 1991, a relatively bad year, no management bonus monies were available. Assignment of management bonuses was done totally subjectively. Top-level managers assigned the bonus pool based on a number of indicators relevant to each individual's job, including 753754customer service and satisfaction, sales levels, factory productivity, and expense control. Body Glove had a five-year strategic plan, the focus of which was on marketing. This plan had few numbers in because of the high uncertainty in the market. Russ said, \"If the bank ever wants numbers, I can give them to them. In fact, I can give them any set they want. It's all smoke.\" CONCERN FOR THE FUTURE As Russ Lesser considered the future of Body Glove, he wondered if the company should do anything differently. Should he implement more formalized planning and performance evaluation processes? Many people thought that the company's informal culture had been a key to its success over the years, but the company was now larger and its operations significantly more complex than they had been in the past. Should he break out the Body Glove operations as a separate financial entity? This might require allocating some of the shared expenses, such as corporate overhead. Should he prepare separate financial reports for each product line? Questions 1. For what purposes does Body Glove use its budgeting system? Which purposes are emphasized? 2. Trace the steps in the development of the budget at Body Glove. What are the key events that relate to the timing of the steps in the budgeting process? 3. The case says that Body Glove never prepared a budget prior to fiscal year 1991. How can a company like Body Glove function effectively without a budget, or can it? 4. What changes to Body Glove's budgeting and review processes would you recommend, if any? 5. If Body Glove continues to grow and, perhaps, diversifies, what changes will have to be made to the budgeting and review processes