Need assistance in describing Hisco's company using the (SWOT Analysis)

Strengths-

Weaknesses-

Opportunities-

Threats

Also, what would be the best strategy would will be for the next two to three years?

Q Income Statement Report Type: a % Profit & Loss [$1 Total Sales V Total COGS v Gross Margin - Total Base Costs V Operating Margin (OM) - Interest Expense V Pre-Tax Net Income - Taxes 8 Net Income Q1'18A $265,860.00 $129,937.31 $135,922.69 $204,265.16 ($68,342.47) $0.00 ($68,342.47) ($34,171 .23) ($34,171 .23) 02'18A $287,910.00 $135,168.89 $152,741.11 $172,591.33 ($19,850.22) $0.00 ($19,850.22) ($9,925.11) ($9,925.11) 03'18A $308,700.00 $146,749.29 $161,950.71 $189,725.67 ($27,774.96) $0.00 ($27,774.96) ($13,887.48) ($13,887.48) Q4'18A $325,710.00 $136,946.30 $188,763.70 $215,386.74 ($26,623.04) $0.00 ($26,623.04) ($13,311.52) ($13,311.52) Q1 '19A $340,990.00 $146,402.48 $194,587.52 $228,383.32 ($33,795.80) $0.00 ($33,795.80) ($16,897.90) ($16,897.90) 02'19A $360,490.00 $168,478.90 $192,01 1 .10 $272,979.72 ($80,968.62) $1,793.82 ($82,762.44) ($41,381.22) ($41,381.22) Q3'19A $397,860.00 $185,435.06 $212,424.94 $298,731.64 ($86,306.70) $5,745.96 ($92,052.65) ($46,026.33) ($46,026.33) Q4'19A $455,950.00 $187,164.21 $268,785.79 $331,767.14 ($62,981.35) $9,228.52 ($72,209.86) ($36,104.93) ($36,104.93) 01 '20P $552,750.00 $287,698.11 $265,051.89 $294,038.12 ($28,986.23) $14,335.95 ($43,322.18) ($21,661.09) ($21 ,661 .09) 02'20P $760,150.00 $323,588.69 $436,561.31 $343,744.47 $92,816.84 $1 1,984.13 $80,832.71 $40,416.36 $40,416.36 03'20P $957,375.00 $341 ,197.13 $616,177.87 $482,723.00 $133,454.87 $12,412.41 $121,042.45 $60,521.23 $60,521.23 Q4'20P $1,270,200.00 $401,934.22 $868,265.78 $529,916.41 $338,349.37 $14,962.19 $323,387.18 $161,693.59 $161,693.59 3 Balance Sheet Report Type: a % Balance Sheet [$] Total Assets = Cash + Receivables V + Flaw Material + Finished Goods + Net PP&E Total Liabilities 8. Equity = Liabilities v + Equity V 01'18A $270,828.77 $180,669.22 $88,620.00 $0.00 $1,539.54 $0.00 $270,828.77 $0.00 $270,828.77 02'18A $260,903.66 $163,997.06 $96,390.00 $516.60 $0.00 $0.00 $260,903.66 $0.00 $260,903.66 03'18A $247,016.18 $87,082.86 $137,000.00 $172.20 $22,761.11 $0.00 $247,016.18 $0.00 $247,016.18 Q4'18A $233,704.66 $46,297.94 $144,760.00 $0.00 $42,646.72 $0.00 $233,704.66 $0.00 $233,704.66 01'19A $264,641.94 $0.00 $211,738.00 $0.00 $52,903.94 $0.00 $264,641.94 $47,835.18 $216,806.76 02'19A 03'19A $328,651.03 $375,492.98 $0.00 $0.00 $256,242.00 $279,010.00 $9,815.40 $35,645.40 $62,593.63 $60,837.58 $0.00 $0.00 $328,651.03 $375,492.98 $153,225.50 $246,093.77 $175,425.54 $129,399.21 Q4'19A $475,586.22 $0.00 $326,447.00 $21,352.80 $127,786.42 $0.00 $475,586.22 $382,291.94 $98,294.28 01 '20P $391,209.89 $0.00 $288,658.33 $56,462.61 $46,088.95 $0.00 $391,209.89 $319,576.70 $71,633.19 02'20P $443,047.25 $0.00 $371,628.89 $12,917.84 $58,500.53 $0.00 $443,047.25 $330,997.71 $112,049.55 03'20P $571,562.46 $0.00 $468,050.00 $6,378.88 $97,133.60 $0.00 $571,562.48 $398,991.71 $172,570.77 Q4'20P $808,408.49 $0.00 $479,853.33 $1 9,487.93 $309,067.23 $0.00 $808,408.49 $474,1 44.1 3 $334,264.36 101 Cash Flow Report Type :" ` ) Cash Flow [ S ] Q 1 ' 18 A Q 2'18 A Q 3 ' 18 A Q 4 ' 18 A Q 1 ' 19 A Q 2'19 A Q 3' 19 A Q 4' 19 A Q 1 '20 P Q 2'20 P Q 3'201 Cash Provided / ( Used ) - Operating Activities * ( $ 1 24 , 330. 78 ) ( $16 , 672. 17 ) ( $76 , 914 . 19 ) ( $40 , 784.92 ) ( $94 , 133. 12 ) ( $ 105 , 390. 32 ) ( $92 , 868. 27 ) ( $ 136 , 198. 17 ) $62 , 715 .24 ( $1 1 , 421. 01 ) ( $67, 994. 01 Cash Provided / ( Used ) - Investing Activities " $0. 00 $0. 00 $0. 00 $0. 00 $0. 00 $0. 00 $0. 00 $0. 00 $0. 00 $0. 00 $0 . 0 Cash Provided / ( Used ) - Financing Activities *\\ $305 , 000 . 00 $0. 00 $0. 00 $0. 00 $47 , 835. 18 $105 , 390. 32 $92 , 868.27 { $136 , 198. 17 ( $62 , 715. 24 ) $71 , 421 . 01\\ $67 , 994. 0 Total Cash Flow $180 , 669. 22 ( $ 1 6 , 672. 17 ) ( $76, 914. 19) ( $40, 784.92 ) ( $46, 297. 94 ) $0. 00 $0. 00 $0. 00 $0. 00 $0. 00 $0. 0 + Beginning Cash $0.00 $180 , 669 . 22 $163 , 997 . 06\\ $87 , 082.86\\ $46 , 297 . 94 $0. 00 $0. 00 $0.00 $0. 00 $0.00 $0. 0 Ending Cash $ 180 , 669. 22 $163, 997. 06 $87 , 082.86 $46 , 297 . 94 $0. 00 $0. 00 $0. 00 $0. 00 $0. 00 $0. 00 $0. 03' Raw Material Current Plan Q1'18A Material Ordered [Units] 458 Backorders [Units] 0 Flaw Material Cost per Unit [$] $86.10 Report Type: $ Inventory [Units] 01'18A Beginning Inventory 0 + Raw Material Received 427 + Back Ordered 0 Available for Production 427 - Production 427 Ending Inventory 0 02'18A 562 $86.10 02'18A 0 458 458 452 Q3'18A 600 0 $86.10 03'18A e 562 568 566 Q4'18A 600 $86.10 Q4'18A 600 602 602 Q1'19A 750 0 $86.10 Q1'19A o 600 600 600 02'19A 1,000 0 $86.10 02'19A o 750 750 636 114 Q3'19A 1 ,000 0 $86.10 Q3'19A 114 1,000 0 1,114 700 414 Q4'19A 1,000 0 $86.10 Q4'19A 414 1,000 0 1,414 1,166 248 01 '20P 900 0 $87.39 01 '20P 248 1 ,000 1 ,248 600 648 02'20P 1,825 $87.39 02'20P 648 900 1,548 1,400 148 03'20P 3,550 $87.39 03'20P 148 1,825 1,973 1,900 73 Q4'20P 3,000 $87.39 Q4'20P 73 3,550 3,623 3,400 223 Production Report Type: Production Capacity Labor Force Costs Production Capacity Q1'18A Q2'18A Q3'18A Q4'18A Q1'19A Q2'19A Q3'19A Q4'19A Q1'20P Q2'20P Q3'20P Q4'20P Production BaseRequested 427 452 566 602 600 636 700 1,166 600 1,400 1,900 3,400 Maximum Production [Units] 427 458 602 600 688 1,011 1,170 1,248 1,548 1,973 3,588 | Raw Material Constraint 427 458 568 602 600 750 1,114 1,414 1,248 1,548 1,973 3,623 | Total Line Capacity 500 500 750 750 750 1,250 1,250 1,500 1,500 2,250 3,000 3,750 | Labor Capacity 429 507 622 662 711 688 1,011 1,170 1,415 1,589 2, 164 3,588 Production Achieved 427 452 566 602 600 636 700 1,166 600 1,400 1,900 3,400 Idle Production Time 0.0% 1.3% 0.4% 0.0% 0.0% 7.69 30.8% 0.3% 51.9% 9.6% 3.7% 5.2% Production Ratio 100.0% 98.7% 99.6% 100.0% 100.0% 92.4% 69.2% 99.7% 48.1% 90.4% 96.3% 94.8%{. Finished Goods Inventory Current Plan Q 1 ' 18 A Q 2'18 A Q 3' 18 A Q 4'18 A Q 1 ' 19 A Q 2'19 A Q 3'19 A Q 4 '19 A Q 1'20 P Q 2'20 P Q 3'20P Q 4'20 P Total Market Demand [ Units ] 1 , 251 1 , 371 1 , 472 1 , 566 1 , 674 1 , 830 2 , 091 2 , 485 3 , 047 3 , 891 5 , 044 6 , 637 * Market Share [ 9/0 ] 33.7% 33.3% 33.3% 33.0% 33.4 33.4 33.4% 33.4 % 33. 0% 34. 0 % 33. 0 % 33.0% Units Sold 422 457 490 517 559 671 698 829 1, 005 1 , 322 1 , 665 2, 190 Report Type : Inventory > Inventory [Units ] Q 1 ' 18 A Q 2' 18 A Q 3 ' 18 A Q 4'18 A Q 1 ' 19 A Q 2'19 A Q 3 '19 A Q 4'19 A Q 1 '20 P Q 2'20 P Q 3'20P Q 4'20 P Beginning Inventory O 5 O 76 161 202 227 229 566 161 239 474 + Production Inventory 427 452 566 602 600 636 700 1 , 166 600 1 , 400 1, 900 3 , 400 Available Inventory 421 451 566 678 767 838 927 1 , 395 1 , 166 1 , 561 2 , 139 3 , 874 - Sales Inventory 422 457 490 517 559 61 1 698 829 1, 005 1 , 322 1 , 665 2 , 190 Ending Inventory 5 O 76 161 202 227 229 566 161 239 474 1 , 684E Financial Metrics Metrics Ratios Variable Costs ($) / Sales ($) Materials ($) / Sales ($) Labor ($) / Sales ($) Base Costs ($) / Sales ($) Gross Margin (%) Operating Margin (%) DuPont Ratios Return on Sales (ROS) Asset Turns Return on Assets (ROA) Financial Leverage Return on Equity (ROE) Marketing & Advertising Marketing ($) / Sales ($) [% of Sales] Advertising ($) / Sales ($) [% of Sales] Quality Engineering Quality ($) / Sales (3) [% of Sales] Quality ($) / Units Produced Lean Six Sigma Lean Six Sigma ($) / Sales ($) [% of Sales] Lean Six Sigma ($) / Units Produced Research Expense 8. Project Funding Research ($) / Sales ($) [% of Sales] Q1'18A 48.9% 13.7% 35.2% 76.8% 51.1% -25.7% -12.9% 0.98 -12.6% 1.00 -12.6% 11.7% 13.5% 4.9% $30.4 6.0% $37.5 0.0% 02'1BA 46.9% 13.7% 33.3% 59.9% 53.1% -6.9% -3.4% 1.10 -3.8% 1.00 -3.8% 10.8% 12.5% 4.5% $23.8 5.6% $35.4 0.0% 03'1 8A 47.5% 13.7% 33.9% 61.5% 52.5% -9.0% -4.5% 1.25 -5.6% 1.00 -5.6% 10.0% 11.7% 4.2% $230 5.2% $283 0.0% Q4'18A 42.0% 13.7% 28.4% 66.1% 58.0% -8.2% -4.1% 1.39 -5.7% 1.00 -5.7% 10.4% 12.0% 5.5% $29.9 6.1% $33.2 0.0% Q1'19A 42.9% 14.1% 28.8% 67.0% 57.1% -9.9% -5.0% 1.29 -6.4% 1.22 -7.8% 10.3% 5.3% 7.3% $41.7 9.4% $53.3 7.3% 02'1 9A 46.7% 14.6% 32.1% 75.7% 53.3% 22.5% -11.5% 1.10 -12.6% 1.87 -23.6% 10.5% 6.4% 9.3% $47.2 9.9% $50.3 8.3% 03'19A 46.6% 15.1% 31.5% 75.1% 53.4% -21.7% -11.6% 1.06 -12.3% 2.90 -35.6% 10.6% 7.0% 11.3% $64.3 8.0% $45.7 8.8% Q4'19A 41.0% 15.7% 25.4% 72.8% 59.0% -13.8% -7.9% 0.96 -7.6% 5.10 -38.7% 10.1% 6.8% 9.2% $360 5.5% $214 9.9% 01 '20P 52.0% 15.8% 36.3% 53.2% 48.0% -5.2% -3.9% 1.41 -5.5% 5.46 30.2% 8.3% 5.1% 7.2% $66.7 4.5% $41.7 6.3% Q2'20P 42.6% 15.2% 27.4% 45.2% 57.4% 12.2% 5.3% 1.72 9.1% 3.95 36.1% 9.5% 3.9% 5.9% $32.1 4.2% $22.9 0.0% 03'20P 35.6% 15.2% 20.4% 50.4% 64.4% 13.9% 6.3% 1.68 10.6% 3.31 35.1% 14.1% 4.2% 9.4% $47.4 4.0% $20.0 0.0% Q4'20P 31.6% 15.1% 16.6% 41.7% 68.4% 26.6% 12.7% 1.57 20.0% 2.42 48.4% 11.2% 2.0% 6.3% $235 2.0% $7.4 0.0% Cash Flow Analysis Cash Conversion Cycle (000) in Days Terms to Customer Average Collection Period in Days Days Inventory Outstanding Days Payable Outstanding Cash Flow from Operating Activities (CFOA) Interest Coverage [0M $ / Interest 35] Cash Flow Coverage Distributor Financials Retail Price ($) Distributor Margin ($6) Distributor Margin ($) Total Distributor Margin ($) 31.1 30.0 30.0 1.1 0.0 ($124,331) $700 10.0% $70.0 $29,540 30.5 30.0 30.1 0.3 0.0 ($16,672) $700 10.0% $70.0 $31,990 54.0 30.0 39.9 14.1 0.0 ($76,914) $700 10.0% $70.0 $34,300 68.0 30.0 40.0 28.0 0.0 ($40,785) $700 1 0.0% $70.0 $36,190 39.4 60.0 55.9 32.5 0.0 ($94,133) $670 10.0% $679 $37,888 102.7 60.0 64.0 38.7 0.0 ($105,390) -45.1 -2.2 $656 10.0% $65.6 $40,054 109.9 60.0 63.1 46.8 0.0 ($92,666) -15.0 -0.6 $633 10.0% $63.3 $44,207 136.2 60.0 64.4 71.7 0.0 ($136,198) -6.8 -0.6 $611 10.0% $61.1 $50,661 79.1 45.0 47.0 32.1 0.0 $62,715 -2.0 0.2 $611 10.0% $61.1 $61,417 63.9 40.0 44.0 19.9 0.0 ($11,421) 7.7 0.0 $639 1 0.0% $63.9 $84,461 71.3 40.0 44.0 27.3 0.0 ($67,994) 10.3 -0.2 $639 10.0% $63.9 $106,375 1 07.6 30.0 34.0 73.6 0.0 ($75,1 52) 22.6 -0.2 $644 10.0% $64.4 $141,133 A R&D Developing Project Project 02 Available Project Project 01 Project 03 No report from competitors Status Summary Status: In Progress since 04'19 Developing plan: - Q4'19: $45,000.00 - 0120: $35,000.00 SPEEDY READER We have found a way to increase the speed of the reader transport mechanism by 100%. This will make the reader 30% faster than it is now. The new system will also use forms printed on standard paper instead of the current heat sensitive paper (similar to that used by most of the old style Rapifax machines). Our Environmental Manager indicates that there is legislative activity to require the phase out of nonrecylable office paper, including possibly heat sensitive types. Although this is speculative at this stage, conversion to the new units may position our products advantageously for the future. As you know, primary paper records are stored for three years at which time most hospitals microfilm these and throw out the originals. I talked to some of our sales representatives and they agree that if we can do it, these features can increase our market share by 15%. (For example, if our market share is now 30% it will jump to 30'1.15=34.5%). However, it will have no effect on the total size of the market. Given that the prior management team had invested $45,000 to get the new design ready, we need one more $35,000 investment this quarter to have the design ready to implement next quarter. There will be some rework east and waste disposal costs for each finished product in stock - about $15 per unit. The labor content of the product will also increase by about 10%. A R&D Developing Project Project 02 Available Project Project 01 Project 03 No report from competitors Status Summary Status: No investing plan PROCESS SIMPLIFICATION We have been studying the design of several of our major assemblies to see if there is a way to simplify the process and thereby reduce off specication material, hazardous waste emissions and the labor content of the product. We find that we can redesign and simplify two of the assemblies. Positive hits can be made in all three areas, however at this stage we can only definitely count on a cut in the total labor content by 25% (this means that the Planned Time will be reduced by 25% in the implementation quarter). This redesign will be a major undertaking. We will need $25,000 in each of the next two quarters to get it ready to implement. We can shorten that time to one quarter, but it will cost $60,000. It can not be done any faster than this no matter what the cost, since the required regulatory permits to build the new lines is three months. At our current production rates this would have a payback of less than one year. I think we should go ahead as soon as possible. A R&D Developing Project Project 02 Available Project Project 01 Project 03 No report from competitors Status Summary Status: No investing plan MARKET EXPANSION We have come up with a way to extend the use of the reader to housekeeping, maintenance and dietary control in hospitals. This will involve a significant change to the interpreter, but it should increase the potential market for the readers by 50%. This will be expensive. We will need to spend $35,000 per quarter for the next three quarters on this project. Any existing finished goods stock will have to be reworked at a cost of $25 per unit. The labor content will also go up by 10%. This will put a lot of strain on our supply chain. Make sure that we are considering these implications as we invest in this project. We can crash the project and complete it in two quarters but this will cost $10,000 in each quarter. If we really want to beat the competition to market, we can do the project in one quarter, for a cost of $200,000. I think it's worth it. If we go ahead with this project and beat our competition, we will not only lead in this new segment of the market, but we should enjoy a beneficial "trickle down" effect on our share and value in the current market. * Growing Your Business " - A Management Simulation Our Educational Objectives to Growing a Business , while not Exhaustive , Necessitates that Future Leaders can* . Derive a Strategy from an Understanding of SWOT and Porter's Five Forces in Uncertain , Ambiguous and Complex Global! Environments , . Convert that Strategy into an Executable Plan in the Short Term while Investing and Creating Options for the Long Term ," . Make Decisions under Time Pressure , Scarce Resources , Limited Information and Divergent Opinions , . Communicate and Negotiate with Internal and External Constituencies for Win - Wins ; . Manage the Interdependencies across Functions , . Measure , Interpret and Explain the Financial Impact of Decisions in an FP &A Methodology of Variance Analysis . Have a responsible mindset in Meeting Commitments within an Ethical Framework , and . Be a Coach and Teacher to everyone within their sphere of influence . All in the Context of Creating Shareholder Value !To: Functional Managers From: William Sellums (Marketing Manager) Product & Industry Background We are developing an advertising theme, which will focus on the history of our product, its labor-saving and productivity features, and its high degree of reliability. We will be asking each of you for your input as we develop the advertising plan. Most of you are aware of the background of our product and our industry. To summarize: - Three companies entered the Reader technology business in 2017 and began selling products in the first quarter of 2018. The Reader was developed to satisfy a need to reduce the time hospital nurses devote to paperwork and administration. Several independent studies revealed that approximately 40% of a nurse's time was consumed in non-patient activities. Trial installations of standard computer terminals at nurse's stations have not solved the problem because data entry and computer training requirements placed resource demands on the hospital staffs that were unattainable. - Hamada, Ltd., a Japanese electronics producer, developed a pick-up cell constructed as a solid-state magnetic sensor using tunnel diodes and special ceramics. This pick-up cell detects marks made with magnetic ink and records their position on a predesigned form. The cell is extremely tolerant of registration errors and allows the remainder of the Reader device to be relatively simple and inexpensive to build using off-the-shelf materials. The Reader is an input peripheral that can be programmed to work with virtually all hospital computer systems. Each Reader requires one pick up-cell. 0 When installed, a Reader system includes a Reader, a special pen containing magnetic ink, and preprinted, computer-generated patient forms. These forms are coated with a special chemical compound similar to that used on heat-sensitive paper for fax machines. Using the pen provided, a nurse marks the form to indicate procedures, drugs, dosages administered, and other information relating to the patient. The form is inserted into the Reader, which converts the marks to computer sensible form for transmission to a database. Like our competitors, we sell Readers to hospital equipment distributors who package the Reader and its ancillary components for sale to some 5,300 hospitals in the United States. We believe that we make a quality product that will get better. We sell at a competitive price. The industry is healthy and on the verge of tremendous growth. Aggressive advertising, marketing, and pricing strategies will stimulate demand. TO: Functional Managers FROM: Ferris Futrell (Finance Manager) Discretionary Operating Plans 2020 (Compan y Use Only) During our November 2019 planning meeting, we agreed on the following discretionary budget for 2020: Quality Engineering: $150,000 RED: $295,000 Marketing: $219,000 Advertising: $90,000 Lean Six Sigma: $128,000 However, since that time, each functional manager made increases in one or more areas. l have heard from you that we need to increase overall investment to successfully improve the product, the manufacturing process, and our market position. Clearly we have limited cash resources at this time, and although we have a line of credit, we must be sensitive to our cash position so that we do not exceed that credit limit. I suggest that we revisit the planning decisions for 2020 during our next staff meeting to ensure that our spending is consistent with our competitive strategy and the availability of resources. At that time, we may wish also to continue our discussions on our resource allocation policies. For example, some of you have suggested that discretionary expenditures in your functional area should increase as our sales volume grows. We must come to agreement as to how this should be done. Product pricing is extremely important to our fiscal strategy and corporate profitability. The market may be receptive to a higher price until demand is satisfied, but we must watch this carefully. Be aware that Stanley Sloane will not approve any price changes exceeding 20% up or down in one quarter. Control of our production costs is essential if we are to be competitive and profitable. Marketing and Manufacturing must address these topics if we are to be profitable. TO: General Manager FROM: Ferris Futrell (Finance Manager) Line of Credit In response to your question about State Street Bank's method of determining our adjustable line of credit, I am providing a portion of the most recent bank letter from Loan Manager, Francine Friendly, on the subject. . . Our analysis of your industry reveals consistent, modest growth during the past year with little fluctuation in price or terms. After discussions with your parent company regarding the prior quarter's performance and your company's increased cash needs to align with potential industry growth, we are pleased to extend your credit line to a minimum of $425,000. We will continue to review your position and adjust your credit line every quarter, as we do with all new companies. Your credit line will increase as your company grows, but it will not go below $425,000. In each quarterly review, we will allow: 1. $100,000 for personal collateral now held; 2. Sixty percent of Accounts Receivable; 3. Thirty percent of the value of all finished goods inventories. Your total line of credit will be either the sum of the above or $425,000, whichever is greater. An interest rate of 15% per annum (3.75% per quarter) will be charged on money borrowed. Borrowing up to the limit of the credit line will be automatic. As cash is received, repayment will also be automatic. In any quarter, interest will be charged based upon the outstanding loan amount (i.e., your negative cash balance) at the end of the previous quarter. You may, therefore, borrow automatically against your credit line during any quarter, and you will pay no interest until the following quarter. We will inform you of any changes in our policies or interest rates. When a line of credit is exceeded, dependent upon the severity of the overdraft and the company plan to remediate the issue, the bank will determine the appropriate actions. In the quarter following the overdraw, the current rate of interest will be charged on money borrowed up to the credit line; a loan restructuring fee of $3,500 will be charged, and an interest rate of 21 % per annum may be charged at the bank's discretion on money borrowed in excess of the credit line. If such an incident should occur, the bank and the company will make every effort to resolve the overdraw condition immediately. Should that not happen and should a successive overdraw occur, the bank may invoke additional remedial steps.\" I hope this clarifies any questions you have on the terms of the line of credit. Please note that exceeding the credit line is not acceptable operating procedure. I recognize that certain negative business conditions may be unforeseen, but for the most part, I would recommend appropriate sensitivity analysis to avoid an overdraft situation. During our first 24 months of operation, we have gone from sales of 422 units in the first quarter to 829 units during the last quarter. That's nearly 100% growth since we started. We are convinced there is tremendous potential growth for our product in the market. Growing demand will follow expanding sales, marketing and advertising investment and decreasing prices. To get a major share of that growing market, we need to be price competitive with a quality product, and we must make a major dollar investment to market our product. Even though we have been in business for over a year now, our name is still unknown; it will take the right balance of marketing and advertising monies to build our brand image. The marketing dollars will support our distributor in his efforts to get "air time" with our end-users. Our distributor charges 10% of the selling price to the customer as his margin to cover pre and post sales costs of supporting our products. For example, if our price to the distributor is $630, the price to the customer is $700. The distributor receives 10% of $700 or $70 per unit. Our expenditures for 2018/2019 were as follows: 2018/2019 EXPENDITURES ADVERTISING MARKETING" 1st Quarter 2018 $36,000 $31,000 2nd Quarter 2018 $36,000 $31,000 3rd Quarter 2018 $36,000 $31,000 4th Quarter 2018 $39,000 $34,000 1st Quarter 2019 $18,000 $35,000 2nd Quarter 201 9 $23,000 $38,000 3rd Quarter 2019 $28,000 $42,000 4th Quarter 2019 $31,000 $46,000 *lncludes the cost of the MAA Marketing Report. We recommend an aggressive marketing program we should be looking at investing 15% of sales into marketing and 5-10% of sales into advertising each quarter in 2020. This market will not reach its potential without stimulation, and we cannot depend on our competitors to do the stimulating for us. Of course, there is a downside to this life cycle phenomenon. At some point, the "mature" phase follows the "growth" phase. Demand begins to level off and eventually declines. The marketing challenge is to anticipate when that is going to happen. We must balance our manufacturing and marketing efforts to be able to serve the market when the demand exists and to curb manufacturing before demand declines. Our manufacturing capacity is of real concern to me. Our projection for major growth must be matched by manufacturing expansion to keep up with that growth. There is more at stake than losing a few sales. An industry that lacks the manufacturing capacity to meet increasing demand often keeps prices high and loses sight of keeping costs low. Such an industry offers a tempting opportunity for a low- cost producer to enter into the market with a significantly lower price. Whenever we have shortage of capacity to meet the demand, we lose all of the unfulfilled demand. There is no backlog that would roll fonrvard to the next quarter. We cannot afford to allow any unfulfilled demand. TO: Functional Managers FROM: William Sellums (Marketing Manager) Marketing Plan 2020 (Compan y Use Only) MARKETING PLAN 2020 ASSU MPTIONS: 1. Demand for the product will increase as the product gains acceptance. The market is stimulated by advertising and marketing expenditures and value pricing. 2. Product quality will become a major factor in product selection. Competing manufacturers will emphasize quality improvements. 3. Costs to produce will be reduced through efficiencies and manufacturing improvements so that cost savings can be passed on to customers through more attractive prices and/or payment terms. OBJECTIVES: 1. Achieve a 36% market share by year-end 2020. 2. Price the product competitively to gain and maintain share; avoid erratic price shifts regardless of the competition; keep the price consistent with reasonable profit margins. 3. Increase our marketing investment as quickly as possible to 15% of sales, and maintain reasonable levels of investment through year end. Periodically evaluate our investment needs as our product offering evolves. 4. Stimulate market growth by attaining a 7% of sales advertising investment, and maintain reasonable investment through year-end. 5. Position the company to take advantage of an exploding market fed by innovation to drive expanding demand for our product. # Beds/Hospital # Hospitals Total # Beds* Total # Readers 100-199 2,209 331,425 33,143 200-299 1 ,155 288,750 28,875 300-399 720 252,000 25,200 400-499 477 214,500 21 ,450 Total 5,349 1,559,175 155,918 MAA offers quality surveys of our product and those of our competitors. For a small fee, MAA will analyze the product's technical quality in independent laboratories and survey the product's perceived quality among current and potential customers and users. In the future, it hopes to also provide demand projections in the service. Whether or when this will happen is not yet certain. A subscription to the survey reports costs $5,000 per quarter. Once we subscribe, we do not need to request it again each quarter; it will be delivered automatically. To start the subscription service, simply check the "Marketing Report\" check box on the "Qtrly Decisions" tab in the quarter in which you want to start the service. Below is a complimentary demand forecast at the end Q4 2019. I highly recommend subscribing to this service. We will only have access to limited competitive information if we do not subscribe, which will put us at a competitive disadvantage and negatively impact our ability to complete the Quarterly Business Report. I cannot overemphasize the value this survey will add to our understanding of the market. 9,000 5,750 4,500 2,250 The graph shows the market forecast as of Q1 2020 with a 90% confidence level. It shows actual total market demand for prior quarters, and expected demand for future quarters based on low, expected, and high estimates. Q3 2019 shows 2,091 units of actual total demand. Q4 2019 shows 2,485 units of actual total demand. For Q1 through Q4 of 2020, the low demand estimate is 2,934, 3,702, 4,743, and 6,166. For Q1 through Q4 of 2020, the expected demand estimate is 3,118, 4,003, 5,330, and 7,088. For Q1 through Q4 of 2020, the high Engineering Quality & NPls l have reviewed our 2018/2019 performance and our prospects for 2020, and conclude that we need to commit more money to engineering quality. I understand Finance will recommend spending $30,000 to $45,000 per quarter for quality engineering in 2020. We can barely hold our own with that amount. In all of 2019, the company invested only $142,000 in engineering quality, about 9% of net Sales. We have invested $90,000 in Engineering Research which should yield results of the feasibility study shortly. It costs money to be competitive. We cannot expect customers to accept a product that is inferior in design or quality. The market will not grow if the industry produces an inadequate product. Quality cannot happen without substantial investments in engineering. With a new product, we need to quickly find ways to make it better. If we don't, a competitor will. I am convinced that our company will rise or fall on its engineering. Hisco has an engineering edge now, but that can change if we do not have consistent and increasing engineering quality investments. We began the studies using product development money. Now we need specific research funding to get some results. The prior management team did begin funding project #2 listed below. We still have to complete funding before we can commercialize the product. Any one of these projects could give us a competitive edge. We will need dollars and time. When you arrive at your company headquarters, we will provide you with the project details. (Corporate policy is not to let new product designs out of the control of our headquarters.) : The projects we know of are summarized for your information and support: #1. A simplification of some of the assemblies in the product Success in this area could significantly reduce the scrap rate, hazardous waste generation, and the labor content of the product; thereby reducing the cost to produce each unit. : #2. An increase in the speed and amount of throughput of the product - This could result in a major product advantage which would translate into a better market share position. The product would also utilize standard paper forms instead of the current heat-sensitive paper, which is not recyclable. Our Environmental Manager indicates this may have a long-tem'l environmental advantage to the end-user because of possible future legislation restricting the use of non-recyclable papers. : #3. An expansion of the applications of the product - The product is now designed for use at nurses' stations. Expanding the applications to housekeeping, maintenance, dietary control, etc. would greatly increase the size of the potential market. ' Note that proper planning around new R&D projects is essential. Given the long-term nature of R&D, once we start on a project, we must finish it in a reasonable period of time. Starting and stopping and then starting again is a poor process with respect to new product developmentnegatively impacting productivity and jeopardizing timely commercialization of the product. Once we commit time and resources, we must see the project through to the end as originally planned, even if budgets are tight. Please see the email from Michael Reasoner regarding the potential impact of Project #3 on the Total Market Demand. Labor Costs and Performance Hire/Fire Costs: Industrial Opportunities handles our labor requirements for a hiring fee and a discharge fee. Our contract will be in effec through 2020. The hiring fee of $2,000 per hire includes preliminary training costs. The discharge fee of $4,000 per individual include: placement and severance costs. Pay Rates: The average pay rate (Qtr 4-2018) was $85.02 per day. This increased to $86.30 per day in 02-2019, an increase of 1.5%. Th1 pay rate will continue to increase at this rate semi-annually for the next three years. (Thus, increases will take place in 04-2019, Q2-202C etc.). Effectiveness: We will end this quarter with a direct labor force of 27 employees. New employees can be added to the payroll as needec however, Industrial Opportunities cautions that, realistically, hiring more than 40 employees in any given quarter may be difficult tr achieve. The hiring cost is as noted above. New hires (first time or former employees) are immediately available, but take about fivr months on the job to become fully effective. In addition, they require 20 hours of basic health and safety training before they are allowet to work with certain paints, solvents, and solders. The overall impact of new hires and the labor-production balance is revealed in "/ Effectiveness" and \"Idle Time" shown on the Quarterly Operating Report. Effectiveness is the ratio of the planned days required to build 4 unit to the actual time used. Idle time is time paid for but not used in production. Effectiveness decreases as new hires are added; i increases as these new hires become fully trained. Idle production time increases when production and labor levels are out of balance. Effectiveness also decreases when new inspection equipment is installed at the factory. Experience indicates that a single line installatior will reduce the entire assembler workforce effectiveness by 5%. Multiple lines will have more significant impacts to the workforce. We achieved our target production of 1166 units, the fourth quarter figures were: % IDLE PRODUCTION TIME 0.3% % EFFECTIVENESS 85.4% PLANNED TIME 1.30 DAYS/UNIT ACTUAL TIME 1.28 DAYS/UNIT Our capacity in the quarter was 1,170 units: 27 People X 65 Working Days/Quarter X 85.4% Effectiveness 1.28 Days/Unit The % IDLE PRODUCTION TIME shown above is computed as follows % Idle Production Time = 1 - (Actual Production/Maximum Production Capacity) = 1 - (1 - 1,166/1,170) = 0.3%