The Assignment:

iRobots cost of goods manufactured are made up of direct materials provided to their contract manufacturers, labor costs paid to their subcontracted manufacturers and product related overhead costs.

On the iRobot case page you can get an idea of how their operation works and potential weaknesses and strengths of the company.

Identify and discuss TWO potential future scenarios (approximately 75 word minimum each) that could impact iRobots operations. Discuss how these events would impact their manufacturing operation, cost of goods manufactured, inventory levels, and profit.

Information:

Summary:

iRobot, the leading global consumer robot company, designs and builds robots that empower people to do more both inside and outside of the home. iRobot created the home robot cleaning category with the introduction of its Roomba Vacuuming Robot in 2002. Today, iRobot is a global enterprise that has sold more than 18 million robots worldwide. iRobot's product line, including the Roomba and the Braava family of mopping robots, feature proprietary technologies and advanced concepts in cleaning, mapping and navigation. iRobot's engineers are building an ecosystem of robots and data to enable the "Smart Home". Roomba vacuums also now integrate with Alexa (Links to an external site.)Links to an external site.so now you can talk to your Roomba.

What is a smart home?

"Smart Home" is the term commonly used to define a residence that has appliances, lighting, heating, air conditioning, TVs, computers, entertainment audio & video systems, security, and camera systems that are capable of communicating with one another and can be controlled remotely by a time schedule, from any room in the home, as well as remotely from any location in the world by phone or internet.

History:

iRobot was started in 1990 by Massachusetts Institute of Technology roboticists and their first product was Genghis, a robot for space exploration. By 2002 they introduced robotic vacuums. The company's story interesting and they provide a summary on their website. (Links to an external site.)Links to an external site.

Products:

iRobot has three main products designed for use in and around the home. About half of their sales come from US customers. They sell their products through a network of national retailers in the US, their own website, and over 50 countries via distributors that serve those countries.

Marketing:

iRobot's marketing strategy is to increase brand awareness and associate the iRobot brand with innovation, reliability, safety and value. They expect to continue to invest in national advertising, consumer and industry trade shows, direct marketing and public relations to further build brand awareness.

Manufacturing:

iRobot considers its core competencies as the design, development and marketing of robots. Their manufacturing strategy is to outsource non-core competencies, such as the production of their robots, to third-party entities skilled in manufacturing. By relying on the outsourced manufacture of robots, iRobot can focus their engineering expertise on the design of robots. iRobot outsources the manufacturing of their products to four contract manufacturers, each of which manufactures their robots at a single plant in China.

R&D:

iRobot believes that future success depends upon their ability to continue to develop new products and product accessories, and enhancements to and applications for existing products. They intend to continue investing in research and development to respond to and anticipate customer needs, and to enable introducing new products over the next few years that will continue to address existing and adjacent market sectors.

Research and development is conducted by teams dedicated to particular projects. iRobot research and development efforts are primarily located at our headquarters in Bedford, Massachusetts and their office in Pasadena, California.

Strategy:

iRobots long term strategy is to:

Increase the penetration of products in existing markets, expand current products into new markets, and develop and launch new products into current and adjacent markets.

Create a system of connected robots for the consumer's home, designed to integrate with other devices, provide increased functionality and features for their products in order to make the Smart Home even smarter

Increase global expansion in China and Japan to capture a larger share of their rapidly growing market for robotic floor care

Develop their wet floor care business to generate a material, secondary revenue stream to compliment the Braavo mop

Explore, develop and grow non-floor care consumer robot products that can generate diversified revenue streams

Make continued operational improvements that can reduce product and operating costs

Financial Overview:

iRobot derives revenue from product sales. In 2016, consumer robot revenue resulted from sales to 15 customers, which were comprised of both domestic retailers and international distributors. iRobot sells products directly to customers and indirectly through resellers and distributors. In 2016, their revenue increased 35.8% over 2015. This increase was driven by a 20.8% increase in units shipped, partially offset by a 0.8% decrease in net average selling price. The increase in domestic consumer robots revenue was primarily attributable to increased sales as a result of significant investments in advertising media and national promotions as well as increased sales of the newer Roomba 900 series robots.

Cost of Revenue (Cost of goods sold)

Cost of revenue includes the cost of raw materials and labor that go into the development and manufacture of iRobot products as well as manufacturing overhead costs. Raw material costs, which are iRobot's most significant cost items, can fluctuate materially on a periodic basis, although many components have been historically stable. Additionally, unit costs can vary significantly depending on the mix of products sold. Labor costs also comprise a significant portion of cost of goods sold. iRobot outsources the manufacture of robots to contract manufacturers in China. While labor costs in China traditionally have been favorable compared to labor costs elsewhere in the world, including the United States, they have recently been increasing. In addition, fluctuations in currency exchange rates can increase the cost of labor which reduces profits.

Gross Margin

Gross margin as a percentage of revenue varies according to the mix of products sold, total sales volume, the level of defective product returns, and levels of product costs. In 2016 gross margin increased 10.5% driven by the success of the higher margin new Roomba 900 series robots.

Research and Development Expenses

Research and development expenses consist primarily of:

salaries and related costs for engineers;

costs for high technology components used in product and prototype development;

costs of test equipment used during product development; and

occupancy and other overhead costs.

iRobot has significantly expanded their research and development capabilities and this expansion is expected to continue as they continue innovating to develop new products. iRobot anticipates that research and development expenses will increase in absolute dollars but remain relatively consistent as a percentage of revenue in the foreseeable future.

Selling, Marketing, General and Administrative Expenses

Selling, marketing, general and administrative expenses consist primarily of:

salaries and related costs for sales and marketing personnel;

salaries and related costs for executives and administrative personnel;

advertising, marketing and other brand-building costs;

customer service costs;

professional services costs;

information systems and infrastructure costs;

travel and related costs; and

occupancy and other costs.

In 2016 sales and marketing expenses increased 17.7% as they increased investments in advertising media, national promotions and other selling and marketing costs incurred to support continued global marketing and branding efforts and approximately $5.1 million associated with the market transition into China. In 2017 they plan to increase sales and marketing expenses in both absolute dollars and as a percentage of revenue as they continue to build their brand.

General and administrative expenses increased 22.7% in fiscal 2016 due to large increases in people related, legal and patent litigation costs. iRobot was embroiled in a patent dispute with Black and Decker (Links to an external site.)Links to an external site. that was recently resolved with a settlement (Links to an external site.)Links to an external site.. As a result Black and Decker will remove their robotic vacuum from the market.

Risk Analysis:

In their 2016 annual report, iRobot lists 28 risk factors. Here are highlights from their identification of risks:

Robots and Smart Home products are an emerging market, which makes it difficult to evaluate the business in the future.

Global economic conditions that dampen consumer spending could hurt their business.

iRobot's business currently depends solely on our consumer robots.

iRobot depends on contract manufacturers located in China. Operations would be adversely impacted if manufacturers fail to meet required production or quality control levels.

While contract obligations with manufacturers in China are typically denominated in U.S. dollars, changes in currency exchange rates could impact materials purchased from suppliers, raising costs and decreasing profits.

iRobot faces intense competition from other companies introducing robotic products.

iRobot purchases parts and components from a small number of suppliers. If those parts were to become unavailable, their ability to manufacture products will damage their business.

If iRobot fails to protect, or incur significant costs in defending, their intellectual property and other proprietary rights (such as patents for the technology in their robots), their business and results of operations could be materially harmed.

iRobot depends on the experience and expertise of their senior management team and key technical employees, and the loss of any key employee may impair iRobot's ability to operate effectively. Competition for hiring these employees is intense, especially with regard to engineers with high levels of experience in designing, developing and integrating robots and engineers with expertise in artificial intelligence, machine learning and cloud applications.

If significant tariffs or other restrictions are placed on Chinese imports or any related counter-measures are taken by China, revenues and results of operations may be materially harmed.