You are working for an investment banking firm. One of your clients is examining the possibility of purchasing Stirling Manufacturing, a parts supplier (specifically, tail- light assemblies) to the automobile industry.
Your client has asked your firm to evaluate Stirling (a privately held company) and indicate how much should be paid for Stirling. Stirling has a batch- manufacturing process. Raw materials inventories are held until they are placed into production. Batches of between 2,000 and 2,500 tail-light assemblies are manufactured. These are then delivered daily, 100 to 150 at a time, to satisfy Stirling’s customers’ demand for just- in- time (JIT) deliveries.
Your client is considering installing JIT production methods at Stirling if the acquisition is completed. Your boss asks you to write a memo that outlines the various likely results if Stirling adopts JIT production techniques and the likely impact on Stirling’s cash flows and eventual market value. Your memo will provide background information for your colleagues who are actually estimating Stir-ling’s current price and future value after acquisition. Your client is planning on making a number of changes at Stirling. JIT is just one of them. Your memo will assist the analysts in your firm and should direct them in their data gathering and valuation efforts. Your memo should describe specifically what additional data your colleagues should collect in order to estimate JIT’s cash flow effects.