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KILGORE CUSTOM MILLING

Kilgore Custom Milling began in late 1980. Steve MacLinden and a fellow business school graduate were wondering what sort of a career they should embark on when they came up with the idea of getting into manufacturing. Before earning his MBA, Steve had worked for five years with a major accounting firm. He went back to business school looking for a way to expand his horizons and thinking he wanted to work in marketing for a multinational company. Upon graduation, however, he thought it might be more of an adventure to be his own boss as an entrepreneur. Along with a classmate, Steve began to explore opportunities. With a government grant for young entrepreneurs, monies from an inheritance, and loans from family and friends, the two young men were able to buy a working tool and die company that had 11 employees; it made custom parts for various repair shops and had a few small contracts with various manufacturing companies. Steve was a big fan of the novelist Kurt Vonnegut, so they renamed the company Kilgore Custom Milling after a recurring character who appeared in several Kurt Vonnegut novels.

For the first few years the company struggled and relied on heavy levels of bank debt and personal loans to stay in business. Steve's business school buddy wanted out as a partner and sold his interest to Steve for a single dollar and a release from the debt obligations of the company. By then the workforce was down to four employees on a full-time basis who were supported by the occasional hiring of short-term contract workers when the work orders required them. While the company started to eke out a very modest profit, its long-term viability was far from guaranteed. It was at this point that the company caught a lucky break when a fire at a competing small auto parts manufacturer caused the latter to cease production for two months. Kilgore stepped in and secured a contract to become a shortterm supplier of parts required for power windows in automobiles. That contract provided a springboard for further contracts, and soon the operations and business of the company were streamlined to focus solely on power window assemblies for direct supply to several auto manufacturers based in southern Ontario. The company grew to employ 128 workers at the company's two manufacturing facilities and a separate warehouse facility. Recent financial statements for Kilgore are provided in Exhibit 19.1.

The production of power window assemblies was a relatively simple task, and the technology was widely available and considered a commodity. The production of a power window consisted of a small electric motor (which Kilgore purchased from a variety of Canadian suppliers), a support bar on which the glass rode, a series of gears, and a variety of metal and plastic components to ensure smooth operation. See Exhibit 19.2 for an illustration of a power window assembly.

Kilgore became a relatively successful manufacturer in the original equipment manufacturer (OEM) field mainly because of its focus on low-cost manufacturing, which in large part was due to the relatively large pool of skilled manufacturing workers available in the Windsor area of southwest Ontario.

Based in southern Ontario, which was also home to the majority of Canada's OEM industry, Kilgore had ready access to labor and, based on operational efficiencies and a focus on a single product, also had a low cost of manufacturing. Indeed, since power window assemblies were low-tech and considered a

Exhibit 19.1 Kilgore Custom Milling Financial Statements

INCOME STATEMENT

(CAD MM)

12/31/12

12/31/11

12/31/10

12/31/09

Net sales

204.8

184.8

154.6

158.4

Costs of goods sold

190.1

169.4

141.0

141.3

Selling, general, and administrative expenses

8.6

8.9

7.8

8.9

Operating income

6.0

6.5

5.8

8.2

Interest expense

2.9

2.5

2.4

2.4

Net nonoperating loss (gain)

2.3

0.0

0.0

0.0

Income tax expense

0.1

1.0

1.0

1.7

Net income

0.6

3.0

2.3

4.1

Common dividend (total cash)

(0.6)

(2.3)

(2.3)

(2.9)

Opening retained earnings

19.1

18.4

18.4

17.2

Closing retained earnings

19.2

19.1

18.4

18.4

CASH FLOW STATEMENT

(CAD MM)

12/31/12

12/31/11

12/31/10

12/31/09

Operating activities

Net income

0.6

3.0

2.3

4.1

Depreciation (gain)/loss on fixed asset

5.1

4.8

4.7

4.6

disposals

0.5

0.1

0.0

(1.9)

Cash from/used for working capital

3.7

(1.5)

0.1

(4.6)

Cash from operating activities

9.9

6.5

7.2

2.2

Investing activities

Additions to fixed assets

(6.5)

(3.4)

(1.9)

(1.9)

Fixed asset disposal proceeds

1.4

0.0

0.6

1.9

Other LT assets

(13.7)

(3.0)

(10.8)

(4.2)

(18.8)

(6.4)

(12.1)

(4.1)

Financing activities

Short-term borrowings

3.0

0.0

0.0

0.0

LT borrowings

(0.8)

(0.8)

(0.8)

(0.5)

Other LT liabilities

8.6

0.1

1.6

0.7

Dividend paid

(0.6)

(2.3)

(2.3)

(2.9)

10.2

(3.0)

(1.5)

(2.7)

Net cash change in year

1.3

(2.9)

(6.5)

(4.6)

Opening cash balance

3.0

6.0

12.5

17.1

Closing cash balance

4.3

3.0

6.0

12.5

Power Window Assembly

Exhibit 19.2 Power Window Assembly

Source: monsterauto.com.

commodity, cost factors largely dictated the degree of success of a firm in winning orders from the major auto manufacturers.

A second competitive factor was quality. Power window assemblies were not seen by the car purchaser, and thus cosmetics, fit, and finish were not an issue. However, a faulty assembly was expensive to repair and considered a serious and annoying quality flaw by car buyers. Although not a drive-train part, the power window was still a moving part and could experience relatively heavy or abusive use. Thus a reputation for building sturdy and reliable quality parts was a key aspect of winning supply bids. With an experienced and dedicated workforce, Kilgore had built an enviable reputation as a reliable supplier of quality assemblies. However, given the simplicity of the technology, this was a difficult competitive advantage on which to differentiate the company from its competitors. The technology of window assemblies had changed little in the past 10 years and was not expected to change much going forward.

A third competitive factor for Kilgore was its philosophy of "sticking to its knitting," a favorite phrase of Steve MacLinden. Before settling on the manufacture of power windows, Kilgore had tried custom manufacturing as well as an expansion of the types of components manufactured for the OEM industry. The operational and financial results were mediocre at best. With a small management team and no special expertise in operations management, the operational and innovation demands of nonspecialization proved too challenging for Kilgore to manage successfully.

An additional argument for "sticking to its knitting" was Steve's lack of a back- ground in engineering or operations. By staying with the production of a commodity product that was sold on the basis of cost and reliability and not innovation or changing functionality, Kilgore did not have to concern itself as much with the ongoing maintenance of a joint venture type of relationship with its customers. Participating in the major industry trade shows and Steve's natural inclination toward sales were generally enough contact with customers to keep Kilgore in the loop and competitive. In this way Kilgore was able to fly below the radar of the large consolidated OEM manufacturers and survive within its niche.

In terms of its own suppliers, Kilgore utilized Canadian specialty manufacturers and raw metal suppliers. This kept the company's own supply issues simple, and allowed it to work with lower levels of inventory, which in turn helped alleviate at least some of its cash flow problems. For heavy demand periods, many potential U.S.-based suppliers existed, but had been used only sparingly. Buying in bulk from Asian suppliers was attractive in terms of pricing, but financing such transactions was difficult and Steve preferred having strong local connections in case any issues arose. Steve was well aware of the horror stories that were common in the industry of trying to fix a problem with a foreign supplier who spoke a different language, was in a time zone that was different by 12 hours, and was at least an 18-hour plane flight away from a potential meeting. Additionally, the use of foreign suppliers complicated exchange rate transactions, which was another management hassle that historically the management team did not feel was justified or necessary. Going forward, Steve believed that Kilgore's existing suppliers would be able to fulfill the company's increased needs with the new contract.

 
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