You are the VP of operations and you have been interrupted from your vacation with some startling news. One of your company’s important products is called "The Superwidget". The US Government, and the national governments of many NATO countries, Japan, Australia, Argentina and Brazil each buy thousands of these Superwidgets a year.
Several companies manufacture a similar competing product and competition for Superwidgets is fierce, based on technical innovation, price, and delivery criteria. The Superwidget is manufactured from components, software, and firmware from numerous companies plus some internal fabrication of parts and subassemblies in your own plants. The final Superwidget usually sells for between $800 and $1200 per unit, based on some special features, warranty, and service. Your company has manufacturing facilities for the Superwidget in the US, Germany, Australia, and Brazil. These manufacturing facilities service specific areas of the world and there is no overlap.
Your company buys a particular subwidget for about $100/unit. This subwidget is a critical component of your Superwidget. You source the subwidget from only one supplier in the US through an exclusive supply contract. Your key competitors have similar exclusive arrangements for their subwidgets from other suppliers.
The phone call to your vacation spot is very disturbing. You have just been informed that deliveries of the subwidget will be late for the next 3 to 4 months. After your staff completed an analysis, it determined that your company does not have sufficient stock of subwidgets to cover the required deliveries for the next 4 to 6 months.
You recognize that you have a huge problem that will affect many aspects of the company’s operations.
Lett's assume that the senior management has concluded that tripling the buffer stock of subwidgets to a minimum of 9 months is one aspect of an appropriate response to the situation. The CFO recognizes that the following issues need to be addressed:
space capacity
cashflow and credit
additional manpower
potential for a decrease in Superwidget price
potential for potential reduction in demand
technological disruption and obsolescence
Which financial ratios are important to bring into the analysis of these potential conditions? Which financial ratios will help the CFO analyze the situation and determine the best courses of action?