Reference no: EM132193657

Case Study

Finest Crafts Inc. designs and manufactures wood furniture. Founded by Bob Daley on the banks of Lake Erie in Sandusky, Ohio, the company began by producing custom-made wooden furniture for vacation cabins located along the coast of Lake Erie and on nearby Kelly’s Island and Bass Island. Being an “outdoors” type himself, Daley originally wanted to bring “a bit of the outdoors” inside. Finest Crafts Inc. developed a solid reputation for creative designs and high-quality workmanship. Sales eventually encompassed the entire Great Lakes region. Along with growth came additional opportunities. Traditionally, the company focused entirely on custom-made furniture, with the customer specifying the kind of wood from which the piece would be made. As the company’s reputation grew and sales increased, the sales force began selling some of the more popular pieces to retail furniture outlets. This move into retail outlets led Finest Crafts Inc. into the production of a more standard line of furniture. Buyers of this line were much more price-sensitive and imposed more stringent delivery requirements than did clients for the custom line. Custom-designed furniture, however, continued to dominate sales, accounting for 60 percent of volume and 75 percent of dollar sales. Currently, the company operates a single manufacturing process in Sandusky, where both custom furniture and standard furniture are manufactured. The equipment is mainly general purpose in nature to provide the flexibility needed for producing custom pieces of furniture. The layout puts together saws in one section of the facility, lathes in another, and so on. The quality of the finished product reflects the quality of the wood chosen and the craftsmanship of individual workers. Both custom and standard furniture compete for processing time on the same equipment by the same craftspeople. During the past few months, sales of the standard line steadily increased, leading to more regular scheduling of this product line. However, when scheduling trade-offs had to be made, custom furniture was always given priority because of its higher sales and profit margins. Thus, scheduled lots of standard furniture pieces were left sitting around the plant in various stages of completion. As he reviews the progress of Finest Crafts Inc., Daley is pleased to note that the company has grown. Sales of custom furniture remain strong, and sales of standard pieces are steadily increasing. However, finance and accounting indicate that profits are not what they should be. Costs associated with the standard line are rising. Dollars are being tied up in inventory, both in raw materials and work-in-process. Expensive public warehouse space has to be rented to accommodate the inventory volume. Daley also is concerned with increased lead times for both custom and standard orders, which are causing longer promised delivery times. Capacity is being pushed, and no space is left in the plant for expansion. Daley begins a careful assessment of the overall impact that the new standard line is having on his manufacturing process.

Questions :

How has the move to producing standard furniture affected the company’s financial structure?