risk mangment

ITS 835 Chapter 19

Kilgore Custom Milling Enterprise Risk Management

Professor Michael Solomon

Introduction

• Background • The management team • The company • The new contract • The financial risk management meeting

Background

• Kilgore Custom Milling • Small private manufacturer

• Power window assemblies

• Based in southern Ontario, Canada

• Pursued contracts to supply plants in the U.S. • Successful in negotiating a contract with Japanese manufacturer

• Previous international contracts resulted in loss • Due to currency volatility

The Management Team

• Owner and CEO • Steve MacLinden

• Left day-to-day operations for the rest of the team

• Manufacturing and Plant operations • Rory Sullivan

• Sales and Client relationships • Casey Dobblestyn

• Treasurer and CFO • Cathy Williams

The Company

• Privately owned • 100% by Steve MacLinden

• Planning to retire in 5 – 10 years

• Main focus is cash flow management • Concerns with currency related cash flow issues • Additional concern about inflation differences

• Between U.S. and Canada

The New Contract

• Dramatically increase sales • Over 100% for 5 years

• Complex and exacting specifications • All proceeds in U.S. dollars

• Kilgore must manage financial risk

• Contract could be extended for 3 years • But at the same price, benefitting the buyer

The Financial Risk Management Meeting

• U.S. and Canadian dollars near par • Caused concern over U.S. competition

• Multiple options to deal with currency risk • Long term swap contracts • Short term forward contract • Currency options

• Management team lack understanding of the options • More open questions than answers • Lots more to do …