Special Risk Management Topics

Chapter19.docx

ITS 835 Chapter 19

Kilgore Custom Milling Enterprise Risk Management

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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

• CathyWilliams

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