[TEA-JAN-26] BBB4M I ...

Alliance Design Concepts

Part 1: Summarize the Important Case Facts

 
Who are you in the case?

Andrew Wagstaff, operations manager at Alliance Design Concepts Inc.

What is the main problem? How did this problem happen?

Alliance needs to figure out a way to deal with currency fluctuations.

Alliance has customers in the US, and Alliance loses profit because they quote in US dollars, but the customer pays later when the exchange rate might have changed.

One particular example:

· Alliance quoted a customer on Oct 7, 2013 for $7500 CAD when 1 CAD = 0.97 USD. So 7500 CAD = 7275 USD

· The customer paid on in February, 2014, when 1 CAD = 0.89 USD. So 7500 CAD = 6675 USD.

· The company lost 8.2% due to currency fluctuations

What are some key facts in the case?

Alliance Design Concepts

· Based in Edmonton Canada

· Founded in 2011

· Two main product lines

o Design and installation of audio and video systems à case focuses on this one

o Live production services

· Small company; focuses on quality and customer relationships

· Revenues of over $700,000 CAD by 2014

· Grew a lot even without advertising

Audio Systems Solutions

· First is site assessment

· Then design and installation of equipment

· Then ongoing support

· Quotes range from 1000+ to 100,000+

Customers

· Budget-driven

· But believe that high quality is worthwhile in the long-run

· Niche market

· Churches

Equipment Suppliers

· Alliance sources from a few key suppliers and is loyal to them

· The biggest supplier for Alliance is based in the US and wants payment in USD. There is no Canadian supplier with this kind of quality.

Price Quotations

· Quote is given in CDN based on the exchange rate on the day of the inspection. The inspector converts the equipment costs from USD to CDN (because the supplier sells in USD)

· Quotes are valid for 30 days from the day of inspection

· Payment of 50% deposit required on the day the customer accepts the quote. Then the remaining balance needs to be paid within 30 days after the installation is complete.

Equipment Procurement

· Need to pay attention to cash flow because equipment is very expensive

· Average of 3-4 weeks to get equipment after ordering

Cash Flow and Invoice Payment

· US suppliers require payment within 60 days of the invoice date

· Alliance usually waits until the 60-day time limit is near and then pays using the spot exchange rate; there’s also a conversion fee of 1.5-3.0%

Exchange Rates

· The company is not interested in speculating and trying to make money on exchange rate fluctuations. They just want to manage the risk of losing money due to exchange rate fluctuations.

· The longer the time period between the quotation day and the payment to supplier day, the larger the risk that exchange rate changes will have a negative impact on profit.

Risk Mitigation Options

1. Involve the Customer

· Option 1.1: State that the final price would be based on the exchange rate at the time of project completion

· Option 2.1: State that the quotation can vary by a few % based on future circumstances

· Option 3.1: reduce the validity period of the quotation to be less than 30 days

· Option 4.1: Change the amount of deposit required to be more than 50%

2. Internal Process Changes

· Change the process of price quotations, equipment procurement, and cash management (collecting money and paying suppliers)

· Option 2.1: Reduce the receivables period to be less than 30 days within the project completion date

· Option 2. 2: Ask suppliers to extend the accounts payment period to be more than 60 days

3. Foreign Exchange Services

· Open a foreign exchange bank account, which would reduce service charges (currently 1.5-3.0%) from CAD to USD

· Can deposit customer payment right away into USD, so Alliance won’t need to worry about converting the CAD later when the exchange rate might be different.

4. Foreign Exchange Contracts

· Can lock in an exchange rate at the time of proposal acceptance by the customer. However, the locked in rate would be a little higher than the spot rate in order to compensate the seller of the contract.

Part 2: Analyze the Case and Find Solutions

Option 1: State that the price will be based on the exchange rate at the time of project completion

· Pro: Exchange risk passed on to customer

· Con: Customers might not like this. Might result in less customers.

Option 2: Shorten the quotation validity period or increase the deposit required

· Pro: exchange risk is reduced

· Con: Customers might not like this. Might result in less customers.

Option 3: Internal process changes

· Could try to implement just-in-time delivery to the customer instead of delivery to Alliance first. That would reduce the time period between paying the supplier and getting payment from the customer. But it’s a lot of work to implement, and the owners of a small business may not want to do it.

Option 4: Foreign Exchange Bank Account

· Pros: Save money on transaction costs. Can convert the money right away when received, so won’t need to worry about exchange rate changing in the future.

· Cons: loss of cash on hand because the cash is converted into USD right away; can’t take advantage of favorable currency movements

Option 5: Futures Contract

· Pros: guaranteed exchange rate eliminates the risk

· Cons: purchasing cost (though not too big); can’t take advantage of favorable currency movements

 
Part 3: Recommendation

Based on the analysis, Alliance should prioritize opening and foreign exchange bank account and buying futures contract for large purchases.

Alliance should open a foreign exchange bank account because that will save the company money on frequent currency conversations. This option also reduces currency exchange risk by allowing Alliance to convert payment from customers into USD right away (for Canadian customers) and to just keep USD (for US customers).

Alliance should also buy futures contract for large purchases because

1. It eliminates the risk of currency fluctuations

2. The fee is relatively small if the purchase is large

3. Alliance is only interested in mitigating the downsides of currency fluctuations and not interested in gambling for the upsides