Cyclermate Ltd.

Part 1

Historical background
In 1988, Lewis Llewellyn and Dai Armstrong were made redundant as a result of the closure of their towns steel works in south Wales. Both had been employed by the firm for more than 20 years. Lewis had worked his way up from apprentice to be chief mill engineer, and Dai had progressed from office boy to a senior marketing post. The men belonged to the local cycle touring club, and through this had become close friends. As the prospects for continued local employment were poor, they decided to use their savings to set up a bicycle manufacturing business an obvious choice, given their shared interest, and combined expertise. The product they selected was a traditional upright cycle, following a design typical of the 1940s and 1950s. They believed that there would be a strong niche market for such a product, given the upsurge in interest in cycling, and increasing consumer interest in retro styles. Working in Lewiss garage, they built their first prototype. Dai persuaded a local cycle shop to put this on show. Within week they had two orders, and the business was launched. By the end of 1990, the business had grown to such an extent that they were unable to meet demand. Taking advantage of the relatively low prices of commercial and industrial property, they purchased a disused 15,000 square feet warehouse with an included 2,000 square feet of office accommodation for 240,000. The buildings were big for their needs but they were optimistic about growth and expansion. The business was moved into this new space, and three employees were taken on to assist in production, packing, administration and selling.

Over the next fifteen years, the business continued to expand. Demand was strong, despite little marketing. Occasional small adverts placed in national newspapers stimulated mail order sales, and Dai continued to be successful in persuading small cycle shops in Wales and in England to take one or two machines for display, or at least to keep a stock of brochures. The high quality of the handmade product, and word-of-mouth reputation seemed to be enough to maintain sales. By 2010, however, the business is in trouble. Prices have been reduced to maintain sales, but demand continues to fall. There are increasing numbers of complaints about quality and faults in the product. One customer is even threatening to sue after an accident purportedly caused by an incorrectly assembled front brake. A recent visit by a health and safety advisor after a minor accident in the factory (a potential customer was hospitalised after falling over a loose cable) has resulted in a requirement to implement a series of changes, only some of which had so far been made. Costs are rising, and the bank manager has expressed concern about the overdraft.

Production
The cycles are made in the open former warehouse. To the untrained eye, the process looks to be somewhat shambolic, but Dai insists that there is a clear order to everything. Dai himself still makes all the frames, using the original jigs constructed in his garage all those years ago. Special steel tube stock is cut to size using an old but automated tube cutting saw and an ancient but effective tube bending machine. He used to be able to make eight frames a day, but is finding it hard to keep up this level of production, both because of the physical demands of the task, and because of his other duties as factory manager and business director. He has frequently discussed the merits of a robotic flash butt welding machine with his colleagues, but they always conclude that they could not justify the investment risk. Fortunately for him, if not for the business, reduced sales have meant that frame construction is not a constraint at the moment. Maldwyn Jones, also a former steel worker, paints frames as and when required. As the standard model of cycle is always painted black, Maldwyn can paint the frames in batches, usually once or twice a week. He generally also paints batches of the mudguards and chain guards at the same time. Complete frames are spray painted in a corner of the space, in a booth partitioned by plastic sheeting. Until recently a traditional cellulose spray technology was used, but Dai hoped to get a better and more durable finish by changing to a modern two-pack automotive paint which involves careful paint mixing, rapid spraying, and then baking in a low heat oven. When it works well, this paint system has provided excellent results, but a number of frames have had to be scrapped because of paint quality problems. There are also some concerns that the elderly compressor and extraction equipment will not adequately protect against the dangers of highly toxic paint materials. Dai is now wondering if it might be worth changing yet again to a highly efficient electrostatic powder spraying technique, but this would involve considerable capital investment. The present process is limited by the oven capacity, to 25 frames at a time, although this is not a problem at the moment with relatively slack demand. When he is not painting, Maldwyn helps in other areas of the factory. Although Maldwyn is not a director of the Company, he is seen by Dai and Lewis as a senior member of the team, and often consulted on management and production matters. Painted frames are moved to the assembly area, which is central to the factory space. Assembly is a complex process, which takes two to three hours for one person. The two assemblers, Janice Jones

(Maldwyns daughter) and Ffred Gregory often have to work overtime to ensure that orders are met on time. Fred, who is 18 years old, is fairly new to the process, and training him has further slowed production recently. Completed cycles are tested in the yard (usually by Fred), before being partially disassembled and packaged for dispatch. Packaging is undertaken by anyone who has spare time. When he is not travelling, Dai will often help out, although Maldwyn, who mostly has time for packing, complains that Dai makes a very poor job of it. Wheels, mudguards, chain guards, stays and other necessary hardware are manufactured in parallel with the frames. Wheel manufacture is a highly skilled, time consuming task. Idris Pugh, the wheelwright, was recruited from a local cycle repair shop that closed some years ago. Idris is a perfectionist, whose wheels are always absolutely true, and never the cause for complaint. He is now in his seventies, however, and not in the best of health a cause for concern, as the only other person with the necessary skill is Dai, and he is not always available. On occasions, the firm has commissioned a cycle shop in Cardiff to build the wheels for it; these are of reasonable quality and are always delivered quickly, although the direct cost is somewhat higher than the materials and components used by Idris. Mudguards and chain guards are cut and pressed in batches alongside the wheel-making jig. Fairly heavy machinery is used to cut the sheet steel to pattern and then fold and press it into shape. A small amount of brazing and riveting is also necessary to attach brackets to guards. Emlyn Morgan, also a former steel worker, undertakes this work, creating batches of components when the assemblers run out. Emlyns background means that he also has the skills to undertake all of the factory maintenance, and he can turn his hand to steel pressing, painting or assembly when required. Most of the smaller high value components used in production (bearings, levers, cables, lights, etc..) are stored in a locked warehouse cage near to the production area. Larger inventory items, such as sheet steel and frame tubing are kept in racks on one wall of the factory. There is a rudimentary card based stock control system, but Janice and Ffred usually notice when stocks of components are running low, and tell the office staff. Stockouts are fairly common, however, and this can disrupt production considerably. A recent shortage of wheel spokes, for example, left Emlyn with nothing to do, and resulted in a build up of incomplete cycles in the factory. The only other employees are two part-time workers; Ianto Prichard works weekday mornings, as odd-job man and cleaner in the factory, and Gladys Wells cleans the office twice a week for an hour or so.

Administration
The office is run by Frieda Schlock, with the help of Gwyneth Morgan (Emlyns wife). Frieda has a strong grasp of all aspects of the business, and deals effectively with invoicing, credit control, disbursement, and the bookkeeping system. The handling of wages and salaries is managed using a software package provided by the bank. Gwyneth works on a part-time basis, and deals with internal and external enquiries, data entry, and other routine tasks. She has recently been put in charge of purchasing, in the hope that this will avoid disruption from stockouts; she is not clear, however, just

what constitutes a low level of inventory for many items, so has significantly increased re-order levels on the card system, just to be sure.

Management and Corporate Structure

Cyclermate Ltd has three shareholders, Lewis Llewellyn, Dai Armstrong and Linda Llewellyn. Shares are held equally between the three shareholders. Linda Llewellyn was Lewiss wife, but they are now divorced. Although she took no part in the running of the business, she invested a legacy from a family member, and was given shares in return. Since the divorce she has been pressing Lewis for return of her money; more recently she has, perhaps under professional advice, argued that she should be given one third of the value of the business. Lewis has yet to respond to this demand. No dividends have been paid recently, a matter adding cause to her complaints. A former colleague of Dais, Geraint Williams, agreed to invest his part of his redundancy settlement by way of a long-term loan to the business. Interest was set at the then competitive rate of 10% per annum, and this has been paid ever since. Geraint used to help out in the business, but has now fully retired. Dai is aware that Geraint relies upon the loan interest to help pay for the care of his wife, who requires 24 hour care. Lewis and Dai share management of the business, although by nature of their differing roles, Lewis tends to focus more on production issues, and Dai on external relations. They are the only directors, and draw equal salaries.

Financial Matters
Attached are financial statements for the business. Presented are: summarised profit statements for the last five years, the latest statement of financial position, and the budget for the coming year. The Company management are deeply concerned both about the loss of profitability, and, more urgently, the rapidly rising overdraft. The bank manager has indicated that increased overdraft facilities are not likely to be made available unless there is convincing evidence of improved trading conditions in the coming year. Unfortunately, the budget suggests that a loss is more likely.

Cyclermate Ltd
Notes of a management meeting on 10 October 2010
Present: Dai Armstrong (chair) Gwyneth Morgan (secretary) Lewis Llewellyn Frieda Schlock Maldwyn Jones Betty Barry (representing Cyclermates accountants Davis, Davies and Davis) The purpose of the meeting was to consider the draft financial accounts and the budget for the coming financial year.

Ms Barry pointed out that a decline in sales and an increase in costs had resulted in a sharp decline in profits, and that her calculations of the budget for the coming year (based on data provided to her by Mr Armstrong) suggested further decline and possible trading losses. She pointed out that it was not for her to comment on the trading situation, but that she felt obliged to highlight the likely cash flow consequences of a further decline in sales or an increase in costs. Ms Schlock noted that a recent letter from the firms bankers had raised similar concerns, and had asked for an urgent meeting with managers to discuss the overdraft. Mr Llewellyn described the difficulties he was finding in persuading his retail customers to continue to take the product, despite the recent price reductions. He expressed surprise that sales were declining, as it was evident that other firms in the same market, such as Pashley, were increasing their sales of traditional machines. He believed that there is still strong growth to come in the cycle market, as more and more people abandon their cars. He wondered, however, if Welshwheels problems might be something to do with the reputation it is getting for poor quality. Mr Jones interjected that the quality problems could probably all be resolved if the directors would allow the employment of more staff in the factory. Ms Schlock resisted this view, noting that adding more staff to the payroll would simply increase the costs. She expressed the opinion that Mr Llewellyn might get on HIS bike a bit more to increase the number of retail customers, as there are plenty of cycle shops that have yet to be asked to sell Cyclermates product. Mr Jones argued that an alternative route to increased sales might be to try to build up the direct sales. The Company had not taken any advertisements in the national press for some years now, and these had always worked in the past. The benefit of direct sales was that the margin was so much greater without the middleman. Mr Armstrong pointed out that the meeting didnt seem to be getting anywhere, despite some good ideas. He questioned whether there was really enough knowledge about the Companys present situation to allow them to come to a balanced decision. He wondered whether they should think about taking consultancy advice. In the short term they needed urgently to do something to satisfy the bank, but in the longer term they probably should consider wider issues, including the strategic direction of the business, the nature of the product, production methods and so on. He mentioned that he was meeting his cousin Owen in a few days, and that Owen had some expertise in new technologies that might be an interesting way to develop the product. It was AGREED That Messrs Armstrong and Morgan arrange a meeting with the firms bankers with a view to discussing what support the bank would be prepared to offer in the short term.

Notes of meetings with staff of Cyclermate and a member of the consultancy arm of Davis, Davies, Jones and Faniente.
These meetings took place in early October 2010 at the behest of the Cyclermates bankers. The Banks regional manager, Mr Titus Haas, presided over an introductory meeting with the consultancy

arm of Davis, Davies, Jones and Faniente. These notes are confidential, and were taken by the consultants as part of the investigations prior to the preparation of a report to the Bank.

Dai Armstrong
Mr Armstrong is very enthusiastic both about the Company and its future. He has a number of ideas about possible future directions, including development of the product range, and the introduction of new ways of working, new materials, and possible outsourcing of manufacture parts of the product manufacture. He recognises, however that such changes will require upheaval for his colleagues because of the inevitable significant and rapid change that will be necessary. He is also concerned that finding the necessary funds to finance change will be difficult. He is very reluctant to cede any control of the Company such as might have to happen if venture capital is sought, and would prefer to find other ways of raising funds. He pointed out that he has a cousin who is just retiring from BAEs wing division in Liverpool. This individual is planning to return to Wales, and is looking for something to do. He will bring with him expertise in manufacturing with exciting new materials such as carbon fibre, and might be persuaded to join the firm and invest in it if the conditions are right. Mr Armstrong recognises, however, that moving from traditional to leading edge might require significant capital investment, and would also be to abandon the niche market currently being exploited by the firm.

Lewis Llewellyn
Mr Llewellyn is less optimistic than Mr Armstrong about the Companys future. He does not think he can put any more effort than he has into trying to sell the product, and he points out that many cycle shops, despite the upsurge in interest in cycling, are closing outpriced by online sales and the success of the big boys such as Halfords. Although he would not want his good friend Dai Armstrong to know this, he feels that the time has come for the Company to recognise the inevitable and either simply close down, or try to sell to one of the other UK firms that manufacture or assemble cycles. There is still valuable goodwill in the name of the Company, and the factory building has increased sharply in value. A sale would almost certainly allow all the debts to be paid off, and would allow the three shareholders and Geraint Williams to recover all of their investments. Getting his ex-wife off his back would be a huge relief. Mr Llewellyn also noted that he finds his work increasingly tiring and stressful, and that he would be happy to retire.

Emlyn Morgan
Mr Morgan has many ideas about how to improve and streamline production, but strongly believes that the existing product has the greatest potential for the firm. He argues that there is a desperate need to modernise however. Modern aluminium frames would much improve the quality and handling of the machine. These would need to be welded robotically in an inert atmosphere, rather than using the old-fashioned and time consuming methods of brazed lugs. Even more beneficial would be a modern spray booth so many complaints recently have been about paint quality. He recognises, however that such changes would be extremely costly, and necessitate the bringing in of financiers who might well want to take some control away from the present directors. Mr Morgan noted that the directors may not agree with his ideas, and he doubts that they will take him very seriously.

Maldwyn Jones
Mr Jones seemed disinclined to talk to the interviewer. He feels that his skills are undervalued by his managers, and is thinking of leaving anyway. When asked about what he thought should be the firms future, he said that he couldnt understand why they didnt simply get the Chinese or Taiwanese to make the machines for them much better quality and half the price.

Gwyneth Morgan
Relatively new to her work, Mrs Morgan felt that there was little she could tell the interviewer. She is pleased to have been put in charge of stock control, although knows that she has a lot to learn. She is not sure about working in the same place as her husband they seem to take their work home with them but the extra money is very welcome. She feels that her husbands skills are undervalued by the directors, who seem to order him around without much thought as how best to use him.

Janice Jones
Janice enjoys her work, and feels proud of the skills she has picked up. Each cycle has something of me in it. She sometime feels under pressure, however, as the flow of production can be very uneven, and some orders are sometimes late; working quickly, and occasionally late into the evening (without overtime) means that mistakes can be made, especially if testing is skipped. The employment of Ffred has helped, although he is still learning, and has to be watched carefully; it will be some time before he stops making careless mistakes (such as putting too few balls in the bearings, or over tightening the headstock).

Frieda Schlock
Ms Schlock has fairly strong views about how the Company should be run. The employment of Mrs Mogan has helped, but she is still under pressure to do almost everything. She thinks that just collecting the debts from these devious cycle shop owners is a full-time job in itself.

Idris Pugh
Unfortunately not available for interview because of illness.

Warehouse Layout (not to scale)

Product specification:
Steel frame with brazed lugs, made in three sizes and in gentlemans and ladys versions. There is little difference in cost between the sizes and versions Traditional curved handlebars with plastic grips Cable operated hub brakes Fully enclosed oil-bath chain Sturmey-Archer three-speed gears Brooks leather saddle Pressed-steel mudguards Generator hub lights Built-in lock Woven basket at the front and pressed steel carrier at the rear