Test of professional competence in management accounting: Kadgee Clothing is hanging by a thread. Adrian Sims analyses the case study's pre-seen material and considers how the firm might avoid coming unstitched.

Author:Sims, Adrian
Position:PAPER P10 - Company overview
 
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This case describes a depressing situation that's familiar to European manufacturing companies, which are having to fight for business against lower-cost operations in the enlarged European Union and beyond.

In the past, Kadgee made profits and had cash--it was in the black at the bank. But now it's teetering on the edge of losses and has deepening debts. Red is this season's colour, but it's not one that suits either the shareholders or the bank.

The firm had grown until the nineties, at which point margins started to slip under the combined pressures of changes in retailing and increasing global competition. It made losses from 1998 to 2002, but some extra nip-and-tuck measures by the management team returned it to profitability in 2004-05. But things are now on the slide again. Its cash position is so bad that it increased its bank overdraft by 61 per cent in 2005. And there's not much in the pre-seen material to suggest that it will get better.

Kadgee is hemmed in by a hostile operating environment. In terms of Porter's five forces, it has suffered market entry based on price from global competition, most recently from China after its admission to the World Trade Organisation. This rivalry will increase further. The firm faces considerable buyer power from the heavily concentrated retail sector, where 73 per cent of its sales are to three clients--and major clients want their own labels instead of Kadgee's.

Its second-largest client, Forum, has withdrawn its contract with effect from the end of August. The management team will need to decide how to rationalise to reduce output by 22.6 per cent. It's already planning to cut 34 jobs to save on wage costs, but three of its six factories make Forum's clothes. Would closing an entire factory be more sensible, so that overheads can also be avoided?

All in all, morale is low, quality is falling and the company hasn't fashioned a strategy to turn itself around.

The examiner has set the same requirement in every TOPCIMA paper since September 2005. Let's assume that a pattern has been set, therefore, and that you will face the following requirement: prepare a report that prioritises and advises on the main issues facing Kadgee Clothing, making appropriate recommendations.

The five pages of unseen material that you'll receive on exam day will be where the examiner introduces twists to the plot. In the past, the unseen material has contained eight or so extra issues. You must use your analytical skills to prioritise the main ones and then justify your choices. So how do candidates know what's important to Kadgee? An important first step is to understand the situation of the firm described in the pre-seen material. (The opening pages contain a brief history of the company. Don't spend too much time analysing this, because it merely sets the scene.)

Kadgee is an unlisted private company. Two people, Bruno Burnak and Anton Kramer, hold 39 per cent of its shares. They are both retired and no longer have daily connections with, or perhaps even loyalties to, Kadgee given that they have received no dividends for at least two years. They are likely to resist any radical changes in direction.

The management team has not been proactive in expanding the business and Kadgee has come to depend on a small number of key contracts. It has...

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