Arborite Case

Q) What can Nutter do to increase Arborite's ROA?

A) As for any other company a low ROA can be attributed to two different factors:

• High costs

• Poor inventory & plant management

In Arborite's case, both of the above are reasons that contribute to the dismal ROA of -19% in 1986. The parent company's target ROA for Arborite was 19%. So the performance of Arborite in 1986 was way off the targeted stats.

High Costs

To start with, the labor costs were much higher than any of its competitors. This pushed the income down quite a bit. Adding to that was wastage associated with the cover paper. Arborite's wastage was above 7% which was highest in the market. Since Arborite had to big production centers in Toronto & Montreal and the inventory was also warehoused there, the cost associated with that also contributed to a lower income.

Poor Inventory & Plant Management

The biggest reason for Arborite's poor ROA is its terribly low capacity utilization. At just 25% & 30% for the two plants this was the lowest in the industry by quite a margin. Competitors like Formica & WilsonArt had capacity utilizations of almost a 100%. This gave them a really significant advantage over Arborite. This meant that those two companies could easily achieve economies of scale where as Arborite couldn't. They weren't even nearly utilizing there assets as efficiently as they could which was the reason for such a poor ROA.

Besides the severe under utilization of their plants, Arborite was also guilty of poor inventory management. Dealers always complained that inventory was not delivered on time by Arborite meaning the dealers would run out of stock. Now