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internatonal teitile industry. Au nets were cotton and synthetic/cotton blond yams that were sold to a variety of apparel and industrial-goods manufacturers that sold then products mainly in U.S. retail markets. Aurora serviced four major customer segments: hosiery, knittfd outerwear, wovens. and industrial and specialty products. Although each of these markets had both domestic and international components, 90% of the company's revenue came from die domestic textile market Yam sales for the tiosiezy market accounted for 43% of Aurora's revenue. The primary consumer products were athletic and dres s socks'
with white athletic socks accounting for the majority of sales. In tad, Aurora was the largest volume producer of all cotton yams tor white athletic socks in the United States, with nearly half the U.S. population owning socks made with Aurora yarns. Aurora had long enjoyed supplying [he hosiery market for several reasons. First, as a leader in the market, Aurora was ahlc to command attractive marghis and niainraip relationships with some of the laigest and most profitable hosiery companies in the world. Second, hosiery was produced using bulky, heavy yams. Aurora's plants were designed for quantitics of yarn efflcJenrly. Third, unlike other segments of the textile industry, the hosiery market had successfully defended itself igiinst global competition. The heavy yams and bulky products ware costly to transport, making them Less attractive for foreign producers.
Moreover, this type of production was highly automated manufacturers did not have sufficient opportunity to provide significant cost savings over U.S. manufacturers. accounting for 35% of sales- Aurora's customers within this market mainly produced knitted cotton and polyester/cotton dress shirtE for a variety of major retailers- The yarns produced were medium- to fine-count yarns (14/i to 22/1 ring and rotor).1 This quality yam, however, was easily produced by other market participants, leaving very little opportunity for suppliers to differentiate their protracts and creating an environatively small but important segment for the company. Most of these yams were used to produce denim for jeans- Although much of the
production had shifted offshore to the supply risks associated with sourcing yarns from other countries. In addition, the yams produced for the wovens market we re coarse (5/1 to 14/1 ring and rotor) and
inent believed that the company had an excellent opportunity for growth in Ihis maike Industrial and specially products constituted the remaining 9^ of Aurora's revequi These yams were used to produce medical supplies, industrial adhesives , rubber- an vinyl-coated fabrics, and protective clothing. Because the yam component of many < these products was very small, it waa not a high-volume business. Nevertheless, th segment provided ihe highest margins for Aurora, which made it an attractive opporti Aurora used rotor- and ring-spinning production ning, which was also called "open-end" spinning, had company's total revciue for many years. (Exhibits 1 statements for 1999 through 2002.) The steady dedii a ment's decision to close four manufacturing facilities i Aurora's capacity ID the shrinking textile market and lanuary 2O03, the company had four plants operatin Butler (see Exhibit 3 for product mix. capacity, and i processes, although rolor sp <nd 2 present Aurora's nnanc n 2000 in an effort to rights }rosa technology by plant)
sales volume had been returned by its retailers. Hie percentage of volume returned bad risen over the past few years owing to advancements in technology and Information flow through the supply chain that made it easier to identify the yarn manufacturer associated wiffi a particular garment If Aurora began selling yams for use in tbe high-end market, the company's dollar liability per garment w
production engineers were confident dial the Zioser would yield such high -quality yam thai the volume returned would drop to 1.0%. The U.S. government's free-trade policies were implemented through the North American Free Trade Agreement (NAFTA) and tbe Caribbean Ba&in Initiative (CB1J. These hade agreements had created a burden on the U.S. textile industry by encouraging trade widi Canada, Mexico, and Caribbean countries, which towered the prices of panics to compete against cheaper labor, lower environmental standards, and govemment-sub&idized operations. Tbe net effect was substantially lower-priced goods for U.5. coraumeis bnt a veiy difficult competitive environment for U.S.-bffied manufacturers. For other parts of the world , the U.S. State Department tad used textile quotas and tariffs as a political bargaining tool to obcain coopgiation from foreign governments. The United States and other countries also used quotas and tariffs as a mechanism to prevent the flumping of foreign goods into local markets and to protect 3 the domestic industry. Recently, however, the World Trade Organization (WTO) L had that as the governing body for iolemalkinal trade, it would ban its mem -jsiog quotas, effective January 1. 2005. This move would further open the n to competition from countries beyond its immediate borders. Notwith -jis outlook, most research analysts bdicved that the U.S. textile industry ms, witfi prices and costs increasing at a 1% inffa-
Production Technology
expensive than open spinning because of the former's slower speed, [be yam quality from ring spinning was better. The additional processes (roving and winding) required for ring spinning made the process more costly per pound produced. Rotor spinning inserted twists by means of a rotating conical receptacle into which the fiber was admitted. In "open-end" spinning, air current and centrifugal force carried fit to the perim eter of the rotor, where they were evenly distributed in a small group. The tads of th fib ers were twisted together by die spinnin g action of was very efficient and reduced the coat of spinning, in part, by eLiminating the need for roving. At a speed of 60,000 rotations per minute. open -end rotors produced yarn end spinning was much more uniform, but it was also considerably weaker and had
F in a n c i a l C l i m a t e Like many of its competitors, Aurora bad been straggling financially. The company consecutive tosses for the past four years (Exhibit 1). Currently, the company bad imited cash available and had trouble maintaining sufficient working capital Since 1999, about 150 Kittle plants had been dosed in the United States, and 200,000 indus-rj jobs had been lost. Aurora had ciosed four inefficient manufacturing operations. " ce 2000, the com -
in older-generation spinning ro at a value of 12 $500,000 for use in mill 1 depreciated in illy 4j sting -11 thai machii by tl market valu
e. Managemen t
To march the current production capacity of the Hauler plant v^nild require H IP purchase of LI machine with 3500 spindles at a cost of 38.05 million. In addition, Ibeic would be an 5 installation COM of $200,000, for a total capitalized cost of J855 million. T^te new spinning machine would be fully depreciated (straight-line) in 10 years, at which point il would haw zero book value, but was expected to realize $100,000 if sold on the open market Aurora had already spent $15,000 on marketing research to the suitability of Hunter's ventilation, materials-flow, and inventory systems. The cost structure of a textile plant was primarily composed of a materials cost (the cose of cotton) and a conversion cost, which included the cost of labor, dyes and chemicals, power, maintenance, customer returns for detects, and various otber pro duction and overhead costs. In 2002, the Hunter plant's conversion cost was 10.43/lb. Most of the conversion costs would not be affected if the Zinser replaced the exist ing spinning machine. For example, mere would be no change in the work force, although the current operators would need to he Imined oti the Zinser. at a one -tune cost of 350,000, during the installation year. A significant benefit of the Zinser. how a. ung of 30.03/lb. The COSE of customer returns constituted $0.O77/lb. of the con version costs for 2002. Based on engineering and marketing projections, Pogonowski estimated that the cost of customer returns would rise to SO.OWdb. for the higher-quality yam produced by the Zinser. As shown in Erfiilll S, the cost per pound was influenced by me return frequency (1.0%). roe liability multiplier (7.5), and the expected incrcd IU ellin g pries per pound ($1.0235 X 110% = Si.126). Depreciation and to remain at 7% of revenues for both the existing spinning machine and the Zjnser. buffer ocks would be necessary to hedge against the uncertainties surrounding th cotton timely delivery to the plant as well as slowdowns and shutdowns due Lo pro ductiorj problems with the spinning machine. Hie Zinser was becoming widely USE bv man TJ S. yam producers, and had proved itself a highly reliable machine, wit very few production delays, compared with earlier-gEDeration spinning machines. Thi dependability had allowed mosl manufacturers to reduce their cotton inventories t
The Decision
Michael Pogonowski had to decide whether the company should purchase the Zinser or keep using the enisling ring-spinning machine. Beyond this specific investment decision, be wondered whether it was in the shareholders' best interest to invest la Aurora when both Ihe company and the industry were continuing to lose moriey. This was paniciilariy troublesome when he considered that the U.S. teii likely experience intense competition when the WTO lii January 2005. whicli would 01 - rating of BB. already below in' ccmed about the higher liability risks a end market, where most of the new yam would be sold. For example, if the frequency of custom er returns rem a ined at the cur rent le ve l of 1. 5%. it Aurora's ability to realize the premium margins that had originally at
heir Aurora holdings fall from about SJO a share to its price of f 12. In light of such poor performance, shareholders might prefer to institution of a dividend rather than see money spent on new assets for Aura ertheless, if buying the Zinser could reverse the downward trend of Aurora price, then it would clearly be a welcome event for the owners. Aurora used : rate of 10% for this type of replacement decision. Pogonowski felt confident confident that Aurora would be able to remain in operation over that time sp
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