AIS 100 Current Event 3
Your 2-page write-up (typed please) is due in class on Wednesday, December 4th or Thursday,
December 5th (depending on the day of week your class meets). The assignment is worth 20 points.
15 points for the requirements in the case and 5 points for completing the short survey by the due
date at: https://buswisc.qualtrics.com/SE/?SID=SV_bveHCN6N6xNsZBH(https://sites
Supplier Conundrum
You work in the procurement unit of Striggs and Bratton (SB), a small engine manufacturer in the
upper Midwest. Your role on the procurement team is to provide financial analysis of potential
suppliers of cable and other hardware that are essential components of SB engines. The main criteria
for selection of a vendor are price, quality, financial stability, and the extent to which the supplier can
be collaborative with SB to ensure a mutually agreeable strategic vendor relationship (see the
attached article for discussion of these supply chain issues.)
With respect to the current cable and hardware sourcing project, your team has identified two
companies that are the finalists, Contador Cable N.A. (based in Brazil) and Grainger Co. (based in
Chicago, IL). These two companies’ products are comparable in terms of product quality and price
(including potential shipping costs, as SB has operations in Brazil and the Midwest.)
The main remaining points of contention in selecting one of these companies as the exclusive
supplier for cables and hardware concern the companies’ relative financial stability and the extent to
which SB management can “work with” the supplier company management. You have gathered the
following financial information for your financial analysis.
(in millions)
Contador Cable N.A. Grainger Co.
Total revenues
R$ 741
$ 517
Average total assets
5,577
4,696
Net income
240
297
(a) Compute the following ratios for Contador and Grainger:
(1) Return on assets;
(2) Profit margin on sales; and
(3) Asset turnover.
Briefly discuss how these companies compare on these performance measures. Based on this
analysis, which company seems to be better on a financial basis?
(b) Contador prepares financial statements, using International Financial Reporting Standards (IFRS)
and uses revaluation accounting for major classes of its manufacturing facilities. Contador reports a
cumulative revaluation surplus of R$2,125. That is, Contador’s average assets are increased by the
amount of the revaluation surplus (the revaluation gain in the current year does not affect income).
How does this additional information affect your conclusions in part (a) on the financial position of
the two potential suppliers?
(c) In addition to the financial analysis, your team is also evaluating the alignment of corporate cultures
between SB and the new potential suppliers. The Grainger Company is well known to SB management
so they are pretty sure they can work with them. However, while SB has been doing some business in
Brazil, they are much less familiar with the business and cultural norms there. Indeed, even though
there are many positives about the Contador product quality and strategic fit with SB, some in top
management have made negative remarks about business standards in Brazil (e.g., long lunches,
different accounting, language barriers, etc.). Some are concerned that these stereotypes, if not valid,
could bias the vendor choice.
See the attached materials to address the following requirements:
 Doing business in Brazil (http://www.worldbusinessculture.com/Business-in-Brazil.html).
(Give particular attention to pages on (1) Management Style, (2) Communication Styles,
and (3) Meetings)
 See the discussion of Global Mindset at the following link:
http://www.ey.com/GL/en/Issues/Driving-growth/Strategies-for-success-in-emerging-markets---Aglobal-mindset
and watch the short video on “Leading your business with a global mindset” on the bottom right side
of the page.
1.
What are some cultural norms that differ from those in the US business environment? What
risks do you see regarding doing business in Brazil? What opportunities might present upside potential
to doing business with a supplier in Brazil?
2.
Consider the elements of global mindset (i.e., Intellectual Capital, Psychological Capital, and
Social Capital) as described by Dr. Javidan. How much weight should be given to non-financial factors
such as differing business cultures in the vendor choice decision? Explain.
Solution - Analysis
Contador
(a)
(1) Return on
Assets
(ROA)
R$ 240
R$ 5,577
Grainger
$297
$4,696
= 4.3%
Contador
(2) Profit
Margin
on Sales
R$ 240
R$ 741
Grainger
= 32.4%
$297
$517
Contador
(3) Asset
Turnover
R$ 741
R$ 5,577
= 6.32%
= 57.4%
Grainger
$517
$4,696
= .13
= .11
Based on return on assets (ROA), Grainger is performing better than Contador. The main
driver for this difference is strong profit margin, which is over three times that of Contador.
For every dollar of sales, Grainger generates approximately $0.57 of net income, compared to
approximately $0.32 for Contador. Contador generates approximately $0.13 of sales per
dollar invested in assets, compared to $0.11 for Grainger. Grainger generates approximately
$0.06 of net income per dollar invested in assets, compared to $0.04 for Contador. Even
though Contador has a higher asset turnover (.13 vs. .11), this results in only a 4.3% ROA
when multiplied by the lower profit margin. While Contador’s ability to generate more sales
per dollar invested in assets exceeds that of Grainger, Grainger’s ability to generate more net
income per dollar of sales leads to an overall greater return on assets for Grainger. Therefore,
on a financial basis, Grainger appears to be the better supplier choice.
(b)
Relative to GAAP, an argument can be made that Contador’s assets and equity are
overstated. To make Contadors’s reported numbers comparable to a U.S. company like
Grainger, you would need to adjust Contador’s assets and equity numbers downward by the
amount of the revaluation surplus.
For example, after adjusting Contador’s assets downward by the amount of the revaluation
reserve, Contador’s ROA increases to:
$240
($5,577 – $2,215)
= 11.3%.
With these adjustments, Contador’s ROA is actually higher than Grainger.
(c)
1. Punctuality does not appear to have the same level of importance as it may have in the U.S.
Also, the display of emotion, which can be seen as a negative signal in the U.S. of someone
who is not in control of themselves or the situation at hand, is taken as a positive signal in
Brazil to express commitment and interest. Also, oral communication is more valued in
Brazil, as compared to the relative importance placed on formal written communication in
the U.S. As the 5th largest market in the world that is emerging as a global economic power, a
presence in Brazil may present substantial future growth opportunities. However, if turmoil
resulting political corruption and unstable currency (characteristics of Brazil’s recent history)
return, the ability of obtaining quality materials at reasonable prices would be greatly
decreased.
2. While non-financial factors such as differing business cultures are not the primary
consideration when faced with a vendor choice decision, such must be considered. The
ability to relate to and communicate with others is of vital importance. This is illustrated by
the case of a professor-student relationship. Even if the professor has vast amounts of
profound knowledge and understanding that add value to one’s ability to identify and solve
problems, if s/he is unable to communicate that knowledge and understanding in a
meaningful way in which students can understand, than the value of that professor’s
knowledge and understanding is decreased.
Due to increasing global interdependence, the consideration differing business cultures is
becoming more important. Soon over half of the sales from US companies will come from
markets outside of the U.S. High global mindset is necessary.
Global Mindset = Intellectual Capital + Psychological Capital + Social Capital
Intellectual Capital = Cognitive Side – how much the manager knows about the global
business (competitors, markets, political systems, regulatory systems)
Psychological Capital = Affective (emotional) side, passion for diversity, have a quest for
adventure
Social Capital = Ability to build trusting relationships with people who are different than you
(i.e., who define trust differently than you do), ability to read non-verbal communication and
build connections)
Punch-lines
1. Need to be careful of financial comparisons of companies using different accounting rules – that is,
once we get to “apples–to—apples” comparison, Contador looks superior.
2. Also, need a global mindset to avoid a bias that could lead to bad selection of a vendor, based on
cultural and other biases.