Research Support January 1994 School of Business Administration NOVA INCORPORATED: CASE D LOCAL OUTSOURCING OF PRODUCTION FOR PERFORMANCE IMPROVEMENT Working Paper #714 Dennis G. Severance The University of Michigan and Jack Muckstadt Cornell University Dennis G. Severance, Andersen Consulting Professor, Computers and Information Systems, The University of Michigan. Jack Muckstadt, Professor and Director, School of Operations Research and Industrial Engineering, Cornell University. FOR DISCUSSION PURPOSES ONLY None of this material is to be quoted or reproduced without the expressed permission of Research Support COPYRIGHT 1994 The University of Michigan School of Business Administration Ann Arbor, Michigan 48109-1234

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1 NOVA MANUFACTURING INCORPORATED: Case D Local Outsourcing of Production for Performance Improvement By many measures, the "Born-Again" process and the Velocity initiatives have now been successful. With the consolidation and focusing of the factories, the institution of TQM throughout the value chain, the pruning of the product line, and the slashing of overhead, Nova's plants and the distribution centers are once again very profitable. Nova's 1993 income statements in Figure 1 show that the revenue slide of the past decade has finally been reversed. Further, as projected by the production plans and financial proformas of Figure 2, marketing believes that sales volume will grow by an additional 7% next year if the plants can reliably maintain a one day lead time and if the central warehouses can provide a fill rate of 99%. As further signs of progress, total inventories in the factories, pipelines and distribution centers have been cut to 61 days. Inventory records are updated in real time. Procurement decisions are made with up-to-the-moment knowledge of pending customer orders and current inventory levels. Customers are served more reliably, in less time and with lower cost than by any one else in the industry. Nova has, in fact, become the best-in-class! As the new year begins, John Fisher sees an opportunity to take some long overdue and much deserved vacation time, and perhaps even a chance to reacquaint himself with the game of golf. He opens the morning mail to find the following memo from Claudio Spiguel proposing to improve customer service in South America with no increase in Nova's cost. The logic seems reasonable. He turns to you for advice. 1/1/94

2 NOVA MANUFACTURING, INC. "Your Global Assembly Supplier" MEMORANDUM TO: John Fisher, CEO FROM: Claudio Spiguel, President, Nova South America DATE: January 5, 1994 SUBJECT: Improving Customer Service and Nova Profitability Attached is a copy of your recent memo on Stockouts and Customer Service,as well as, a copy of Larry Judge's memo on improving return on investment. Sometimes it takes a combination of reminders like this to shake us loose from old habits... to drive home the point that we can't make marginal changes if we seek major improvements. Let me explain. First, I am sure that my South America operations were a significant contributor to your tomemo. While we have strived in the past to maintain generous inventories of finished goods in an attempt to provide superior service to our customers, we have found that deliveries from Cincinnati and London are so unreliable that if ever we do stockout of a part, we may be out of stock for an extended period. Therefore my initial reaction to your memo was to increase inventory by increasing my cycle stocks and raising my reorder points to "safer" levels. While I knew this was expensive, it seemed to be the right thing to do for our customers. But then later, Larry Judge's memo on RONA arrived. It reminded me that customer service was not the only goal for Nova managers to attend to. Making a "fair profit" for our share holders on 1/1/94

3 the assets they had provided us with was also important. Since inventories are the greatest of the assets under my local control and their holding costs contribute heavily to our operating expense, inventory reduction is my key lever for RONA improvement. With the current measurement system, I am torn between the goals of inventory reduction and customer service. When I improve one the other gets worse. When I shared this dilemma with a cousin who runs a manufacturing firm here in Sao Paulo, he asked for a sample of each of the products that Nova sells in South America. After reverse engineering our ten products, he designed a manufacturing process to build each and lined up a set of local suppliers. He has now offered me the following contract. If I guarantee to purchase from him all Nova products sold in South America during the next 5 years, he will make the capital investment required to manufacture these products. He will sell the products to me at our current Nova transfer price, quoted in dollars to eliminate Nova's exposure to Brazilian currency fluctuation, and he will guarantee the price for the 5 years (which Cincinnati will not do for me). Moreover, he will require no minimum order size and he will guarantee 1 day delivery of any order quantity up to 2% of annual demand. Finally, he will pay all transportation costs and will guarantee that product quality will meet or exceed Nova's existing standards. This is the answer to a prayer. He will own the pipeline stock, and I will need only 2 days of safety stock and 1/2 day of cycle stock. My fill rates will jump from 65% to 99.9% and my transportation costs will go to $0.00. From your perspective, the risk of profit erosion from the wild currency fluctuations that we have experienced in recent years will be eliminated. I estimate that my RONA bonus will exceed 40%, and he feels that he will make an acceptable profit. This is a win-win-win situation. Do I have your approval to sign the contract and proceed with this new alliance? Attachments: 2 /1/94

4 NOVA MANUFACTURING, INC. "Your Global Assembly Supplier" MEMORANDUM TO: All Nova Distribution Center Managers FROM: John Fisher, CEO DATE: November 29, 1993 SUBJECT: Stockouts and Customer Service In the last two weeks I ran into a board member and then a college classmate, who each informed me that during the past year their company had attempted to buy our products on several occasions when we were out of stock. As a result they were forced to go to a competitor. Without having details on products, regions and dates, they assured me that the problem was real and getting worse. They wondered if Nova was backing out as a supplier to their industry. Not only is this an unacceptable way to run a company which is focused on customer service, it is personally embarrassing to me. Let me be blunt. If you can not represent Nova better in your region by satisfying basic customer demand, I will be forced to find someone who can. Our board meets again in nine weeks and I plan to attend a school reunion in three months. I am sure that I will be given an update on our current service levels. I will tell you what I find. Attachment 1 1/1/94

5 NOVA MANUFACTURING, INC. "Your Global Assembly Supplier" MEMORANDUM TO: All Nova Distribution Center Managers FROM: Larry Judge, CFO DATE: December 15, 1993 SUBJECT: Lean Production To survive in our increasingly competitive business environment, it is imperative that we all strive continuously to improve financial performance. Return on net assets, RONA, is a traditional and important measure of the effectiveness with which productive assets are deployed by a company's management. I have therefore decided to establish this year's RONA numbers as a benchmark for company performance. Hereafter, monthly RONA numbers at each location will be used as a barometer to measure performance improvement as we move forward during the new year. I will calculate your 1993 RONA and will tie your compensation to your ability to improve it in 1994. The company improvement goal of 4% must be met by all locations. Managers who exceed this goal will receive a salary bonus percentage equal to twice their percentage improvement beyond 4%. I know you will each do the right thing. Attachment 2 1/1/94

Figure 1a. NOVA 1993 INCOME STATEMENTS Consolidated Sales Revenue Cost Of Goods Sold Finished Goods Inventory Value (starting) Add Cost Of Goods Manufactured Raw Material Inventory Value (starting) Raw Material Purchases Raw Material Handling Costs Transportation Costs Cost Of Materials Available For Use Deduct Raw Materials Inventory Value (ending) Cost Of Materials Used Direct Labor Manufacturing Overhead Depreciation Other Total Cost Of Goods Manufactured Cost Of Finished Goods Available For Sale Deduct Finished Goods Inventory Value (ending) Cost Of Goods Sold Gross Margin On Sales Operating Expenses Selling Picking, Packing, Handling and Transportation Central Warehouse and DC Fixed Overhead Total Selling Expenses General And Administrative Administrative Overhead Engineering Overhead Raw Material Inventory Holding Costs Finished Goods Inventory Holding Costs(DC + Fac.) Total G&A Expenses Total Operating Expenses Interest Expenses Short Term Interest Long Term Interest Total Interest Expenses Income Before Income Taxes Income Tax Expense Net Income After Income Taxes Annual 28,306,750 6,762,578 806,950 3,916,143 61,000 148,400 4,932,493 855,249 4,077,243 1,515,500 2,405,353 612,200 8,610,296 15,372,875 6,226,505 9.146,370 19,160,380 607,450 2.571.700 3,179,150 2,998,300 600,000 190,620 2,904,549 6,693,469 9,872,619 68,169 457,280 525,449 8,762,312 3,167,214 5,595,098

Figure Ib. NOVA 1993 INCOME STATEMENTS Factories Sales Revenue Cost Of Goods Sold Finished Goods Inventory Value (starting) Add Cost Of Goods Manufactured 10,626,458 9,405,793 20,032,250 883,367 1,086,254 Raw Material Inventory Value (starting) 394,510 Raw Material Purchases 1,823,465 Raw Material Handling Costs 34,500 Transportation Costs (Inbound) 86,800 Cost Of Materials Available For Use 2,339,275 Deduct Raw Materials Inventory Value (endir 264,873 Cost Of Materials Used 2,074,402 Direct Labor 795,500 Manufacturing Overhead Depreciation 1,694,564 Material Handling, Tooling, Utilities, ( 305,500 Total Cost Of Goods Manufactured 4,869,965 Cost Of Finished Goods Available For Sale 5,753,332 Deduct Finished Goods Inventory Value (ending) 882,911 Cost Of Goods Sold 4,870,421 Gross Margin On Sales 5,756,036 Operating Expenses Selling Picking And Packing 26,250 Central Warehouse Fixed Overhead 412,000 Total Selling Expenses 438,250 General And Administrative Administrative Overhead 458,100 Engineering Overhead 300,000 Raw Material Inventory Holding Costs 102,020 Finished Goods Inventory Holding Costs 863,068 Total G&A Expenses 1,723,188 Total Operating Expenses 2,161,438 Interest Expense Short Term Interest 11,478 Long Term Interest 88,480 Total Interest Expense 99,958 Income Before Income Taxes 3,494,640 Income Tax Rate 34% Income Tax Expense 1,188,178 Net Income After Income Taxes 2,306,463 412,440 2,092,678 26,500 61,600 2,593,218 325,503 2,267,715 720,000 710,789 306,700 4,005,205 5,091,458 1,085,009 4,006.450 1,969,621 806,950 3,916,143 61,000 148,400 4,932,493 590,376 4,342,117 1,515,500 2,405,353 612,200 8,875,170 10,844,791 1,967,920 8.876,871 5,399,343 11,155,379 28,500 54,750 351,000 763,000 379,500 817,750 360,300 818,400 300,000 600,000 88,600 190,620 763,906 1,626,974 1,512,806 3,235,994 1,892,306 4,053,744 14,105 25,583 74,000 162,480 88,105 188,063 3,418,932 6,913,573 41% 1,40,762 2,589,940 2,017,170 4,323,633

Figure 1c. NOVA 1993 INCOME STATEMENTS Regional Distribution Centers US Europe EB SA AP Total Sales Revenue Cost Of Goods Sold Inventory Value (starting) Add Cost Of Goods Purchased Purchases Handling Costs Transportation Costs (Inbound) Total Cost Of Goods Purchased Cost Of Merchandise Available For Sale Deduct Inventory Value (ending) Cost Of Goods Sold Gross Margin On Sales Operating Expenses Selling Warehouse Fixed Overhead Total Selling Expenses General And Administrative Administrative Overhead Inventory Holding Costs Total G&A Expenses Total Operating Expenses Interest Expense Short Term Interest Long Term Interest Total Interest Expense Income Before Income Taxes Income Tax Rate Income Tax Expense Net Income After Income Taxes 7,815,950 6,705,100 5,145,450 4,693,800 3,946,450 28,306,750 848,140 715,690 1,039,184 1,179,900 1,010,044 4,792,957 5,656,950 4,730,900 3,754,250 3,402,100 2,488,050 20,032,250 27,500 26,500 22,500 20,500 18,500 115,500 99,800 134,000 107,000 48,900 47,500 437,200 ~~~~~~~~~~~~~~3, 2. 0 0.* 5,784,250 6,632,390 649,451 5,982,939 1,833,011 4,891,400 5,607,090 536,829 5,070,261 1,634,839 3,883,750 4,922,934 1,058,545 3,864,389 1,281,061 3,471,500 4,651,400 1,133,119 3,518,281 1,175,519 2,554,050 3,564,094 880,642 2,683,452 1,262,998 20,584,950 25,377,907 4,258,585 21,119,322 7,187,428 432,700 359,300 385,700 256,000 375,000 1,808,700 432,700 359,300 385,700 256,000 375,000 1,808,700 480,300 522,100 360,500 432,700 384,300 2,179,900 194,835 161,049 317,563 339,936 264,192 1,277,575 675,135 683,149 678,063 772,636 648,492 3,457,475 1,107,835 1,042,449 1,063,763 1,028,636 1,023,492 5,266,175 6,495 5,368 10,585 11,331 8,806 42,586 50,000 34,800 41,600 106,000 62,400 294,800 56,495 40,168 52,185 117,331 71,206 337,386 668,681 552,222 165,112 29,552 168,299 1,583,866 34% 41% 40% 35% 28% 227,352 226,411 66,045 10,343 47,124 577,274 441,330 325,811 99,067 19,209 121,175 1,006,592

Figure 2. 1994 PRODUCTION PLANS and FINANCIAL PROFORMAS Finished Goods Part Number 1 2 3 4 5 6 7 8 9 10 Where Distribution Centers Get Their Products (Units) Where Products Are Manufactured (Units) North American DC _... US Factory 8568 4632 744 0 0 144 0 48 24 0 European Factory 0 0 0 1416 264 0 72 0 0 0 European DC - US Factory 0 0 1008 0 0 552 0 24 24 0 I European Factory 5568 3576 0 864 1008 0 216 0 0 0 Eastern European DC ______ US Factory0 0 1 0 0 16 0 312 0 48 48 0 Euroan Factory 4152 2688 0 720 744 0 192 0 0 24 South American DC _____ ___ US Factory 2760 1872 1224 0 0 696 0 240 120 0 European Factory 0 0 744 264 0 432 0 72 Asia Pacific DC ___ US Factory0 0 1800 0 0 312 0 528 312 0 European Factory 816 552 0 312 168 0 792 0 0 216 US Factory 11328 6504 5832 0 0 2016 0 888 528 0 European Factory 10536 6816 0 4056 2448 0 1704 0 0 312 ls[ oTotal 1 21864 13320 5832 4056 2448 2016 1704 888 528 312

Return on Net Assets by Location Distribution Centers RONA Revenue Net Income Tax Fixed Costs & Interest Variable Costs North America 10% 7,862,760 231,240 119,124 1,164,330 6,348,067 Europe 22% 6,848,760 349,798 243,080 1,082,617 5,173,264 Eastern Europe 13% 5,664,960 270,501 180,334 1,115,949 4,098,176 South America 11% 5,239,920 244,599 131,707 1,145,967 3,717,647 Asia Pacific 12% 4,377,960 283,655 110,310 1,094,699 2,889,296 Total1 29,994,360 1,379,793 784,555 5,603,561 22,226,450 Factories I................................. I Fixed Costs Variable RONA Revenue Net Income Tax Interest Co................... ____________& Interest Costs North America 26% 11,204,102 1,232,451 634,899 4,319,523 5,017,229 Europe 39% 10,759,687 1,058,036 735,245 3,320,415 5,645,991 Total. 21,963,789 2,290,487 1,370,144 7,639,938 10,663,219 Corporate.....I T. XT }.T Fixed Costs Variable RONA Revenue Net Income Tax Interest Co Nova Corporate 20 29,994,36 3,670,281 2,5& Interest Costs Nova Corporate 20% 29,994,360 3,670,281 2.154,700 13,243,499 10,925,880

Balance Sheets Factories Distribution Centers us Europe US Europe Eastern Europe South Asia America Pacific Nova Corporate Assets Current Assets Cash Accounts Receivable Inventory Raw Material Finished Goods Long Term Assets Property Plant Equipment Liabilities Current Uabilities Short Term Debt Accounts Payable Payroll Due Other Accruals Long Term Uabilitles Long Term Debt Shareholder's Equity 7,977,726 2,329,181 33,612 0 1,147,784 264,873 882,911 5,648,545 325,000 1,870,000 3,453,545 1,557,057 451,057 114,778 280,708 44,203 11,367 1,106,000 1,106,000 5,214,005 2,844,707 23,684 0 1,410,512 325,503 1,085,009 2,369,298 280,000 865,800 1,223,498 1,422,313 497,313 141,051 292,359 54,448 9,455 925,000 925,000 4,009,701 2,150,701 65,523 786,276 649,451 0 649,451 1,859,000 370,000 810,500 678,500 788,666 163,666 64,945 31,740 63,481 3,500 625,000 625,000 2,896,927 1,815,607 57,073 684,876 536,829 0 536,829 1,081,320 165,000 560,700 355,620 570,068 135,068 53,683 25,866 51,733 3,786 435,000 435,000 4,079,144 2,730,794 47,208 566,496 1,058,545 0 1,058,545 1,348,350 327,000 585,300 436,050 692,967 172,967 105,854 20,491 40,982 5,640 520,000 520,000 4,707,104 2,833,895 43,666 523,992 1,133,119 0 1,133,119 1,873,209 440,000 740,300 692,909 1,497,627 172,627 113,312 18,588 37,176 3,550 1,325,000 1,325,000 3,907,982 2,235,562 36,483 437,796 880,642 0 880,642 1,672,420 320,000 780,000 572,420 916,104 136,104 88,064 14,446 28,893 4,700 780,000 780,000 32,792,589 16,940,447 307,249 2,999,436 6,816,881 590,376 6,226,505 15,852,142 2,227,000 6,212,600 7,412,542 7,444,801 1,728,801 681,688 684,200 320,915 41,998 5,716,000 5,716,000 25,347,788 6,420,669 3,791,692 3,221,035 2,326,859 3,386,177 3,209,478 2,991,879

Proforma Income Statements U.S. Factory Finished Goods Product Number I I I I I I I I I I - I Totals II 1 2 3 4 5 6 7 8 9 I 10 Units Sold 27,096 11,328 6,504 5,832 0 0 2,016 0 888 528 0 Total Expenses 9,336,752 3,448,995 2,078,175 2,327,343 0 0 799,028 0 406,715 276,495 0 Factory Margin 20% 20% 20% 0% 0% 20% 0% 20% 20% 0% Transfer Price 365.36 383.43 478.88 0.00 0.00 475.61 0.00 549.61 628.40 0.00 Sales Revenue 11,204,102 4,138,794 2,493,810 2,792,812 0 0 958,834 0 488,058 331,794 0 Variable Expenses 5,017,229 1,796,980 1,070,286 1,398,068 0 0 418,631 0 203,015 130,250 0 Material (including transportation & handling) 2,807,081 944,577 547,696 909,234 0 0 224,490 0 110,274 70,809 0 Direct Labor 2,210,148 852,403 522,590 488,834 0 0 194,141 0 92,741 59,440 0 Fixed Expenses. 4,219,565 1,610,226 983,896 907,761 0 0 372,960 0 200,424 144,298 0 Allocated Manufacturing Overhead 1,583,935 624,250 377,742 347,627 0 0 132,391 0 62,397 39,528 0 Allocated Depreciation (% util'n) 1,278,435 496,530 304,412 281,872 0 0 109,661 0 52,385 33,575 0 Material Handling, Tooling, Utilities, etc (% units pr 305,500 127,720 73,331 65,754 0 0 22,730 0 10,012 5,953 0 Allocated Fixed Overhead 2,635,630 985,976 606,153 560,134 0 0 240,569 0 138,027 104,770 0 Picking And Packing (% direct labor) 26,250 10,124 6,207 5,806 0 0 2,306 0 1,101 706 0 Central Warehouse Fixed Overhead (% direct labor) 412,000 158,899 97,417 91,125 0 0 36,190 0 17,288 11,080 0 Administrative Overhead (% direct labor) 458,100 176,679 108,318 101,321 0 0 40,240 0 19,223 12,320 0 Etginoering Ovorhlead ( iqtzl) 300,000 50,000 50,000 50,000 0 0 50,000 0 50,000 50,000 0 Raw Material Holding (% direct labor) 88,426 34,104 20,908 19,558 0 0 7,767 0 3,710 2,378 0 Finished Goods Holding (% direct labor) 264,873 102,156 62,629 58,584 0 0 23,267 0 11,114 7,124 0 Unabsorbed Direct Labor (% units produced) 669,852 280,045 160,788 144,175 0 0 49,838 0 21,953 13,053 0 Unabsorbed Depreciation (% units produced) 416,128 173,970 99,885 89,565 0 0 30,961 0 13,638 8,109 0 Operating Income 1,967,308 731,588 439,628 486,983 0 0 167,243 0 84,619 57,247 0 Interest Expense 99,958 41,789 23,993 21,514 0 0 7,437 0 3,276 1,948 0 Short Term Interest (% units produced) 11,478 4,799 2,755 2,470 0 0 854 0 376 224 0 Long Term Interest (% units produced) 88,480 36,991 21,238 19,044 0 0 6,583 0 2,900 1,724 0 Total Expenses 9,336,752 3,448,995 2,078,175 2,327,343 0 0 799,028 0 406,715 276,495 0 Income Before Income Taxes 1,867,350 689,799 415,635 465,469 0 0 159,806 0 81,343 55,299 0 Income Tax Expense 34% )634,899 234,532 141,316 158,259 0 0 54,334 0 27,657 18,802 0 Net Income After Income Taxes 1,232,451 455,267 274,319 307,209 0 0 105,472 0 53,686 36,497 0

European Factory Finished Goods Product Number or or T Totals ir 1 1 2 1 3 4 1 5 1 6 1 7 8 1 9 I o10 A Units Sold 25,872 10,536 6,816 0 4,056 2,448 0 1,704 0 0 312 Total Expenses 8,966,406 3,117,203 2,110,405 0 1,862,541 960,166 0 693,506 0 0 222,585 Factory Margin 20% 20% 0% 20% 20% 0% 20% 0% 0% 20% Transfer Price 355.03 371.55 0.00 551.05 470.67 0.00 488.38 0.00 0.00 856.10 Sales Revenue 10,759,687 3,740,644 2,532,486 0 2,235,049 1,152,199 0 832,207 0 0 267,102 Variable Expenses 5,645,991 1902,309 1,279,748 0 1,327,868 593,125 0 418,187 0 0 124,754 Material (including transportation & handling) 2,923,592 898,515 587,786 0 884,427 283,904 0 195,582 0 0 73,378 Direct Labor 2,722,399 1,003,794 691,962 0 443,440 309,221 0 222,606 0 0 51,376 Fixed Expenses 3,232,310 1,179,015 807,446 0 520,861 358,704 0 269,516 0 0 96,769 Allocated Manufacturing Overhead 851,709 327,219 220,269 0 137,459 89,437 0 63,694 0 0 13,631 Allocated Depreciation (% utiln) 545,009 202,320 139,468 0 89,378 60,417 0 43,494 0 0 9,932 Material Handling, Tooling, Utilities, etc (% units pr 306,700 124,899 80,800 0 48,082 29,020 0 20,200 0 0 3,699 Allocated Fixed Overhead 2,380,601 851,796 587,178 0 383,402 269,267 0 205,822 0 0 83,138 Picking And Packing (% direct labor) 28,500 10,508 7,244 0 4,642 3,237 0 2,330 0 0 538 Central Warehouse Fixed Overhead (% direct labor) 351,000 129,420 89,215 0 57,173 39,868 0 28,701 0 0 6,624 Administrative Ove Orhead (% direct labor) 360,300 132,849 91,579 0 58,688 40,924 0 29,461 0 0 6,799 Engineering Overhead (equal) 300,000 50,000 50,000 0 50,000 50,000 0 50.000 0 0 50,000 Raw Material Holding (% direct labor) 115,917 42,741 29,463 0 18,881 13,166 0 9,478 0 0 2,188 Finished Goods Holding (% direct labor) 325,503 120,018 82,734 0 53,020 36,972 0 26,616 0 0 6,143 Undbsorbed Direct Labor (% units produced) 733,601 298,748 193,268 0 115,008 69,413 0 48,317 0 0 8,847 Unabsorbed Depreciation (% units produced) 165,781 67,512 43,675 0 25,990 15,686 0 10,919 0 0 1,999 Operating Income 1,881,386 659,320 445,292 0 386,321 200,370 0 144,504 0 0 45,580 Interest Expense 88,105 35,880 23,211 0 13,812 8,336 0 5,803 0 0 1,062 Short Term Debt (% units produced) 14,105 5,744 3,716 0 2,211 1,335 0 929 0 0 170 Long Term Interest (% units produced) 74,000 30,135 19,495 0 11,601 7,002 0 4,874 0 0 892 Total Expenses 8,966,406 3,117,203 2,110,405 0 1,862,541 960,166 0 693,506 0 0 222,585 Income Before Income Taxes 1,793,281 623,441 422,081 0 372,508 192,033 0 138,701 0 0 44,517 Income Tax Expense 41% )735,245 255,611 173,053 0 152,728 78,734 0 56,867 0 0 18,252 Net Income After Income Taxes 1,058,036 367,830 249,028 0 219,780 113,300 0 81,834 0 0 26,265 I I -j

North American Distribution Center Finished Goods Product Number -1 Totals II 1 2 3 4 5 I 6 1 7 i 8 I 9 1 10 Units Sold 15,912 8,568 4,632 744 1,416 264 144 72 48 24 0 Total Expenses 7,512,396 3,737,947 2,109,366 414,474 925,696 151,509 80,901 43,436 31,200 17,867 0 Selling Price ll 460 470 585 660 660 650 750 725 750 0 Sales Revenue 7,862,760 3,941,280 2,177,040 435,240 934,560 174,240 93,600 54,000 34,800 18,000 0 Variable Expenses 6,348,067 3,140,680 1,783,777 359,752 787,126 126,987 70,008 36,616 27,325 15,795 0 Contribution To Fixed Expenses 1,514,693 800,600 393,263 75,488 147,434 47,253 23,592 17,384 7,475 2,205 0 Allocated Fixed Overhead 1,107,835 566,848 309,144 52,080 133,543 23,585 10,381 6,564 3,705 1,987 0 Regional Warehouse Fixed Overhead (% unit 432,700 232,992 125,959 20,232 38,506 7,179 3,916 1,958 1,305 653 0 Administrative Overhead (% units sold) 480,300 258,623 139,816 22,457 42,742 7,969 4,347 2,173 1,449 724 0 Inventory Holding Costs 194,835 75,232 43,368 9,391 52,295 8,437 2,118 2,433 950 610 0 Operating Income 406,858 233,753 84,120 23,407 13,892 23,668 13,211 10,820 3,770 218 0 Interest Expense 56,495 30,420 16,446 2,642 5,027 937 511 256 170 85 0 Short Term Interest (% units sold) 6,495 3,497 1,891 304 578 108 59 29 20 10 0 Long Term Interest (% units sold) 50,000 26,923 14,555 2,338 4,449 830 452 226 151 75 0 Total Expenses 7,512,396 3,737,947 2,109,366 414,474 925,696 151,509 80,901 43,436 31,200 17,867 0 Income Before Income Taxes 350,364 203,333 67,674 20,766 8,864 22,731 12,699 10,564 3,600 133 0 Income Tax Expense ( 34% ) 119,124 69,133 23,009 7,060 3,014 7,728 4,318 3,592 1,224 45 0 [Net Income After Income Taxes 231,240 134,199 44,665 13,706 5,850 15,002 8,382 6,972 2,376 87 0

European Distribution Center Finished Goods Product Number Totals II 1 2 1 3 1 4 1 5 I i 7 I 8 I Q 1i0 Units Sold 12,840 5,568 3,576 1,008 864 1,008 552 216 24 24 0 Total Expenses 6,255,881 2,432,186 1,624,333 594,874 554,174 562,792 325,313 125,846 17,133 19,229 0 Selling Price ll|480 495 600 640 650 720 740 750 740 0 Sales Revenue 6,848,760 2,672,640 1,770,120 604,800 552,960 655,200 397,440 159,840 18,000 17,760 0 Variable Expenses 5,173,264 1,984,456 1,334,914 489,974 479,846 478,169 267,896 107,252 14,392 16,366 0 Contribution To Fixed Expenses 1,675,496 688,184 435,206 114,826 73,114 177,031 129,544 52,588 3,608 1,394 0 Allocated Fixed Overhead 1,042,449 430,312 278,232 101,747 71,625 81,469 55,691 17,918 2,666 2,788 0 Regional Warehouse Fixed Overhead (% unit 359,300 155,809 100,067 28,207 24,177 28,207 15,447 6,044 672 672 0 Administrative Overhead (% units sold) 522,100 226,406 145,407 40,987 35,132 40,987 22,445 8,783 976 976 0 Inventory Holding Costs 161,049 48,097 32,758 32,553 12,316 12,275 17,799 3,091 1,019 1,141 0 Operating Income 633,047 257,873 156,974 13,079 1,489 95,561 73,854 34,669 942 -1,394 0 Interest Expense 40,168 17,419 11,187 3,153 2,703 3,153 1,727 676 75 75 0 Short Term Interest (% units sold) 5,368 2,328 1,495 421 361 421 231 90 10 10 0 Long Term Interest (% units sold) 34,800 15,091 9,692 2,732 2,342 2,732 1,496 585 65 65 0 Total Expenses 6,255,881 2,432,186 1,624,333 594,874 554,174 562,792 325,313 125,846 17,133 19,229 0 Income Before Income Taxes 592,879 240,454 145,787 9,926 -1,214 92,408 72,127 33,994 867 -1,469 0 Income Tax Expense ( 41% ) 243,080 98,586 59,773 4,070 -498 37,887 29,572 13,937 355 -602 0 1Net Income After Income Taxes 349,798 141,868 86,014 5,856 -716 54,521 42,555 20,056 511 -867 0

Eastern European Distribution Center Finished Goods Product Number I I -- II Tntial II 1 2 1 4 1 5 1 6 I 7 I. _ I. -- I 8 1 9 1 10 Units Sold 9,984 4,152 2,688 1056 720 744 312 192 48 48 24 Total Expenses 5,214,124 1,924,876 1,295,822 650,833 489,188 440,781 193,707 118865 35,201 39,522 25,329 Selling Price 495 560 620 655 700 710 750 760 745 815 Sales Revenue 5,664,960 2,055,240 1,505,280 654,720 471,600 520,800 221,520 144,000 36,480 35,760 19,560 Variable Expenses 4,098,176 1,484,919 1,007,629 515,059 402,365 355,449 153,464 96,498 28,520 32,450 21,823 Contribution To Fixed Expenses 1,566,784 570,321 497,651 139,661 69,235 165,351 68,056 47,502 7,960 3,310 -2,263 Allocated Fixed Overhead 1,063,763 418,255 274,143 130,254 83,060 81,443 38,613 21,364 6,430 6,821 3,380 Regional Warehouse Fixed Overhead (% unit 385,700 160,399 103,842 40,795 27,815 28,742 12,053 7,417 1,854 1,854 927 Administrative Overhead (% units sold) 360,500 149,919 97,058 38,130 25,998 26,864 11,266 6,933 1,733 1,733 867 Inventory Holding Costs 317,563 107,936 73,243 51,329 29,247 25,837 15,294 7,014 2,842 3,234 1,586 Operating Income 503,021 152,066 223,508 9,407 -13,825 83,907 29,444 26,138 1530 -3,512 -5,643 Interest Expense 52,185 21,702 14,050 5,520 3,763 3,889 1,631 1,004 251 251 125 Short Term Interest (% units sold) 10,585 4,402 2,850 1,120 763 789 331 204 51 51 25 Long Term Interest (% units sold) 41,600 17,300 11,200 4,400 3,000 3,100 1,300 800 200 200 100 Total Expenses 5,214,124 1,924,876 1,295,822 650,833 489,188 440,781 193,707 118,865 35,201 39,522 25,329 Income Before Income Taxes 450,836 130,364 209,458 3,887 -17,588 80,019 27,813 25,135 1,279 -3,762 -5,769 Income Tax Expense ( 40% ) 180,334 52,146 83,783 1,555 -7,035 32,007 11,125 10,054 512 -1,505 -2,307 Net Income After Income Taxes |270,501 78219 125,675 2,332 -10,553 48,011 16,688 15,081 767 -2,257 -3,461

South American Distribution Center Finished Goods Product Number _Totals 1 2 3 4 5 6 7 8 9 10 Units Sold 8,424 2,760 1,872 1,224 744 264 696 432 240 120 72 Total Expenses 4,863,614 1,375,295 971,479 764,948 528,128 166,094 433,970 278,405 170,771 96,687 77,838 Selling Price l 11 525 600 640 680 720 745 770 780 740 1 850 -Sales Revenue 5,239,920 1,449,000 1,123,200 783,360 505,920 190,080 518,520 332,640 187,200 88,800 61,200 Variable Expenses 3,717,647 1,018,116 725,979 593,559 418,659 129,035 336,597 217,208 135,424 78,067 65,004 Contribution To Fixed Expenses 1,522,273 430,884 397,221 189,801 87,21 61,045 181,923 115,432 51,776 10,733 -3,804 Allocated Fixed Overhead 1,028,636 318,737 219,427 154,342 99,107 33,382 87,679 55,179 32,004 16,949 11,830 Regional Warehouse Fixed Overhead (% unit 256,000 83,875 56,889 37,197 22,610 8,023 21,151 13,128 7,293 3,647 2,188 Administrative Overhead (% units sold) 432,700 141,768 96,156 62,871 38,216 13,560 35,750 22,190 12,328 6,164 3,698 Inventory Holding Costs 339,936 93,095 66,382 54,274 38,281 11,799 30,778 19,861 12,383 7,138 5,944 Operating Income 493,637 112,147 177,795 35,460 -11,846 27,663 94,244 60,252 19,772 -6,216 -15,635 Interest Expense 117,331 38,442 26,074 17,048 10,383 3,677 9,694 6,017 3,343 1,671 1,003 Short Term Interest (% units sold).11,331 3,712 2,518 1,646 1,001 355 936 581 323 161 97 Long Term Interest (% units sold) 106,000 34,729 23,556 15,402 9,362 3,322 8,758 5,436 3,020 1,510 906 Total Expenses 4,863,614 1,375,295 971,479 764,948 528,128 166,094 433,970 278,405 170,771 96,687 77,838 Income Before Income Taxes 376,306 73,705 151,721 18,412 -22,208 23,986 84,550 54,235 16,429 -7,887 -16,638 Income Tax Expense ( 35% ) 131,707 25,797 53,102 6,444 -7,773 8,395 29593 18,982 5,750 -2,760 -5,823 Net Income After Income Taxes 244,599 47,908 98,619 11,968 -14,435 1,591 9 54,958 35,253 10,679 -5,126 -10,814

Asia Pacific Distribution Center Finished Goods Product Number Totals 1 2 3 4 5 1 6 1 7 _8 9 10 Units Sold 5,808 816 552 1,800 312 168 312 792 528 312 216 Total Expenses 3,983,995 441,755 310,248 1,213,099 239,097 114,961 212,761 545,673 400,885 265,714 239,801 Selling Price 610 685 750 790 800 800 805 830 785 930 Sales Revenue 4,377,960 497,760 378,120 1,350,000 246,480 134,400 249,600 637,560 438,240 244,920 200,880 Variable Expenses 2,889,296 297,838 211,936 875,643 178,190 83,320 154,060 396,195 298,125 202,577 191,412 Contribution To Fixed Expenses 1,488,664 199,922 166,184 474,357 68,290 51,080 95,540 241,365 140,115 42,343 9,468 Allocated Fixed Overhead 1,023,492 133,912 91,544 315,388 57,082 29,582 54,876 139,768 96,287 59,312 45,741 Regional Warehouse Fixed Overhead (% unit 375,000 52,686 35,640 116,219 20,145 10,847 20,145 51,136 34,091 20,145 13,946 Administrative Overhead (% units sold) 384,300 53,993 36,524 119,101 20,644 11,116 20,644 52,405 34,936 20,644 14,292 Inventory Holding Costs 264,192 27,234 19,379 80,067 16,293 7,619 14,087 36,227 27,260 18,523 17,502 Operating Income 465,171 66,009 74,640 158,969 11,208 21,498 40,664 101,597 43,828 -16,969 -36,273 Interest Expense 71,206 10,004 6,768 22,068 3,825 2,060 3,825 9,710 6,473 3,825 2,648 Short Term Interest (%.units sold) 8,806 1,237 837 2,729 473 255 473 1,201 801 473 328 Long Term Interest (% units sold) 62,400 8,767 5,931 19,339 3,352 1,805 3,352 8,509 5,673 3,352 2,321 Total Expenses 3,983,995 441,755 310,248 1,213,099 239,097 114,961 212,761 545,673 400,885 265,714 239,801 Income; BIotoro Income Taxei 393,965 56,005 67,872 136,901 7,383 19,439 36,839 91,887 37,355 -20,794 -38,921 Income Tax Expense ( 28% ) 110,310 15,681 19,004 38,332 2,067 5,443 10,315 25,728 10,459 -5,822 -10,898 |Net Income After Income Taxes 1_ 283,655 40,324, 48,868 | 98,569 | 5,316 13,996, 26,524 66,159 26,895 -14,972 -28,023

Nova Corporate Finished Goods Product Number Totals ir 1 2 3 4 5 6 7 8 9 10 Units Sold 52,968 21,864 13,320 5,832 4,056 2,448 2,016 1,704 888 528 312 Total Expenses................... 24,169,380 8,598,819 5,473,531 3,172,759 2,363,776 1,244,105 1,086,846 973,524 573,848 383,721 298,450 Sales Revenue 29,994,360 10,615,920 6,953,760 3,828,120 2,711,520 1,674,720 1,480,680 1,328,040 714,720 405,240 281,640 Variable Expenses 10,925,880 3,745,859 2,387,971 1,439,242 1,359,005 613,887 441,822 439,749 218,743 143,710 135,892 Material (including transportation & handli] 5,993,333 1,889,662 1,173,420 950,408 915,564 304,666 247,681 217,143 126,002 84,270 84,516 Direct Labor 4,932,547 1,856,197 1,214,551 488,834 443,440 309,221 194,141 222,606 92,741 59,440 51,376 Fixed Expenses 12,718,051 4,657,304 2,963,832 1,661,572 965,278 608,165 620,199 510,310 341,516 232,156 157,720 Allocated Manufacturing Overhead 2,435,644 951,469 598,011 347,627 137,459 89,437 132,391 63,694 62,397 39,528 13,631 Allocated Depreciation 1,823,444 698,850 443,880 281,872 89,378 60,417 109,661 43,494 52,385 33,575 9,932 Material Handling, Tooling, Utilities, e 612,200 252,619 154,131 65,754 48,082 29,020 22,730 20,200 10,012 5,953 3,699 Allocated Fixed Overhead 10,282,407 3,705,835 2,365,821 1,313,945 827,818 518,728 487,808 446,616 279,119 192,628 144,089 Picking And Packing 54,750 20,632 13,451 5,806 4,642 3,237 2,306 2,330 1,101 706 538 Central Warehouse Fixed Overhead 763,000 288,318 186,632 91,125 57,173 39,868 36,190 28,701 17,288 11,080 6,624 Regional Warehouse Fixed Overhead 1,808,700 685,761 422,398 242,649 133,252 82,998 72,711 79,684 45,216 26,970 17,061 Factory Administrative Overhead 818,400 309,527 199,896 101,321 58,688 40,924 40,240 29,461 19,223 12,320 6,799 Regional Warehouse Administrative Overhe 2,179,900 830,709 514,961 283,547 162,731 100,497 94,452 92,483 51,422 30,242 18,857 Engineering Overhead 600,000 100,000 100,000 50,000 50,000 50,000 50,000 50,000 50,000 50,000 50,000 Raw Material Holding 204,343 76,844 50,371 19,558 18,881 13,166 7,767 9,478 3,710 2,378 2,188 Finished Goods Holding at Factories 590,376 222,174 145,363 58,584 53,020 36,972 23,267 26,616 11,114 7,124 6,143 Finished Goods Holding at Regional Wareh 1,277,575 351,594 235,131 227,615 148,433 65,966 80,076 68,627 44,455 30,646 25,033 Unabsorbed Direct Labor 1,403,453 578,793 354,056 144,175 115,008 69,413 49,838 48,317 21,953 13,053 8,847 Unabsorbed Depreciation 581,909 241,482 143,561 89,565 25,990 15,686 30,961 10,919 13,638 8,109 1,999 Operating Income 6.350,429 2,212,757 1,601,957 727,306 387,238 452,668 418,659 377,981 154,461 29,374 -11,972 Interest Expense 525,449 195,656 121,729 71,945 39,494 22,053 24,825 23,465 13,588 7,856 4,839 Short Term Interest 68,169 25,719 16,062 8,691 5,388 3,262 2,884 3,034 1,580 929 620 Long Term Interest 457,280 169,936 105,667 63,254 34,106 18,790 21,942 20,430 12,008 6,927 4,219 Total Expenses 24,169,380 8,598,819 5,473,531 3,172,759 2,363,776 1,244,105 1,086,846 973,524 573,848 383,721 298,450 Income Before Income Taxes 5,824,980 2,017,101 1,480,229 655,361 347,744 430,615 393,834 354,516 140,872 21,519 -16,810 Income Tax Expense 2,154,700 751,486 553,041 215,721 142,503 170,195 139,256 129,161 45,957 8,157 -777 Net Income After Income Taxes 3,670,281 1,265,615 927,188 439,640 205,241 260,420 254,577 225,355 94,915 13,362 -16,034