Question

J&L Packaging, Inc.: Cash-to-Cash Conversion Cycle Case Study

Jake and Lilly Gifford founded J&L Packaging, Inc. (J&LP) in 1995 after graduating from the University of Cincinnati. Jake earned a degree in robotics and mechanical engineering, while Lilly graduated with a degree in computer science. They met at the university while working on an information systems course project and married immediately after graduation. Their privately held firm manufactured cardboard packaging and boxes for computer devices such as personal computers, keyboards, replacement hard drives, servers, and so on. Many of their packages were high-end boxes with glossy finishes and the company’s logo on the box. Last year, J&L Packaging, Inc. sales were $106 million.

J&LP Packaging provided many services with their products, such as box and packaging design engineering and consulting, embossing and foil guidance, barcode advice, cartons that fold and collapse for easy storage, and a variety of colors and box strengths. In 2010, J&LP began to research the sustainability issues regarding boxes in the reverse logistics supply chain.Their research lead to a change in production technologies to accommodate up to 100 percent recycled fiber content and solar panels on the roofs of their two U.S. factories. They also hired an engineer to lead the company’s efforts to become a “Green Cycle”-certified manufacturer.

J&LP recently purchased and installed an ISOWA FALCON state-of-the-art, four-color, high-speed flexo box machine with an extensive zero defects quality control system. This box cutting and fabrication machine is manufactured in Kasugai, Japan, by the ISOWA Corporation (www.isowa.com). There are several videos of this automated machine in operation on YouTube,” for example https://www.youtube.com/watch?v5XofTns666Aw.

J&LP’s financial information for last year follows. It is assumed the business operates 300 days per year. One note in J&LP financial statement states that the $4,906,000 of inventory does not include $886,000 in inventory allowances for excess, cancelled orders, and obsolete inventories. The note goes on to say, “Inventory management remains an area of focus as we balance the need to maintain strategic inventory levels to ensure competitive lead times versus the risk of inventory obsolescence because of changing technology and customer requirements. The box and packaging business is a dynamic industry that must quickly accommodate customer requirements, changes in forecasts, and new findings from research and development on product features and options.” The following data (in thousands of dollars $) is provided.

Sales
• Manufactured Goods	$87,475
• Services	$18,619
• Total	$106,094
Cost of Sales
• Manufactured Goods	$25,818
• Services	$ 5,907
• Total	$31,725
Operating Expenses
• Research and Development	$17,619
• Sales and Marketing	$23,132
• Other	$ 6,182
• Total	$46,933
Obsolete Inventories	$ 886
Inventories	$ 4,906
Accounts Receivable	$ 7,593
Accounts Payable	$ 9,338

1. Should we consider services in the cash-to-cash conversion cycle computations?
2. How will you handle the $886,000 in obsolete inventory?
3. What is the total cash-to-cash conversion cycle for J&L Packaging, Inc. for last year?
4. What are your conclusions and final recommendations?

Answer 1

Q1 - Answer - Yes, we need to consider services in cash-to-cash conversion cycle. As the primary business of J&LP was of manufacturing of cardboard baxes for computer and its equipments. Services which they are providing is design engineering and consulting, embossing and foil guidance, barcode advice, cartons that fold and collapse for easy storage, and a variety of colors and box strengths. Hence the services become integrial part of manufacturing business, so we need to consider services in the cash-to-cash conversion cycle computations.

Q2 - Answer - As J&LP operates in manufacturing of cardboard boxes which was very industry and product specific and the industry in which they operates is very dynamic that must quickly accommodate customer requirements, changes in forecasts, and new findings from research and development on product features and options. $ 886k inventry was consist of inventory allowances for excess, cancelled orders, and obsolete inventories. Hence the same should be get consider for closing stock as the same should get write off in income statement.

Q3 - Answer- The total cash-to-cash conversion cycle for J&L Packing Inc. for last year was Sale - 106,904 (-) Cost of sale - 32,725 (-) Operating Expenses - 46,933 = Cash-to-cash - 27,246.

Q4 - Answer - J&LP should write off $886,000 on account of obsulate inventory. On recommendations side they should plan for Just in time inventory management system due to which there handling and carrying cost will reduce.