Guarantee Provision

Laying off the guarantee provision for ISE

Further to the insurance rates given to us by Paul Feek it’s clear that we are in credit with what we have allowed in terms of cash.

If we were to proceed with JTM the following figures apply:

1+5

Each sale generates ……………………….£40.00

Each 4 year parts without BER …………..£22.04

This leaves a total of £17.96 per sale to look after the 1st year parts and labour provision of 1+5 sales.

5+5

Each sale generates (40 + 51.06)………………..….£91.06

Each 4+4 Parts and Labour without BER…………..£50.93

This leaves a total per sale of £40.13 per sale to look after the 1st year parts and labour guarantee of 5+5 sales.

Actual figures

Guarantee cards so far received seem to be 2 to 1 in favour of the 5+5 scheme which means the 164 cards back so far would generate £5361.97 surplus to manage the 1st year guarantee of these 164 appliances. Of course the equation can differ if the ratio alters.

This averages at £32.69 per appliance which is adequate without being brilliant. I see it as imperative that we accumulate this cash reserve in the warranty pot, building us a war chest for a rainy day. If we achieve 8{e5d1b7155a01ef1f3b9c9968eaba33524ee81600d00d4be2b4d93ac2e58cec2d} intervention we will in the fullness of time be rewarded with reasonable profit from this, which as we increase sales will proportionally grow.

If we need to breakaway from CDA in the future we have to consider the following points

1) Our ability to fund 3 months production
2) Our ability to fund 1 months stock (354 appliances)
3) Our ability to sell 354 appliances per month
4) Our ability to buy all stock from CDA to prevent any retaliation

I estimate we will need £296,000 to do the above four points assuming CDA had 1000 appliances in stock. Therefore dealing direct with Beko is not an option at this time, we simply can not fund it.

We can of course help CDA to reduce those levels of stock, insist they buy no more until the stock holding is down to 400, with future orders matching our sales.

Therefore my recommendation is that we plan to withdraw from CDA buy using surplus guarantee provision to fund that withdrawal at a time of our choosing. In the meantime we continue to help CDA reduce stock by purchasing where we can the “summer specials” increasing our margin as we do. As the “summer specials” are limited to around 600 appliances the savings can not be given away on a permanent basis, we therefore should benefit.

The proposed unit for UKW will come into this plan and Sean and Dave are confident we can (if we had too) store 2 containers in the unit. In the meantime we can discreetly seek distribution and storage options for ourselves.
Lastly we can progress the relationship with Beko to enable full negotiation advantages to lie with us as and when required.

I strongly advise against using any surplus to reduce the selling price of the appliance at this time. The estimated £32.69 is flexible and does have to cover provision for the 1st 12 months, we have no history or reliability issues to guide the proposed level of demand on this resource, and therefore we must err on the cautious side. Once (if) we lower the selling price it will be extremely difficult to ever raise it, at this stage in our growth we can not fund any lowering of the selling price.

Just my thoughts on the matter, it will of course be interesting to see what D&G come up with and how the sums alter.

Kevin