DECEMBER 9, 2008
WILLIAM E. BRUNS
SHARON M. BRUNS
Merrimack Tractors and Mowers, Inc.:
LIFO or FIFO?
Ricardo “Rick” Martino, president and chief operating officer of Merrimack Tractors and Mowers, Inc., of Nashua, New Hampshire, felt that his job had grown much more complicated during 2007 and 2008. Merrimack was a major regional manufacturer and seller of large commercial grass mowers based on a design developed by his grandfather in the years after World War II. The company’s major competitors were John Deere, The Toro Company, Simplicity, and Husqvarna—much older and larger corporations with extensive lines of lawn care and maintenance equipment. Originally, Merrimack mowers were manufactured and assembled in a workshop and factory in Nashua. However, by 2008 the company was buying all of its tractors and machines, manufactured to its specifications, from a contract manufacturer in China, and it was operating almost exclusively as a machine-and-parts designer and distributor. The company had incorporated in 1980, and an initial public offering was followed by additional offerings of shares over the next decade. By 2008 the company had about 4,000 shareholders, including some mutual funds. About 25% of the outstanding stock was held by members of the Martino family, and shares were traded on NASDAQ. Rick had been elected president after the death of his father late in 1995. Martino’s father had initiated several changes and made decisions that led to the company’s current situation. In the early 1980s, management closed down the last manufacturing operations in Nashua. Labor costs in Japan, and later in China, had historically been well below those in the United States, so it made sense to outsource manufacturing to Japanese and, later, Chinese manufacturers. Even with shipping costs, the mowers’ variable cost was substantially less than it would have been in Nashua. The China arrangements had worked well, and there had been no problems meeting demand in Merrimack’s markets at competitive prices. Through the years, the Martinos had thought about expanding beyond their regional base but, in contrast to their competitors who had developed national and international sales forces, had never done so.
However, by 2008 a number of things had changed. Economic development, including activities supporting the 2008 Beijing Olympics Games, had increased wages and labor costs in China, and material and energy costs were also rising. These cost increases were compounded by the ever ________________________________________________________________________________________________________________ Professors William J. Bruns, Jr. (HBS emeritus professor, now at Northeastern University), Sharon M. Bruns (Northeastern University), and Susan Harmeling prepared this case solely as a basis for class discussion and not as an endorsement, a source of primary data, or an illustration of effective or ineffective management. This case is based on general experience. All names and data are fictitious, and any resemblance to actual persons or entities is coincidental.
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3217 | Merrimack Tractors and Mowers, Inc.: LIFO or FIFO?
strengthening value of the Chinese currency (the Yuan or Renminbi) compared with the U.S. Dollar.1 Loyal suppliers had no choice but to raise prices they charged Merrimack for the mowers they manufactured. Rising oil prices had also increased...
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