A REPORT ON
WEST LAKE HOME FURNISHINGS LTD.
Submitted to
Prof. MM MONIPPALLY and
Shibani Shah
In partial fulfillment of the requirements requirements of the course
Written Analysis and Communication-I on Aug 2, 2008
By
Section C!
IN"IAN INS#I#$#% O& MANA'%M%N# A(M%"A)A"
May 25th, 2007 To, Charles Bowman, Chief Exe!ti"e Offier, #est $a%e &ome '!rnishin(s $t)* Toronto*
'rom, +t!)ent, #M# +ir, +!-.et / Co!rse of ation for the -!siness roosal from a %ey lient* This reort a))resses the iss!e of whether to aet the -!siness roosal of yo!r %ey lient* t resents three otions an) the onsi)erations an) imliations of eah one* The reort resents a )etaile) analysis of eah otion an) ro"i)es a reommen)ation*
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EXECUTIVE SUMMARY
An attrati"e -!siness roosal from a %ey lient whih romises a tremen)o!s -oost of fo!r times its resent sales for a re)!tion of 57*221 in the rie of a ro)!t line has romte) #est $a%e &ome '!rnishin(s $t)* #$3 to reassess its !rrent mar%et osition an) whether it an aet the offer* This offer seems hi(hly l!rati"e the romise is more on "ol!me than money3onsi)erin( that #$ is (rowin( at a mea(re 0*41 as oose) to a mar%et whih is -oomin( at *61* &owe"er, %eein( in min) lon( term onsi)erations, #$ has )ei)e) to ne(otiate with the lient for a riin( of 84*44 an) a fi"e year ontrat for the same* Wor Cou!"# $0%
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TA&LE OF CONTENTS
+T9ATON ANA$:++****************************************************************************************************** 5 PROB$EM +TATEMENT****************************************************************************************************** OPTON+******************************************************************************************************************************* CRTERA 'OR E;A$9ATON*****************************************************************************************
E;A$9ATON O' OPTON+********************************************************************************************** 7 RECOMMEN
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SITUATION ANALYSIS#
#est $a%e &ome '!rnishin(s $t)* #$3, a Cana)a>-ase) man!fat!rer oeratin( thro!(h #holesale, Retail an) nternet, is %nown for its reasona-le riin( an) mo)ern )esi(ns* The omany has a mar%et share of 6*2?1 @Exhi-it 6 in a hi(hly fra(mente) an) ometiti"e se(ment where no layer has a share of more than 51* nrease) ons!mer )eman) has le) to intense ometition amon( existin( an) new layers to at!re the (rowin( mar%et @Exhi-it 2* This has )ri"en ries )own an) le) to the a)otion of ost !ttin( meas!res li%e o!tso!rin( ro)!tion to low>ost man!fat!rin( ones in Asia from where 401 of #$s ro)!tion is so!re) at resent3* &owe"er, #$s :o: (rowth rate for 2005>200 is only 0*41 while the in)!stry has seen a CADR of *61 with !nit sales (rowin( at a-o!t 651* The nee) to ro"i)e F!st in TimeG s!ly to retailers has le) to hi(h in"entory osts res!ltin( in ne(ati"e ash flows )esite ha"in( ma)e rofits3* Also, the entry of two new layers offerin( similar )esi(ns at lower ries a))s ress!re to #$* n this senario, #$ is fae) with an offer -y one of its to three wholesale !stomers* n exhan(e for a 57*221 re)!tion in the retail rie of a si(nat!re line of lams for a year, this 9+>-ase) retail hain 9+C3 has romise) rominent shelf sae in its networ% of stores an) a ossi-le inrease of ?001 in sales* of only that setor3 +!h a stee re)!tion in rie for one arti!lar !stomer wo!l) lea) other !stomers to )eman) similar )iso!nts* Also, wareho!sin( an) stora(e osts wo!l) si(nifiantly inrease from the 200 fi(!re of 6*m*no mention of shelf sae whih )ereases wareho!sin( ost3 At resent #$ is finane) entirely -y its sharehol)ers, -!t it may -e fore) to ta%e a loan an) there-y in!r interest exense3 if it has to exe!te s!h a lar(e or)er* +ine the )eal is for one year, the fate of the ro)!t after that remains !nertain* 5 * P a g e
Also, #$ has omromise) its osition -y re"ealin( too many ro)!tion )etails to 9+C, th!s (i"in( it the (ro!n) to )eman) s!h a s!-stantial re)!tion* Th!s, 9+C o!l) ontat Asian s!liers an) ome o!t with heaer imitations* Aetin( this offer o!l) hel #$ ahie"e its (rowth tar(et of 60>651this exhi-it only shows (rowth of slaes to one lient not the whole or(anisation3 @Exhi-it 8 thro!(h -etter ro)!t "isi-ility* Also, a fo!rfol) inrease in "ol!me wo!l) re)!e so!rin( osts in Asia th!s lea)in( to inrease) mar(ins*
'RO&LEM STATEMENT#
+ho!l) #$ aet 9+Cs offer in its resent formH
O'TIONS#
• •
•
Aet offer in its resent form* Ne(otiate with 9+C for a retail rie of 84*44 an) a lon(er a(reement erio) of 5 years* Re.et offer*
CRITERIA FOR EVALUATION#
• • •
Exloit (rowin( mar%et an) ahie"e at a healthy (rowth rate of 60>651* #$s re!tation an) sales of other ro)!t lines sho!l) not -e a)"ersely affete)* 'inanial "ia-ility of otion*what is finanial "ia-ility,is it ash r!nh or in"entory mana(ement3
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EVALUATION OF O'TIONS#
A(()*" "+) o)r -! -" *r))!" or/. E*1o-" gro-!g /3r4)" 3! 3(+-)5) 3 +)31"+6 gro"+ r3") o $07$9. • 9+Cs offer (!arantees (rowth of o"er 601 @Exhi-it 8the analysis is limite) to
this wholesaler alone,how it affets the other wholesalers is not ta%en into ao!nt3 whih is in %eein( with the omanys tar(et* Cons!mers are %nown to refer lar(er retail hains so this strate(y wo!l) ro"i)e -etter exos!re to the ro)!t an) hene inrease sales* This wo!l) -e f!rther stren(thene) -y 9+Cs (rowin(
•
resene in the mar%et* WL: r)*u"3"-o! 3! 31) o o"+)r *rou(" 1-!) +ou1 !o" ;) 35)r)16 3)("). The )eal wo!l) reI!ire hea"y in"estments in terms of ro!rement an) stora(e of
in"entory for a short term erio) of only one year* A )rasti re)!tion in rie wo!l) a)"ersely imat the ro)!ts ima(e as a hi(h en) exl!si"e one* Also, this ro)!t is exl!si"e to 9+C an) ao!nts for 6J8r) of the sales of #$ an)
•
hene its f!t!re rosets wo!l) stron(ly imat #$s re"en!e* F-!3!(-31 5-3;-1-"6 o o*"-o!. Aetin( this offer wo!l) hel in ne(otiation with Asian ro)!ers for re)!e) ries in all f!t!re transations lea)in( to a more a((ressi"e riin( strate(y an) a onseI!ent inrease in sales* On the fli si)e, hea"y in"estments wo!l) -e reI!ire) to ro!re an) store 5 times the in"entory* Also a loan may ha"e to -e ta%en to finane the ro!rement of in"entory an) to han)le the inrease in "ol!me*
N)go"-3") -"+ USC or 3 r)"3-1 *r-() o <=>.>> 3! 3 1o!g)r 3gr))/)!" *)r-o. W+6 -11 "+)6 3gr)) or "+) (+3!g) -! o)r? E*1o-" gro-!g /3r4)" 3! 3(+-)5) 3 +)31"+6 gro"+ r3") o $07$9. • Offerin( the ro)!t at 84*44 wo!l) (i"e a sales mar(in of 4,256,24*0 th!s
ahie"in( its tar(et of 60>651 sales (rowth* 7 * P a g e
•
S31) o o"+)r *rou(" 1-!) 3! WL: r)*u"3"-o! +ou1 !o" ;) 35)r)16 3)("). A lon(er a(reement erio) say 5 years3 wo!l) .!stify the hi(h in"estments ma)e
towar)s in"entory ro!rement an) wareho!sin(* Also, the ro)!t wo!l) retain
•
its ima(e as a hi(h>en) one* F-!3!(-31 5-3;-1-"6 o o*"-o!. A retail rie of 84*44 wo!l) res!lt in a rofit mar(in of 68*44@Exhi-it ? er !nit th!s ma%in( the offer more finanially "ia-le for the omany* +ine the ro)!t !nit sales may not (row -y 5 times @Exhi-its 5 an) , it wo!l) res!lt in losses an) hene this otion seems more "ia-le as it miti(ates this ris%* A hi(her mar(in wo!l) also ne(ate the reI!irement of a loan*
R)@)(" o)r E*1o-" gro-!g /3r4)" 3! 3(+-)5) 3 +)31"+6 gro"+ r3") o $07$9. • The sales of the omany wo!l) ontin!e stat!s I!o (rowth rate 0*413 ro"i)e)
9+C ontin!es to mar%et the ro)!t* The extra money an -e )irete) to tain( the otential mar%et of interior )eorators in Toronto* Also, nternet sales hi(h mar(in of 76*513 o!l) -e romote) thro!(h fo!sse) mar%etin( amai(ns* So "+) "3rg)" - /)" or !o"? •
S31) o o"+)r *rou(" 1-!) 3! WL: r)*u"3"-o! +ou1 !o" ;) 35)r)16 3)("). Re.etion of this offer o!l) res!lt in the retailer with)rawin( his entire ortion of
#$s ro)!t th!s res!ltin( in a net lon( term loss of K24,KK8*88 H3for #$* Also, 9+C o!l) .eoar)ie #$s osition thro!(h a((ressi"e mar%etin( of
•
heaer s!-stit!tes of its ro)!ts th!s res!ltin( in a h!(e loss of re"en!e* F-!3!(-31 5-3;-1-"6 o o*"-o!. Re.etion of the offer wo!l) not ha"e any )iret a)"erse eonomi imat on #$s re"en!e in the short r!n* Ta%in( a loan to f!n) !rhase of in"entory is a"oi)e)* The omany an !se its retaine) earnin(s of 6?7500H3 to f!n) an a)"ertisin( )ri"e to -etter !-liie its ro)!ts*
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RECOMMENDATION# The )etaile) analysis a)"oates ne(otiatin( with 9+C for a retail riin( of
84*44 for a lon(er term of a(reement of 5 years at 651 mar(in*
•
ACTION 'LAN# Ne(otiate with 9+C for ro)!t riin( at 84*44 for an a(reement erio) of 5
•
years* Better romotional strate(y for nternet -!siness setor th!s translatin( into hi(her
•
mar(ins* A)"ertise #$s ro)!ts amon( interior )eorators in Toronto*
Wor Cou!"# $0>>.
EXHI&ITS# E+-;-" $# '-) C+3r" )*-("-!g WL: /3r4)" +3r) -! "+) 1-g+"-!g -!u"r6. Total Sales of West Lake in 2006 Market for ligting in 2006 " sare of Westlake in total
$11,200,0 00 $!00,000, 000 1#24"
E+-;-" 2# 'or")r: F-5) For() Mo)1 or WL.
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Treat fro% s'.stit'tes *rod'+ts
/argaining *o(er of ons'%ers S
West Lake o%e &'rnisings Ltd#
Treat fro% ne( entrants o)ering si%ilar *rod'+ts and *ri+ing aggressiel-#
E+-;-" =# 'ro@)(") !)" *ro-" or "+) !) *ro*o31.
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Treat fro% s'**liers sian S'**liers
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E+-;-" %# 'ro@)(" *ro-" or 3 r)"3-1 *r-() o <=>.>> 3! <%>.>>.
&ow are "al!es for +DA an) +# osts are al!late) is not (i"en 'orm!las !se) for al!lations are not (i"en* E+-;-" # 'ro@)(" -!(o/) 3!316- or 3 u!-" 31) -!(r)3) o 2, =, % 3! "-/).
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E+-;-" # Gr3*+-(31 r)*r))!"3"-o! o "+) 3;o5).
Net rofit on : axis*
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