west lake

A REPORT ON

WEST LAKE HOME FURNISHINGS LTD.

Submitted to

Prof. MM MONIPPALLY

and

Shibani Shah

In partial fulfillment of the requirements of the course

Written Analysis and Communication-Ion

Aug 2, 2008

By

(Section C)

INDIAN INSTITUTE OF MANAGEMENTAHMEDABAD

May 25th, 2007

To,

Charles Bowman,

Chief Executive Officer,

West Lake Home Furnishings Ltd.

Toronto.

From,

Student,

WIMWI

Sir,

Subject – Course of action for the business proposal from a key client.

This report addresses the issue of whether to accept the business proposal of your key client.

It presents three options and the considerations and implications of each one. The report

presents a detailed analysis of each option and provides a recommendation.

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EXECUTIVE SUMMARY

An attractive business proposal from a key client which promises a tremendous boost of four

times its present sales for a reduction of 57.22% in the price of a product line has prompted

West Lake Home Furnishings Ltd. (WL) to reassess its current market position and whether it

can accept the offer. This offer seems highly lucrative (the promise is more on volume than

money)considering that WL is growing at a meagre 0.9% as opposed to a market which is

booming at 6.1%.

However, keeping in mind long term considerations, WL has decided to negotiate with the

client for a pricing of $39.99 and a five year contract for the same.

Word Count: 104

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TABLE OF CONTENTS

SITUATION ANALYSIS...................................................................................................... 5

PROBLEM STATEMENT...................................................................................................... 6

OPTIONS............................................................................................................................... 6

CRITERIA FOR EVALUATION......................................................................................... 6

EVALUATION OF OPTIONS.............................................................................................. 7

RECOMMENDATION.......................................................................................................... 9

PLAN OF ACTION................................................................................................................ 9

EXHIBITS.............................................................................................................................. 10

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SITUATION ANALYSIS:

West Lake Home Furnishings Ltd. (WL), a Canada-based manufacturer operating through

Wholesale, Retail and Internet, is known for its reasonable pricing and modern designs. The

company has a market share of 1.24% [Exhibit 1] in a highly fragmented and competitive

segment where no player has a share of more than 5%. Increased consumer demand has led to

intense competition among existing and new players to capture the growing market [Exhibit

2]. This has driven prices down and led to the adoption of cost cutting measures like

outsourcing production to low-cost manufacturing zones in Asia (from where 90% of WL’s

production is sourced at present).

However, WL’s YoY growth rate for 2005-2006 is only 0.9% while the industry has seen a

CAGR of 6.1% with unit sales growing at about 15%. The need to provide “Just in Time”

supply to retailers has led to high inventory costs resulting in negative cash flows (despite

having made profits). Also, the entry of two new players offering similar designs at lower

prices adds pressure to WL. In this scenario, WL is faced with an offer by one of its top three

wholesale customers. In exchange for a 57.22% reduction in the retail price of a signature

line of lamps for a year, this US-based retail chain (USC) has promised prominent shelf space

in its network of stores and a possible increase of 400% in sales. (of only that sector)

Such a steep reduction in price for one particular customer would lead other customers to

demand similar discounts. Also, warehousing and storage costs would significantly increase

from the 2006 figure of $1.6m.(no mention of shelf space which decreases warehousing cost)

At present WL is financed entirely by its shareholders, but it may be forced to take a loan

(and thereby incur interest expense) if it has to execute such a large order. Since the deal is

for one year, the fate of the product after that remains uncertain.

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Also, WL has compromised its position by revealing too many production details to USC,

thus giving it the ground to demand such a substantial reduction. Thus, USC could contact

Asian suppliers and come out with cheaper imitations.

Accepting this offer could help WL achieve its growth target of 10-15%(this exhibit only

shows growth of slaes to one client not the whole organisation) [Exhibit 3] through better

product visibility. Also, a fourfold increase in volume would reduce sourcing costs in Asia

thus leading to increased margins.

PROBLEM STATEMENT:

Should WL accept USC’s offer in its present form?

OPTIONS:

Accept offer in its present form.

Negotiate with USC for a retail price of $39.99 and a longer agreement period of 5

years.

Reject offer.

CRITERIA FOR EVALUATION:

Exploit growing market and achieve at a healthy growth rate of 10-15%.

WL’s reputation and sales of other product lines should not be adversely affected.

Financial viability of option.(what is financial viability,is it cash crunch or inventory

management)

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EVALUATION OF OPTIONS:

Accept the offer in its present form.

Exploit growing market and achieve a healthy growth rate of 10-15%.

USC’s offer guarantees growth of over 10% [Exhibit 3](the analysis is limited to

this wholesaler alone,how it affets the other wholesalers is not taken into account)

which is in keeping with the company’s target. Consumers are known to prefer

larger retail chains so this strategy would provide better exposure to the product

and hence increase sales. This would be further strengthened by USC’s growing

presence in the market.

WL’s reputation and sales of other product lines should not be adversely

affected.

The deal would require heavy investments in terms of procurement and storage of

inventory for a short term period of only one year. A drastic reduction in price

would adversely impact the product’s image as a high end exclusive one. Also,

this product is exclusive to USC and accounts for 1/3rd of the sales of WL and

hence its future prospects would strongly impact WL’s revenue.

Financial viability of option.

Accepting this offer would help in negotiation with Asian producers for reduced

prices in all future transactions leading to a more aggressive pricing strategy and a

consequent increase in sales. On the flip side, heavy investments would be

required to procure and store 5 times the inventory. Also a loan may have to be

taken to finance the procurement of inventory and to handle the increase in

volume.

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Negotiate with USC for a retail price of $39.99 and a longer agreement period.

Why will they agree for the change in offer?


Offering the product at $39.99 would give a sales margin of $9,251,296.60 thus

achieving its target of 10-15% sales growth.

Sales of other product lines and WL’s reputation should not be adversely

affected.

A longer agreement period (say 5 years) would justify the high investments made

towards inventory procurement and warehousing. Also, the product would retain

its image as a high-end one.


A retail price of $39.99 would result in a profit margin of $13.99[Exhibit 4] per

unit thus making the offer more financially viable for the company. Since the

product unit sales may not grow by 5 times [Exhibits 5 and 6], it would result in

losses and hence this option seems more viable as it mitigates this risk. A higher

margin would also negate the requirement of a loan.

Reject offer


The sales of the company would continue status quo (growth rate 0.9%) provided

USC continues to market the product. The extra money can be directed to tapping

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the potential market of interior decorators in Toronto. Also, Internet sales (high

margin of 71.5%) could be promoted through focussed marketing campaigns.

So the target is met or not?

Sales of other product lines and WL’s reputation should not be adversely

affected.

Rejection of this offer could result in the retailer withdrawing his entire portion of

WL’s product thus resulting in a net long term loss of $829,883.33 (?)for WL.

Also, USC could jeopardize WL’s position through aggressive marketing of

cheaper substitutes of its products thus resulting in a huge loss of revenue.


Rejection of the offer would not have any direct adverse economic impact on

WL’s revenue in the short run. Taking a loan to fund purchase of inventory is

avoided. The company can use its retained earnings of $147500(?) to fund an

advertising drive to better publicize its products.

RECOMMENDATION:

The detailed analysis advocates negotiating with USC for a retail pricing of

$39.99 for a longer term of agreement of 5 years at 15% margin.

ACTION PLAN:

Negotiate with USC for product pricing at $39.99 for an agreement period of 5

years.

Better promotional strategy for Internet business sector thus translating into higher

margins.

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Advertise WL’s products among interior decorators in Toronto.

Word Count: 1099.

EXHIBITS:

Exhibit 1: Pie Chart depicting WL’s market share in the lighting industry.

Total Sales of West Lake in 2006 $11,200,000 Market for lighting in 2006 $900,000,000 % share of Westlake in total 1.24%

Exhibit 2: Porter’s Five Forces Model for WL.

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West Lake Home Furnishings Ltd.

Threat from new entrants offering similar products and pricing aggressively.

Threat from substitutes products

Bargaining power of Consumers (USC)

Threat from suppliers (Asian Suppliers)

Exhibit 3: Projected net profit for the new proposal.

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Exhibit 4: Project profits for a retail price of $39.99 and $49.99.

How are values for SGA and SW costs are calculated is not given

Formulas used for calculations are not given.

Exhibit 5: Project income analysis for a unit sales increase of 2, 3, 4 and 5 times.

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Exhibit 6: Graphical representation of the above.

Net profit on Y axis.

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west lake

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