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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-I


on
Aug 2, 2008

By

(Section C)

INDIAN INSTITUTE OF MANAGEMENT


AHMEDABAD

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.........................................................................................

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 WLs
production is sourced at present).
However, WLs 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 USCs 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%.


WLs 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%.
USCs 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 companys 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 USCs growing

presence in the market.


WLs 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 products image as a high end exclusive one. Also,
this product is exclusive to USC and accounts for 1/3 rd of the sales of WL and

hence its future prospects would strongly impact WLs 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.

Negotiate with USC for a retail price of $39.99 and a longer agreement period.
Why will they agree for the change in offer?
Exploit growing market and achieve a healthy growth rate of 10-15%.
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.
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Sales of other product lines and WLs 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.


Financial viability of option.
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
Exploit growing market and achieve a healthy growth rate of 10-15%.
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
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 WLs reputation should not be adversely
affected.
Rejection of this offer could result in the retailer withdrawing his entire portion of
WLs product thus resulting in a net long term loss of $829,883.33 (?)for WL.
Also, USC could jeopardize WLs position through aggressive marketing of

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


Financial viability of option.
Rejection of the offer would not have any direct adverse economic impact on
WLs 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.

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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.
Advertise WLs products among interior decorators in Toronto.

Word Count: 1099.

EXHIBITS:
Exhibit 1: Pie Chart depicting WLs market share in the lighting industry.
Total Sales of West Lake
in 2006
Market for lighting in
2006
% share of Westlake in
total

$11,200,0
00
$900,000,
000
1.24%

Exhibit 2: Porters Five Forces Model for WL.

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Threat from
substitutes products

Bargaining power of
Consumers (USC)

West Lake Home


Furnishings Ltd.

Threat from new


entrants offering
similar products and
pricing aggressively.

Exhibit 3: Projected net profit for the new proposal.

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Threat from
suppliers (Asian
Suppliers)

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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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