Assignment No.

2
West Lake Home Furnishing Limited

A report submitted to

Prof. MM Monippally
&
Ms. Shibani Shah

In partial fulfillment of the requirements of the course

Written Analysis and Communication-I
On
08/02/08
By

Section C

INDIAN INSTITUTE OF MANAGEMENT, AHMEDABAD

Letter of Transmittal
May 30, 2007

To,
Mr. Charles Bowman
Chief Executive Officer
West Lake Home Furnishings Limited

From,
Students
WIMWI

Subject: Report on whether West Lake Home Furnishings Ltd. should

accept the proposal by US based Retail Chain
This report analyses the viability of accepting the proposal by US based
Retail Chain (USRC) against the backdrop of a highly competitive
lighting and lighting fixture retail market in Canada. After insightful
considerations, it is recommended that West Lake Home Furnishings Ltd
(West Lake) should accept the proposal.

Executive Summary
USRC has proposed prominent shelf space and a quintuple rise in the
sales of West Lakes signature line, provided West Lake brings down the
retail cost from $69.99 to $29.99. Considering a competitive Canadian
retail market, this proposal could entice other retailers to enforce a
reduction in their retail price, thereby reducing the gross margins. The
lower retail price may hamper West Lakes potential to get into the
luxury segment. But USRC being the biggest retailer for West Lake, a
successful deal would greatly(enhance) total sales turnover, its overall
profits and improve its negative operating cash flows. Hence West Lake is
recommended to accept the offer.

Word Count: 108

TABLE OF CONTENTS

1. Situation Analysis...........................................................................1
2. Problem Statement.........................................................................2
3. Options............................................................................................2
4. Criteria for evaluation...................................................................2
5. Evaluation of Options....................................................................3
6. The Recommendation..................................................................35
7. Action Plan....................................................................................36
8. Exhibit...........................................................................................37

Situation Analysis
In the month of May, 2007 West Lake was considering a proposal made
by one of its top three wholesale customers (hereafter referred to as
USRC) to reduce the retail price of a signature line of decorative lamps
from $69.99 to $29.99 for a period of one year. In lieu, the retailer had
offered to give the product prominent shelf space and the possible
potential to more than quintuple the wholesalers unit sales from this
retailer. West Lake primarily dealt in the Canadian market in the mid and
premium priced range of lighting and lighting fixture. However the
signature line of West Lake was sold only by USRC.(case facts)
In 2006, the Canadian retail market for lighting and lighting fixture had
recorded sales of $900 million out of more than $200 million total sales.
Impressive growth rates, rising income level of consumers, outsourcing
of manufacturing units to low cost Asian countries (especially China),
penetration of new entrants, had made the market highly competitive. The
retailers increasing stress on quality, timely delivery and responsiveness
of the supplier had not only intensified the competitive nature of the
market but their insistence on on-time delivery had substantially
increased the inventory requirements.
At this juncture, accepting the proposal, would not only increase the Sales
and Administrative expenses, Shipping and Warehouse expenses, it would

also entice its other two big retailers to enforce lower wholesale prices for
its products, thereby pulling down the gross margins as a percentage of
sales. Although West Lake had a retail store and started Interest based
sales, wholesale still accounts for two-third of its total sales. More
importantly, with a growth rate of 0.9% Year-on-Year, a market share of
less than two percent and with new entrants targeting West Lakes
retailers primarily on price, it cannot afford to lose USRC which had
attributed to 23.83% of the formers overall sales turnover in 2006.
Besides, accepting the offer would also boost its total sales, subsequently
increasing its brand recognition and facilitating its goal to become price
competitive and prominent.

Problem Statement
Should West Lake accept USRCs proposal?

Options
1. West Lake should accept the offer made by USRC.
2. West Lake should decline the offer made by USRC.

Criteria for evaluation

a. The decision must improve the financial position(??) of the
company.
b. The decision must be consistent with the goals set by the company.
c. The decision should put other competing firms at a disadvantage.
(why should it bother?)
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Evaluation of Options
1. West Lake should decline the offer made by USRC.
a. The deal must improve the financial position of the company
The USRC deal will drive down the gross margins of West Lake
from 38.76% to 21.54% [Exhibit] .The current gross margin of the
wholesale business is at 38.75%. Accepting this deal will mean similar
concessions from the other retailers and eventually drive down the gross
margins in the entire wholesale retail business to 21.54%.
Secondly the deal will mean enhanced inventory requirements.
West Lake already has an inventory exposure of $1.6 million and
accepting this deal will increase the inventory to $1.76 million
[Exhibit].This is adding to a cash outflow of $9600 [Exhibit].If other
retailers request similar concessions the inventory requirements as well as
the cash outflow will further increase.
b. Decision must be consistent with the goals of the company
West Lake will lose on price competitiveness if it refuses USRC.
However if it accepts (irrelevant here)the offer it might become a product
for lower mid priced market , thereby possibly losing the opportunity to
become a major player in the luxury market. The luxury market has
significant potential and West Lake is yet to put in substantial efforts to
capture this market.

c. The decision should put competing firms at a disadvantage.

Newer entrants, entering the market are looking to compete with
West Lake primarily on price and are targeting its retail accounts. USRC
being the biggest retailer, West Lakes refusal might lead to severing
business relationships with USRC. There is a possibility USRC will get
the price it is asking from other suppliers or from the Chinese
manufacturers. Consequently other retailers will ask for similar
concessions from West Lake.(not clear)

2. West Lake should accept the offer made by the USRC

a. The deal must improve the financial position of the company
The deal will increase the profits as well as the cash in hand of
West Lake [Exhibit]. Extra cash will help West Lake recover from
negative cash flows .The cash getting stuck up in the inventory will be
reduced and West Lake will avoid the interest on the line of credit. This
will lead to greater profits in the future.(how?)
b. Decision must be consistent with the goals of the company
Accepting the deal will give West Lake prominent shelf space in
the stores of USRC. Retail customers prefer one stop shops and a
prominent display will increase the brand recall of the West Lake brand.
The brand recall will promote the internet business thereby improving the
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performance of paid search advertising. Accepting the offer might enable

West Lake to cut its costs across the wholesale, retail and internet
businesses.
c. The decision should put other competitive firms at a disadvantage
The offer made by USRC will allow West Lake to source cheap
from its suppliers in China thereby permitting West Lake to set lower
price points for its retail and internet business. The demand in the home
furnishing market is projected to increase in the near future leading to an
increase in profits.
New players entering the market are competing on price and
targeting the retail accounts of West Lake. This agreement will enable
West Lake to deal with both these challenges.
In due course of time other retailers might negotiate with West
Lake for similar concessions .This will further increase sales volumes and
eventually decrease costs.

The Recommendation
West Lake should accept the offer made by USRC as it would ensure
higher sales turnover, a considerable competitive edge over the new
entrants and a much greater visibility in the overall Canadian retail
market, thereby meeting its goals to be price competitive and a highly
recognisable brand.

Action Plan
Ensure that the supply from China for the increased production
order is delivered on time at the warehouse.
Extend the capacity of warehouse to facilitate the storing of
increased inventory.(that is not possible)
Get to know the delivery schedules of USRC and plan to minimise
the inventory costs.
Focus on internet based sales and custom designs for the luxury
market by capitalising on the enhanced brand visibility.(vague)
Word Count: 1091

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Exhibit
Analysis of the USRC Deal
(All values in $)
Description
Total Revenues
Revenue from the USRC
Price of Goods Sold to USRC by West Lake
No of Units sold by West Lake to USRC
Cost per unit for West Lake
Cost of Goods Sold
S,G and A Expenses for USRC **
SG&A Expenses as percentage of Sales for USRC
S&W Expenses for USRC***
S&W Expenses for USRC as a percentage of Sales
Credit Line for the year for USRC due to increased
inventory
Interest due to Credit Line @ 6%
Gross margin
Net Profit
Increase in Profit
Percentage Increase in Profit(YoY)
Gross Margin as a Percentage of Sales

Before the
proposal
11200000.00
2666666.66
48.99
54430.00
30.00
1632900.00
650406.50
24.39
197619.05
7.41

After the
proposal
15470845.06
6937511.73
25.49
272150.00
20.00
5443000.00
780487.80
5.04
494047.62
3.19

0.00
0.00
1033766.66
185741.11

160000.00
9600.00
1494511.73
210376.30
24635.19
13.26
21.54

38.77

The details of the calculations are not mentioned

*All values are in $ unless mentioned explicitly

** Given that the SG&A expenses will rise by 30% specific to the retail
account due to the proposal
***Given that S&W expenses will rise by 150% specific to the retail
account due to the proposal
Assumptions:
Any Increase in Credit Line will have to be financed using interest
paying loans.
S,G&A and S&W expenses have been calculated assuming
proportionality with the sales in the year 2006.
Effects of the offer have been projected assuming the costs and
revenues associated with other retailers, retail business and internet
are constant.

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