West Lake Home Furnishing Ltd.

Report

WAC-1

Submitted By:
Himanshu Agrawal (P16002)
Date of Submission: 24/12/2016

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Table of Contents
West Lake Home Furnishing Ltd. Report...............................................................................................................1
Letter of Transmittal................................................................................................................................................2
Executive Summary................................................................................................................................................3
Situation Analysis....................................................................................................................................................5
Problem Statement..................................................................................................................................................6
Options.....................................................................................................................................................................6
Criteria for evaluation.............................................................................................................................................6
Evaluation of Options..............................................................................................................................................6
Recommendation.....................................................................................................................................................8
Action Plan..............................................................................................................................................................8
Exhibits....................................................................................................................................................................9
Exhibit 1..............................................................................................................................................................9

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Letter of Transmittal
May 25th, 2007
To,
Mr. Charles Bowman
Chief Executive Officer
West Lake Home Furnishings Limited

Subject: A full 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 proposition by US based Retail Chain in a
highly competitive lighting and lighting installation retail market in Canada. After thoughtful
considerations, it is recommended that West Lake Home Furnishings Ltd (West Lake) should
accept the proposition.

From,
Himanshu Agrawal
Consultant

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Executive Summary
A larges US based retail chain has promised quintuple rise in sales of West Lakes signature line
of decorative lamps and a prominent shelf space, if West Lake cut down the retail price from
$69.99 to $29.99. As the Canadian retail market is highly competitive, this proposal could tempt
other retailers to reduce their prices and thereby reducing the gross margin. Lower prices may
hinder West Lakes potential to get into the luxury segment. But this retail chain is the biggest
retailer for West Lake, accepting this deal would greatly enhance their sales turnover, overall
profits, improve cash flows and brand visibility. Therefore, West Lake is recommended to accept
this offer.

Word Count: 111

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Situation Analysis
In Month of May, 2007 West Lake was thinking about a proposal made by one of its top three
wholesale customers to reduce the retail price of signature line of decorative lamps from $69.99
to $29.99 for one year period. In return, the retailer offered to provide the product prominent
shelf space and quintuple sales from this retailer. Customer prefers West Lake products because
their products are modern, priced reasonably and capture quality products also.
In 2006, the Canadian retail market for lighting and lighting fixtures had recorded sales of $900
million. The market is highly competitive due to growth opportunities (though the prices were
decreasing sales were increasing at the rate of 15 percent a year), rising income level of
consumers and outsourcing of manufacturing to low cost Asian countries especially China (90
percent of total manufacturing from Asian countries ), and penetration of new entrants. Inventory
requirements are increasing substantially due to insistence by customers for on-time delivery.
Market is highly fragmented and the highest market share by any company is 5% only, some
companies are competing on price, some on design and other on wide variety of products.
Keeping the market conditions in sight, accepting this proposal, would not only increase the sales
but will increase the West Lakes market share, and market penetration. Due to economies of
scale cost of manufacturing will be lower. Increase in brand awareness will have a positive
impact on the sales on retail and internet business line. As wholesale account for two-third of its
total sales, West Lake cant afford losing a prominent customer like this. If West Lake reject this
offer, customer will go to other supplier and West Lake will lose its price competitive advantage.
On the contrary, accepting this offer, would also increase administrative expenses, shipping and
warehouse expenses and it would also tempt other two big retailer to reduce their prices,
therefore this will pull down the gross profit margins. West Lakes brand value may deteriorate
as it is a 60% price reduction and peoples perception may change about the brand. Also, it will
be difficult for West Lake to increase prices after one year.

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Problem Statement
Should West Lake Home Furnishings Ltd accept US based retail chains proposal?

Options
1. West Lake should accept the offer made by US based retail chain.
2. West Lake should decline the offer made by US based retail chain.

Criteria for evaluation

a. The decision must improve the sales, profits margins, cash flows of the company.
b. The decision should be consistent with the objectives (most recognizable, price
competitive, innovative and best-in class) of the company.
c. The decision should put the West Lake at competitive advantage.

Evaluation of Options
1. West Lake should accept the offer made by US based retail chain.
a. The decision must improve the sales, profits margins, cash flows of the company.
Total revenue will increase by more than $ 4 million (refer exhibit-1). Also, cash liquidity
will be increased and this will help Wet Lake to recover from negative cash flows. Profit
will increase by more than $24000 and YoY profit will rise by 13.28% (refer exhibit-1).
b. The decision should be consistent with the objectives of the company.
Acceptance will provide prominent shelf space in stores, increase the presence in price
competitive market and will increase the market size and brand awareness of the
company. Brand awareness will also enhance internet business and will improve the
performance of paid search advertising. Also Wes Lake might be enabled to cut down
their costs due to economies of scale.
c. The decision should put the West Lake at competitive advantage.

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Acceptance of the offer will allow West Lake to source at cheap prices from China.
Therefore they can set lower prices for retail and internet business also. The demand for
home furnishing market is projected to increase in near future, hence leading to an
increase in profits.
Newer entrants, are looking to compete with West Lakes on the price. As the retail chain
is one of the biggest retailer in US, accepting the offer will put them on advantage as
prices of West Lake will be very competitive now and their visibility will increase in the
market.
2. West Lake should decline the offer made by US based retail chain.
a. The decision must improve the sales, profits margins of the company.
This deal will decrease the gross margins of West Lake from 39% to 22% (refer Exhibit1). Accepting this deal will mean that other two retailers have to reduce their prices and
eventually gross margins of entire wholesale retail business will be brought down to 22%.
Also, inventory requirements will be increase after this deal from current requirement of
$ 1.6 million to $ 1.76 million (refer exhibit-1). This will cost a cash outflow of
$9600(refer exhibit-1). If other retailers demanded similar concession then inventory and
cash outflow level would further increase.
b. The decision should be consistent with the objectives of the company.
West Lake will lose on price competitiveness if they refuses this offer. It will become a
hurdle for West Lakes luxury market as after accepting this offer, West Lake would be
positioned as a price taker brand.
c. The decision should put the West Lake at competitive advantage.
If West Lake refuses the offer, this will lead to severing business relationship with
retailer. As the market is highly competitive, there is a possibility that retailer will get the
price from other supplier and West Lake will lose their potential customers. Also, once
the lower prices have been accepted by other suppliers, West Lakes other retailers will
also ask for price concession in future.

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Recommendation
West Lake should accept the offer made by retail chains because it would ensure higher sales
turnover, low prices would give a competitive edge over the new entrants and make West Lakes
brand more visible in Canadian market, therefore meeting their goals to be price competitive and
a highly recognizable brand.

Action Plan

Timely delivery of order from Asian countries.

Work out the delivery schedule with retailer and plan to minimize the inventory cost as

per the schedule.

Focus on internet based business by capitalizing on enhance brand visibility.

Word Count: 1036

Exhibits
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Exhibit 1
Analysis of Offer *
Description
Total Revenues
Revenue from US Retailer (who provided the offer)
Price of Goods Sold to US retailer by West Lake
No of Units sold by West Lake to US retailer
Cost per unit for West Lake
Cost of Goods Sold
S,G and A Expenses for US Retailer **
S&W Expenses for US Retailer***
Credit Line for the year for US Retailer 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
2666667
49
54422
30
1632900
650406
197619.05

After the proposal

15470845
6937512
25
272110
20
5443000
780487
494047.6

160000

0
1033767
185741

9600
1494512
210376
24635
13.28
21.54

38.77

*All values are in $ unless mentioned explicitly.

** Given that the SGA 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:

For calculation purpose, West Lake signature line of decorative lamp is considered the
only product in wholesale business by West Lake.
Any Increase in Credit Line will have to be financed using interest paying loans.
SG&A and S&W expenses have been calculated assuming proportionality with the sales
in the year 2006.
Costs and revenues associated with other retailers, retail business and internet are
constant.

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