Baldwin Bicycle Case

BALDWIN BICYCLE COMPANY

WHO?
Ms. Suzanne Leister (SL), BALDWIN BICYCLE COMPANY (BBC) Karl Knott (KK), HI-VALUE STORES INC. (HVS)

WHEN?
May 1983

WHERE?

HI-VALU
Chain of discount department stores in the northwest. Adding house brands. Approached Baldwin about having Baldwin produce bicycles. Would bear the name challenger.

HI-VALU PROPOSAL
1. Need ready access to large inventory, (HVS has difficulty in predicting sales) 2. HVS would store inventory in regional warehouses. 3. Title would not pass until shipped to a particular store. 4. Upon shipment, payment will be due in 30 days.

HI-VALU PROPOSAL (contd.)

5. Title passes automatically when bicycle has been in warehouse 120 days. 6. HVS pays in 30 days. 7. HVS estimated an average bicycle would remain in the warehouse 2 months. 8. HVS desired to sell Challenger bicycles at lower prices than their name-brand bicycles. Did not want to take sales away from their name brands.

HI-VALU PROPOSAL (contd.)

9. Wanted BBC to sell them at prices lower than the wholesale prices sold through normal channels. 10.Wanted the Challenger to be different from other BBC bicycles. 11.Wanted different fenders, seats, and handlebars. 12.Wanted the Challenger name on the bicycle. 13.The packing boxes would have the HVS and Challenger names

HI-VALU PROPOSAL (contd.)

14.Ms. SL (Baldwins Mktg. VP) thought those requirements would increase purchasing, inventory, and production costs over and above costs of a similar increase in BBC volume. 15.Bicycle boom has flattened.

THE CURRENT STATUS

BBC Plant at 75% capacity. Added volume is attractive. HVS will agree to buy house brand bicycles exclusively from BBC for 3year period, with automatic extension unless either party gives notice.

Q.1 ) What are the important features of this case?

BBC is a mid-range full-line bicycle manufacturing company. It distributed exclusively through independently-owned retailers & speciality bicycle shops. Hi-Valu was a discount department store. Hi-Valu had proposed a private-label agreement. Result in cannibalization of an estimated 3000 units. Terms of the proposal deviated from the standard practice. Relevant Cost Analysis revealed that Challenger deal could be lucrative source of incremental revenue

Data pertinent to Hi-Valu proposal

Q.2) Bring out the data pertinent to Hi-Valu proposal?

1. Estimated first-year costs of producing Challenger bicycles (average unit costs) a. Materials $39.80 b. Labor... $19.60 c. Overhead ( @125% of labor) $24.50 $83.90 (approx.. $84) 2. Unit price and annual volume. Hi-Valu estimates that it will need 25,000 bikes a year & proposes to pay an average of $92.29 per bike for the first year).* price will increase in proportion to inflation -specified in contract containing inflation escalation clause]. 3. Asset related costs (annual variable cost) a. Pretax cost of funds (to finance receivables/inventories)...18.0%

b. Record keeping costs (for receivables/inventories)......1.0

c. Inventory insurance.. ..0.3 d. State property tax on inventory...0.7 e. Inventory handling labor and equipment...3.0 f. Pilferage, Obsolescence, breakage, etc0.5

4. Assumptions for Challenger-related added inventories. a. Materials: Two months supply b. WIP: 1,000 bikes, half completed (but all materials for them issued) c. Finished goods: 500 bikes (awaiting to get into Hi-Valus warehouse). 5. Impact on regular sales: Some customers compare the bikes and may recognize Challenger bike as a good value bike when compared with other bikes. In 1982, Baldwin sold approx. 99,000 bikes.

a. It will sell 1,00,000 bikes if it do not accept the proposal.

b. If it accepts the proposal, Baldwin will lose about 3,000 units per year.