Written Analysis and Communication- I

Assignment 3
WEST LAKE HOME FURNISHINGS LTD.
A report submitted to

Prof. Rohini Patel

On
31/08/2014
By

Deepshikha Meena
Section A
Indian Institute of Management Udaipur

MEMORANDUM

Date: May 30, 2007

Charles Bowman, CEO, West Lake Home Furnishings Ltd.
From: Deepshikha Meena, Executive Assistant
SUBJECT: Recommendation regarding acceptance or rejection of offer by XYZ Wholesale
Retailer
As requested, please find attached herewith an analysis of the issues related to the proposal made
by XYZ Wholesale Retailer, and the inherent trade-offs in accepting/ rejecting it. My
recommendations for further course of action are also attached.

Case Analysis Summary

Situation Analysis
West Lake, Home furnishing company surviving with increasing competition, it is a profitable and
reasonably well recognized brand name. It got an offer from one of West Lakes top wholesale
customers on their signature line of decorative lamps to reduce the price; Charles Bowman is in a
fix.
Problem Statement
Accept or reject the proposal of reducing price from $ 69.99 to $29.99 of one of the West Lakes
clients.
Options
1 Accept the proposal
2 Reject the proposal
Evaluation Criteria
1 Profitability of the business
2 Relationship with Retailer
3 Market
Evaluation
Option 1: Better profitability assured, retailer is also happy get an opportunity to become the
market leader.
Option 2: Concern about profits is there. Relationship with retailers is on stake and also chances
that it will not able to capture the market.
Recommendation
Considering the higher net income and better profitability, increased sales and a good opportunity
to become the market leader with a better relationship with retailers the proposal should be
accepted.

Situation Analysis
West Lake, an attractive firm which has been earning profits consistently with no external longterm debt and sufficient inventory as required by wholesale customers. Although it is, not a
market leader, but it has the potential through various market channels. West Lake offerings
consist of table lamps, floor lamps and lighting fixtures sells through wholesale chains, its retail
outlet and internet website. All market channels are providing an opportunity to reach a wide
range of customers and also with good percentage gross margin. West Lake strength is its
reasonable price points and modern and innovative design. Its home furnishings market has
recorded compound average growth rate of 6.1% from 2002 to 2006; however, there was a
significant fall in average prices but unit sales increased roughly as 15%.Baby boomers(45 to
64), major segment reflects potential market that is more spending on home furnishing. On the
other hand, the lightings and fixtures, another significant segment with the top five major
competitors had a combined share of 20 percent and banking mostly on competitive designs.
Private-label lightning and other small firms accounted for remaining 80%.
West Lake sold its product in three national wholesale chains, small retailers
and on the internet. The three chains account for approximately 71% of the
companys wholesale sector. Hence, business is largely dependent on large
order customers who integrate sales and market penetration, while also
being more cost efficient. However due to increasing awareness of Asia as a
low-cost production base and consumers growing interest in home
furnishings, and many new competitors forced to shift its manufacturing unit
to Asia. Because of all these changes large retailers opened sourcing offices
to buy directly from the local manufacturer so that consumers get access to
a variety of merchandise at lower prices. This results into high inventory
stock with manufacturers so that they can manage their supply chain costs
by keeping in mind the just in time approach for satisfying suppliers.
In this case, one of West Lakes top wholesale customer and nationwide retail
chain offers its product a prominent shelf space and the potential to more
4

than quintuple unit sales if it would drop the retail price of a signature line of
decorative lamps from $69.99 to $29.99. Bowman found the prospect of
boosting sales attractive, but also worried that acceptance of the offer could
force reduction of price in other market channels but if he reject this offer
then it might be possible that Chinese replicate West Lakes signature line.
Now, Charles Bowman is faced with a dilemma.
Problem Statement
Accept or reject the proposal of reducing price from $ 69.99 to $29.99 of one of the West Lakes
clients.

Options
1.

Accept the proposal

2.

Reject the proposal

Evaluation Criteria
1.

Profitability of the business

2.

Relationship with retailers

3.

Market

Evaluation
Option 1: - Accept the proposal

Acceptance of the proposal will offer lucrative benefits to West Lake Home Furnishings Ltd. as
if retail price of a signature line reduced for a period of one year then wholesaler give benefit of
prominent shelf space and quintuple sales too. On the other hand, sales have also increased from
$11200000 to $15470787(Exhibit 1).Although S, G&A Expenses and S&W Expenses increased,
operating income and Net earnings of 2007 increased in good volumes as comparison to
2006(Exhibit 1).All these lucrative benefits are increasing profitability of the business.
This will also enhance relationship with retailers as they will get benefit for their business so in
return West Lake will earn trust as intangible asset to its business with other tangible benefits and
in future also these retailers will give all large orders or other benefits to West Lake only.
West Lake is not a market leader, but by accepting the offer it can, as price reduction and getting
prominent shelf sales can boost its sales, and the effect is shown in Exhibit 1 for reference.
Lower Price means more spending on home improvements and more ownership of the home by
consumers result into more income for West Lake.
Option 2: - Reject the proposal
Rejection of the proposal will not be beneficial as sales will not increase that much, and even
this will also affect the net income as rejection means retailers will take gross margin of about
30%.West Lake can lose the opportunity to quintuple its sales.Hence, overall profitability will
not increase in this option.
Rejection can bring that soreness in the relationship with retailers, and this will not impact
retailers but West Lake can lose trust, crucial credit for the company .Retailers can contact
similar suppliers in Asia who would be willing to manufacture a similar looking private label
line. This can also result in fewer orders or no large orders for future by retailers.
West Lake can lose present retailers and all those attractive benefits attached to it.Although its
not a market leader right now but rejection of proposal means losing the opportunity to become a
market leader and deteriorating its present share in market as this news of rejection can spread
negativity among retailers and retailers may think not to give any offer to West Lake in future.

Recommendations: 6

After evaluating all the options under given criteria, it is recommended that Charles Bowman
should accept the proposal for better profitability of the business , good relationship with
retailers and to grab the opportunity to become a market leader in future.

Action Plan: Based on recommendation Charles Bowman should accept the offer and reduce the retail price
of a signature line of decorative lamps from $69.99 to $29.99 and then one one hand West Lake
should try to focus on increasing its market share to become a new market leader and on other
hand it should try to sustain its prices in Wholesale ,retail and internet.

RETAILER
EXHIB

WHO MADE

IT 1

OFFER

TOTAL

TOTAL
WHOL
ESALE

units
2006($)

sold
54430

INTER

TOTAL

(2006)

STORE(

NET(20

TOTAL(

2007($)

2007($)

($)

2006)($)

06)($)

2006)($)
112000

6937454

15470787

8000000

3000000

200000

00
705700

57000

Sales

2666667

COGS
Gross

1143020

3810068

9724048

4900000

2100000

Margin
As a %

1523646

3127386

5746739

3100000

900000

143000 4143000

of sales

57.14%

45.08%

37.15%

38.75%

30.00%

71.50%

714286

857143

3142857

2142857

803571

53571 3000000

197619

494048

1126429

592857

222321

14821

830000

611741
214109.

1776195

1477454

364286

-125893

74607

313000

5156

621668

127500

-44063

26113

109550

397632

1154527

236786

-81830

48495

203450

36.99%

S, G&A
Expens
es
S&W
Expens
es
Operati
ng
Income
Income
Taxes
Net
Earning
s

Number of words-903