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... of handling big jobs. SMC can modify its current mower to influence consumers to similarly perceive its products. Finally, Smc's newly developed high-wheel string trimmer, the Trim-Max, also provides it with an opportunity to tap a new product market. This can be launched in the metropolitan or the non-metropolitan areas. Threats The characteristics of the sales trend of Smc's riding mowers tend to indicate that the product is in the mature stage of its life cycle (Smc's sales trend is stagnant while the industry sales trend is rising).
This is a threat that SMC must promptly manage. In summary, SMC has strengths in its production expertise, quality assurance and profitability, but is weak in market penetration and expansion. It has opportunities to expand its production and sales, but is also under the threats of risks associated with high reliance on a matured product. Evaluation of the Private-Brand Proposal Reject or Accept Proposal Private-brand offer Pros Cons Accept Opportunity to immediately expand sales distribution and increase sales by three-fold Utilisation of excess capacity Lower sales expenses Long-term benefits SMC can terminate contract with 6 -month notice if loss is greater than expected in the first year Chain unlikely to terminate contract due to high set-up costs Greater exposure to liability claims Cannibalism existing sales Higher financing costs May not be able to cope with over-capacity if sales demand increases Over-reliance on private-branding sales Financial loss Reject Status quo no short-term financial loss and still maintain annual profit of $ 400 K Limited relationship with private-branding retailers Competition & loss of long-term profit if other manufacturers take up the offer Need to look for other means to expand business Pros of Accepting Private-Brand Offer By accepting the Private-Brand Offer, SMC will be able to revive its stagnant business and immediately increase sales volume by two folds, from current annual sales of 4, 200 units to 12, 400 units. Sales for spare parts will also increase correspondingly. In addition, by tapping onto the larger distribution network of the chain, SMC can expand its business into the northern and western United States.
At the present, most of Smc's distributors are located at central and eastern United States. SMC is currently under-utilising its facility at only 42 % of total production capability. Accepting the offer will increase machine utilisation rate (based on depreciation expenses) from $ 0. 15 / unit to $ 0. 55 / unit. The offer will also lower the current sales and administration expenses rate, as the Chain will supply all advertising related to the private-branding product. SMC need not have to employ additional sales representatives. If this private-branding opportunity turns out well, both parties are likely to extend the boundaries of the contract.
Future contracted annual volume may increase, and SMC can even introduce more products to be included in the distribution. For instance, SMC can bring in its new product, Trim-Max to the expanded distribution network. Both parties are not bounded by the contract in the long term. In the event that actual losses are more than expected in the first six months, SMC can terminate the contract by giving a 6 -month notice and minimise future losses. On the other hand, it is unlikely that the Chain will not go for a long-term relationship with SMC. Set-up cost of getting another supplier is high, and ultimate customers may be dissatisfied if products were terminated.
Cons of Accepting Private-Brand Offer With broaden distribution and higher volume as a result of taking up the private branding offer, there will be greater exposure to liability claims, although SMC has not experienced any significant product-liability claims for products sold or used since 1956, and it is thus unlikely that the risk of exposure will increase substantially in the short term. In addition, existing sales can be cannibalism by private-label sales, although the negative impact on the income statement as a result of the cannibalization is not material. SMC will have to incur additional costs to finance its higher cash requirement due to higher inventory and accounts receivable level as a result of taking up the offer. Financing costs is expected to increase by $ 78, 000 and $ 59, 000 respectively, assuming current 60 inventory days and 45 days credit term. With private-branding sales, SMC will be able to operate at 24 % above its existing production capacity. If demand were to increase in the future, the factory may not be able to cope with the higher requirement.
SMC may need to consider expanding its production facilities in the future. In addition, accepting the offer will result in increasing its private-branding sales from existing 40 % of current sales to 80 %. Such over-reliance on private-branding sales is dangerous if the organisations were to terminate the contract suddenly. Except for all the above-mentioned cons, the most damaging factor is that SMC would suffer huge income losses if the offer were accepted (see Table 1). In fact, further calculations would show that the company would continue to see red for the next 10 years. Profit would only be made from the eleventh year onwards.
Thus, based on financial grounds, the offer should not be accepted. Pros of Rejecting Private-Brand Offer If SMC rejects the offer, and assuming ceteris paribus, the company will remain status quo and enjoy a yearly profit of about $ 400, 000 with stable business. At the same time, SMC can devote more time and effort in building its own brand and expanding its network. Cons of Rejecting Private-Brand Offer Private-branding represents the biggest share of total industry sales (about 70 %). SMC will be going against the industry trend and may miss out opportunities if it rejects the offer and constrains itself to only 40 % of its sales in private-branding. If SMC rejects the offer, the Chain will approach other manufacturers to take up the opportunity.
Future competition would increase and market share would be reduced. There would be difficulty defending itself and protecting the existing sales. In addition, the private-brand offer represents a rare opportunity and quick solution to expand Smc's existing market share. If the offer is rejected, SMC has to find other means to revive its stagnant business. Even if a solution were found, it will take an extremely long time to triple sales volume. TABLE 1: Assumptions and...
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