Executive Summary
There are two or more alternatives that managers normally confront in various organizations. It is better to pursue an alternative that maximizes value and profit of the organization. This paper is set to discuss a problem that CEO and President of Swisher Mower and Machine Company face.
The company is being approached by a major national retail merchandise chain with a proposal that mentions various terms and conditions for a business deal that targets the purchase of 8,200 units of private-label riding mowers on an annual basis. This paper will show why the acceptance of the new proposal may lead to a loss in the organization.
Through extensive analysis, the researcher found out that SMC should be able to meet a break-even point of 12,822 units if the new proposal is accepted.
Given that the sales of the company as regards to private-labeled riding mowers amount to 40%, it would be risky to accept the proposal since SMC is likely to lose sales via other channels such as wholesale distribution and direct-to-dealer sales. However, if the chains were to accept negotiation over the previous terms in order to reach the break-even point, it would be worth considering the proposal.
Nevertheless, it is quite difficult for the chain to accept negotiation given that there are other competitive manufacturers in the industry. Given the current terms, which interfere with the SMC advertisement and promotion, the management of SMC will not consider the proposal. Therefore, SMC should continue advertising and promoting in order to recruit new dealers. This would expand its market share.
Problem Statement
Swisher Mower and Machine Company began its operations in 1950s. The company deals with a number of products that are concerned with agricultural production and environmental cleaning. Manufacturing of the best mowers in the lawn and garden equipments industry helped the company gain popularity in the US and in other foreign countries.
Max Swisher had been the company’s President Chief Executive Officer for over thirty years. However, after growing old, Mr. Max stepped down to allow his son Mr. Wayne Swisher to manage the company as the CEO and the President. With three years experience in the sales and marketing department, Mr. Wayne was expected to utilize the MBA skills to manage the company in the most effective way.
In early 1996, Mr. Wayne received a proposal from a major national retail merchandise chain inquiring about a private-brand distribution arrangement for SMC’s riding mowers. This is the first proposal Mr. Wayne encountered as the president and the CEO of Swisher Mower and Machine Company.
The administrator thought about the proposal as an opportunity that required keen consideration. This is because the sales of SMC riding mower had stagnated for several years. Nevertheless, Mr. Wayne and his associates had to scrutinize details concerning the proposal since it meant that SMC would change its current distribution practices. This was a challenge for Wayne and the management.
Although the company expected high sales from this new deal, Mr. Wayne wondered whether the current distribution channels would be negatively affected. Presently, the firm issues its lawn mowers through farmhouse stores, lawn and garden supplies, home centers, and hardware stores situated in reserve areas.
From the company’s financial information, it is evident that three quarters of the SMC sales are made in nonmetropolitan areas. SMC sales its Ride King Mower either directly to dealers or through wholesale distributors who later distribute the equipment to various independent dealers.
On the other hand, the new proposal has come with new terms and conditions that Mr. Wayne considers to be worthy of his consideration. Apart from asking for a sample of 700 standard riding mowers at the beginning of the year 1997, the national retail merchandise chain expects to make an annual order of about 8,200 units.
However, the deal appears quite different from the normal business deals the company had with other private-label institutions. The retail merchandise chain needs to purchase a standard mower at 95% of the market price quoted by SMC. Unlike other business deals, this retail merchandise chain did not need any seasonal or promotional discounts but guaranteed low price.
In addition, the chain promised to pay for all freight charges. The chain did not want the title to be transferred to it until the goods were transferred from its regional warehouse to a particular company facility. After the chain had acquired the title, payment was provided in 45 following days. The company agreed that for goods staying in the warehouse for more than two months, it would acquire the ownership title and payment would be made in 45 days.
Apart from the title and payment, some changes would also be needed with regards to the appearance of the mower. This effort was focused on differentiating the mowers on the new deal from the Ride King. The changes included a unique seat and a specific color.
All parts had also to be American-made or display an American name as the equipment producer. The chain suggested that it would supply all labels using its own brand name. However, the national retail merchandise chain did not propose any mechanical specifications for the mowers that were to be supplied.
Other terms in this proposal include the need for the SMC warranty that was required for all parts of the mower. As a result, the chain needed reimbursement of $22 per hour, a cost that was associated with the warranty work. If this business deal was successful, a contract of two years was expected to be initiated after which it could be extended on an annual basis.
Termination of any contract would only be validated following a six-month notice. A new price would be negotiated after two years were over. The proposal also clearly indicated that SMC could not mention any relationship existing between the chain and SMC in its advertising or promotion. SMC would be liable for personal injury resulting from the mower maintenance or usage.
Situational Analysis
Swisher Mower and Machine Company
Currently Swisher Mower and Machine Company is utilizing outside suppliers for machine tool work, as well as subassembly. It produces 10,000 units of riding mowers every year on a working rate of 40 hours per week. However, the company currently rents both space and office from another firm.
Since its inception early in 1950s, the company has continued to focus on customer needs. This has made the company remain customer-oriented meaning that it recognizes and offers goods as per the needs and the tastes of both dealers and end users. The former president and CEO of the company insisted that the company should always maintain a ‘small company image’. This has resulted over the years into great relationships between customers and company. As a result, loyalty has resulted into strong sales.
Distribution and promotion
The management of the company has always stated that 75% of all sales are made in nonmetropolitan areas. Wholesalers who represent the SMC are located across the country but they only supply products to farm dealers located in the southeastern and south central parts of the United States. While wholesalers account for 30% of sales, direct-to-dealer sales account for only 25% of the total sales. Private-label riding mower sales account for 40% of the total sales.
The company produces Big Mow mowers for Mid-states that are located in Minneapolis and Wheat Belt, which are situated in Kansas City. In addition, the company has distribution arrangements with some companies in Europe and South Pacific that account for 5% of the company’s total sales.
Company’s competitors and Industry
This market comprised of 10 major competitors in 1995. The manufactures included American Yard Products, Ariens, Honda, John Deere, Kubota, MTD and Murray of Ohio. Others included Snapper, Toro and Garden Way. These manufactures normally sell their products in various lawn and garden stores and other special retailers.
However, other manufactures such as MTD, Murray and American Yard Products sell their products to national merchandise chains. The 10 companies engage in production of riding mowers under national brand names. They also engage in private-label production. Companies in this industry produce both nationally branded riding mowers and private labels for mass merchandisers such as Sears, Wal-Mart, and K-mart, as well as home centers such as Lowe’s and Home Depot.
They also sell the combination of hardware chains such as True Value Hardware. It has been confirmed that private-label riding mowers has led to high volume sales in the market. and it constitutes about 65% to 75% of sales in the industry. The major competitors in the industry produce mowers at different prices. The prices also vary according to the different retail outlets in the country.
The national retail merchandise chain accounts for 24% of the total industry sales. Outdoor power equipment or farm equipment & supply stores account for 22% of the industry total sales while Lawn/Garden stores account for 19% of the total sales.
On the other hand, Discount department stores account for 13%, Home centers account for 10%, while the Hardware stores account for 2% of the total industry sales. Other distributors account for 10% of the total industry sales. From the industry statistics, it is clear that the riding mower unit in terms of volume of sales is cyclical. In 1974, the volume of sales was 1,020,000 units. In the following year that is, 1975, the units sold in the industry dropped to 640,000 units.
This was due to the decline in the US economy. In 1979, the units rose to the highest of 858 units while it fell to 620 units in 1981 due to poor economic conditions. The lawn mower industry is seasonal since one third of the riding mowers sales occur in March, April and May while half of the sales occur between January and April.
Analysis proposal opportunity and other Alternatives
The decision regarding the proposal will mainly depend on the situation of the company and the industry where the company will be competing. The proposal will be analyzed in accordance with the internal and external environment. According to Wayne, it is true that the proposal needs a rigorous and extensive scrutiny to determine whether the proposal is worth being embraced by the company.
The proposal will give SMC an opportunity to expand its level of production. The company stands a chance to benefit from the expanded distribution in the metropolitan areas. The company had extensive distribution in the nonmetropolitan regions. There is a high chance for the company to get the opportunity to sell trail mower. However, the plan for production is underway.
However, there are also other negative factors associated with the acceptance of the new proposal. According to the company, SMC had never experienced liability claims associated with the maintenance and use of its mowers. Since the chain had suggested that SMC would be liable for injury resulting from the maintenance and use of the mowers, there is a high likelihood that SMC would be exposed to more liability claims.
There is also a possibility that the price will increase by 4% if workers were paid overtime. The overtime will be required because of the increased level of production. Increased level of production would call for an additional 1% of the current manufacturing cost. The company is likely to lose 1% of the company’s profits. Other expenses that are expected to increase the costs by 1.5% include additional inventory insurance, additional wear and maintenance costs, pilferage and breakage, and county property tax.
Other one-time costs would be associated with the increased production. This includes costs that are incurred while arranging for specific sources and materials that differ from those that were used in the previous production. Rearrangement of facilities that allow the new level of production will also reflect the new increased one-time costs.
The one-time costs would range from $10,000 to $12,000. Since the new proposal reflects an additional 2,100 units, there is a high chance that the financing cost will increase. The financing costs are associated with the financing of mower inventories and account receivables. The prime rate of offering short-term funds is 7%. SMC obtains the short-term funds from the local banks at the rate of 9.5%, given that it obtains funds at 2.5% above the prime rate.
Given that the chain would need 8,200 units on an annual basis, there is a chance that the already established lines of sales would be cannibalized by the new proposal. From the evaluation, it is likely that SMC will lose about 300 units of Ride King every year. The established SMC dealers would not welcome the new competition arising from the national retail chain dominance in the market.
As a result, there is a likelihood that most dealers that associate with SMC will drop the SMC line. According to the proposal, there are aspects that can be negotiated while others cannot be negotiated. Aspects that are likely to be negotiated include the title transfer and the period of payment.
However, other aspects are more likely to be fixed. These include the unit price indicated in the proposal. Moreover, the company would be approaching new companies in the market for the same deal. SMC has the advantage since it manufactures highly differentiated and established riding mowers. Other manufactures in the industry offer indistinguishable mowers.
Although this is one of the attractive opportunities to consider, SMC should strike a balance between this opportunity and other existing and available alternatives at the market. The new proposal is more appealing because the private-brand distribution is to be made with a major national retail merchandise chain. This chain would offer various benefits to SMC.
The negative impact arising from the acceptance of the new proposal includes a decrease in aggressive advertising that is intended to recruit new dealers, as well as helping existing ones. There is also a risk associated with the introduction of the new Tri-Max product under the Swisher’s name.
The manufacture’s list price for a standard Ride King is $650. From the company’s financial statements, it has been confirmed that the company earns a gross profit of 15%. For the cost of goods sold, the cost for labor is about $100 while that for parts is $453.
The company mowers are of high quality in the market considering that they are designed in a way to allow easy usage, as well as easy maintenance. It also stays for long without the need for replacement. The warranty lasts for one year. As in 1995, the Riding mowers accounted for 63.6% of the Swisher Merchandise Chain sales.
However, the Riding mowers only accounted for 57.8% of the total gross profit incurred by the company. Unlike other companies in this industry, SMC is lucky since its current parts are interchangeable with parts that date back to 1956. The company is also lucky because its patent for zero-turning drive unit has expired. Due to this, the company has faced no competition in the market regarding the patent. This is because no company has acquired such patent in the market.
Another brand that was produced by SMC is T-44. This trail mower has a cutting width of 44 inches. Nevertheless, when the unit is hitched to a riding lawn mower, the unit increases the cutting width by 44 inches. This unit is pulled behind by all-terrain vehicle. According to the financial statements released in1995, the T-44 units contributed to 8.2% of total sales and 13.2% of total gross profit.
The self-propelled push mowers contributed 8.2% of the total sales experienced by SMC in the year 1995. These units did not contribute any amount to the gross profit of the company. The replacement parts contributed 20% of the company’s total sales.
This is because there is little standardization among the mower parts that are produced in the industry. The replacement parts contributed 29% of the total gross profit of the company. Since 1996, the firm concentrated on widening its production by setting up a high-wheel string trimmer product, such as Trim-Max, a high-wheel walk behind product.
The break-even point
Breakeven point analysis for lawn mower considering its flagship product, Ride King
Profit = (Sales – Variable Expenses) – Fixed Costs
Sales = Variable Expenses + Fixed Costs + Profits
To attain break-even point, profits must be equal to zero. Therefore, for one to get break-even point, the formula changes.
Sales = Variable Expenses + Fixed Costs
Fixed Costs
Sales and administrative expenses = $264,700
Depreciation = $2,300
Total fixed costs per year = $267,000
Variable Costs per Unit
Cost of goods sold (standardized mower price) = (85%*653) $555
Sales Price per Unit = $650
Volume in units for break-even point
$650Q = $553Q + $264,000
$98Q = $267,000
Q =2725
If the company chooses to sale its flagship product that is, Ride King, it should sell 2,725 units to meet the break-even point. Given the company makes total annual sales of 4250 units, it will mean that annual sales associated with Private-label riding mower will be 40% of 4250 units. This is because the company’s financial reports point out that sales resulting from private-label riding mowers are only 40%. On average, the SMC sells 1700 units.
This means that the company will not be able to meet the break-even point of 2725 units if it only ventures in selling private-labeled riding mowers. With the additional sales such as those associated with wholesalers and direct-to-dealers, SMC is able to reach the break-even point. This ensures that the company does not operate under a loss.
Acceptance of the Proposal from the National Retail Merchandise Chain
With the acceptance of the proposal, there will be changes in the variable and fixed costs.
Changes
The payment for overtime will be an additional cost that will reflect 4% in the price of the mower. Additional direct material costs could represent another 1% of the current manufacturer’s price. Additional overhead costs were estimated to be one percent.
Other expenses that would be expected to increase the price by 1.5% include additional inventory insurance, additional wear and maintenance costs, pilferage and breakage, and county property tax. The chain expected SMC to reimburse it for labor costs resulting from warranty work at $22.00 per hour. The one-time costs would range from $ 10,000 to $12,000.
Additional costs
Variable costs
Raw materials = 4% of manufacture’s price
Overhead expenses =1%
Other expenses= 1.5%
Total increase in variable costs = (4%+1%+1.5%)*$650=42.25
Fixed costs
Onetime costs= [(10,000+12,000)/2] =$11,000
Warranty work costs per week=$22*40hrs=880
Yearly warranty work= 880*52= $45,760
Total increase in fixed costs =$45,760+$11,000= $56,760
Total variable costs= 42.25+ 550 = $592.25
Total Fixed costs= $56,760 + $267,000= $323,760
The chain suggested that it would purchase at a discount of 5% of the market quoted price
Sale price per unit = 95% of 650 = $617.50
Volume in units for break-even point
$617.5Q = $592.25Q + $323,760
$25.25Q = $323,760
Q =12,822
From the calculation presented above, it is expected that SMC should be able to sell 12,822 units every year to avoid losses resulting from low level of production as well as low sales. The 12,822 units represent the number of private-label riding mowers that should be sold every year in order to meet the break-even point.
Currently, the SMC private-label sales represent 40% of the total sales. Given the chain plans to order 8,200 units from SMC every year, it is apparent that the proposal is not worth accepting. However, freight charges and advertisement costs, which represent reduction in costs of operation, have not been incorporated in the calculation due to lack of accurate costs related to transportation and advertisement.
Rational decision
From the calculation made earlier in this paper, it is clear that after the acceptance of the proposal, SMC should reach a breakeven of 12,822 units. Considering that national retail merchandise will be making an annual order of 8,200 units, it would be prudent to undertake a further analysis.
The company does not clearly indicate its costs of advertising and promotion associated with 8,200 units. As it has been pointed out, it is apparent that the chain does not need any promotion or advertisement associated with products that would be shipped to its warehouses and stores.
This means that there would be a reduction in costs associated with promotion and advertising if SMC accepts the proposal. Since the advertisement and promotional costs are not known, they were not incorporated in the calculation of reduced costs resulting from promotion and advertisements. Therefore, if these costs are known, there is a possibility that a breakeven would be below 8,200 units, which means it would be worth considering the proposal.
Another aspect that still leaves some concerns of whether to accept the proposal includes the freight charges. The chain proposed that it would be able to pay all freight charges that were associated with shipping the products from SMC premises to the chain warehouses and stores. This shows a possibility of reducing the transportation costs.
However, the information given does not indicate the exact amount that is associated with the transportation costs. Therefore, the transportation was not incorporated while calculating changes that might occur after accepting the proposal. This implies that there could be a reduction in variable costs if transportation costs were incorporated into the calculation after the acceptance of the proposal.
As a result, the breakeven point would decline below the annual order of 8,200 units. At such point, it would be prudent to accept the proposal given that the chain will be ordering 8,200 units of mowers every year. Otherwise, with the current situation, the proposal should not be accepted. The proposal might thwart SMC’s efforts to expand its share in the market through advertisement and promotion.
Implementation and evaluation
The private-label represents the highest sales of the Swisher Mower and Machine Company. However, an interest to pursue the opportunity presented by a national retail merchandise chain would lead to losses. The company should continue with the current channels of distribution.
The company should incur costs with an aim of expanding its market share. The company should also find new partnerships at the global level in order to increase its international sales from 5% to over 20% in the next two years. Selling of its products through known chains at the global level would enable it to gain an international presence that would further lead to more sales in the near future.
In addition, it should increase the number of retail outlets it has throughout the country to increase the sales resulting from the direct-to-dealer sales. Direct-to-dealer sales should increase in accordance with sales through wholesalers. Direct-to-dealer sales would allow the firm to enhance the design of the mower in accordance with the taste and preference of the final user.
Wholesalers will help the firm expand its operations. Given that wholesalers are purchasing the Ride King at the market price of $650, and the cost of goods amount to $552, the company is assured that fewer sales would lead to break-even point. If increase in the cost of advertisements leads to increased market share by 20% in the next two years, the company should specialize in such private-label riding mowers. This will be in anticipation of increased volume of production that would be able to meet the break-even point.