Pieles De La Garriga

Name: Isidoros Priftis

Pieles de La Garriga

Summary

In the Pieles de La Garriga case study we have to decide whether we are going to accept the offer of Comerpiel and under which conditions. In order to make our decision we have to consider some criteria. The criteria that I identified as the most important are the lack of capacity for the first month if we decide to take the whole order, the profit or loss, the risk that Comerpiel will back out the contract, and the strategic implications of our decision.

None of the alternatives is perfect. So we have to decide which of the criteria are the most important and to choose the alternative that satisfies them the most. For me, the most important criteria are the strategic implications and the maximum profit that we can make. I don't think that the risk is so high and the problem with the capacity can be solved if we pay some overtimes.

So, I chose to accept the whole order of Comerpiel (to produce both the small and the large bands) and to ask for a price 5% higher than the suggested. By choosing a price 5% higher we can earn much more profits and at the same time we reduce he financial risk.

Analysis

The first thing I am going to do concerning the analysis is to define the problem that we are facing (I consider myself in this case as a partner of Pedro). Basically we have to make a decision. We have to decide if we are going to accept the offer of Comerpiel and the conditions of the agreement. The conditions have to do with the products that we will have to deliver (small bands, large bands or both) and the price of these products.

The next step is to choose the criteria that we are going to take into consideration. In my opinion, the most important criteria are the following (their order does not indicate their importance):

1. Capacity

2. Profit

3. Risk

4. Strategy

I am going to start with the capacity of the machine and the capacity of the rest of the factory. As we know, if we order the machine now (which is the end of August) it will take approximately two weeks to be delivered and start working (without taking into consideration any possible delays). That means that we will have approximately two weeks time to produce the first delivery. That delivery (at the end of September) consists of the 30% of the total amount and if we choose to produce both the small and the large bands it will take us about 18 working days to produce it (if we assume that each day has 8 working hours). So, in that case we don't have enough time unless we work overtimes.

Considering the total capacity of the factory, I don't think that we will have any problems since even if we accept the whole order there is still going to be extra capacity (according to Pedro).

The next criterion I am going to discuss is the profit or loss we expect to make from this order. The earnings from the order depend on the following factors:

1. The price that we are going to sell the products. As we know, Beatriz (manager of Comerpiel) suggested $35 for the large bands and $14 for the small bands. Whatsoever, according to Pedro, it might be possible to achieve prices which are even 10% higher.

2. The products that we will decide to produce. We can decide to produce small bands, large bands or both.

3. The products that Comerpiel will be willing to buy. There is a possibility that Comerpiel is going to stop buying our products if the hats and the gloves that they are selling do not do well in the market. There are many possibilities there. They might want to stop buying only the small bands, only the big ones or both. Furthermore, there are many times during the year that they can stop buying. Of course, the later they choose to stop buying, the better the financial results are.

In calculating the costs of production we also have to make certain assumptions:

1. The cost for producing the bands is 13,49 for the small ones and 30,76 for the large ones.

2. In the case that we want to produce both the small and the large bands, for the first month 3 more workers will have to operate the machine during the weekends or the afternoons. They will have to work for 8 extra eight hour shifts and they will be paid 60 euros per day. These workers will only do the special finishing. The rest of the production procedure will be done during the ordinary shifts, as we have enough capacity to do it.

3. Taking the worst case scenario I consider the value of the machine after the production of the order practically zero. So we shouldn't calculate any depreciation costs.

4. In case Comerpiel decides that they don't need more bands, they will inform us when we will have produced half of the bands needed for the monthly delivery. That is the average of the worst case scenario (to inform us when we will have produced the whole delivery) and the best case scenario (to inform us before we start producing).

In exhibit 2 I present the profit/loss for all the cases that I explained under the assumptions that I made.

I would also like to analyze the risk that we are taking by accepting the order. As we can see from the results in exhibit 2, if Comerpiel cancels the order during the year we might have significant losses (up to 200.000 euros). That is a lot of money for us since all the profits of the rabbit pelt division per year is about 750.000 euros (in order to calculate this, I used the margins for the two types of bands and I assumed that we produce 50% small bands and 50% large bands).

The last criterion is the strategy. To be more specific, I mean the strategic implications that there would be if we "disappoint" Comerpiel by not accepting the order (or accepting part of it). The last thing that we want is Comerpiel to give that order to another company. Our cooperation with Comerpiel is a strategic mater for us because they help us to enter the world of furs.

Synthesis

Considering all the criteria that we have, we must now decide what we are going to do.

As we can see from the exhibit 2, producing only the small bands is no profitable at all. So, we should forget about that option.

If we produce only large bands the risk is less, comparing it with the risk of producing