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INTENSIVE GROUP CASEANALYSISWILLIAM OLIVER, BOOTMAKERTABLE OF CONTENTS1. INTRODUCTION......................................................................................................................................2. PROBLEM STATEMENT................................................................

Description

INTENSIVE GROUP CASE ANALYSIS WILLIAM OLIVER, BOOTMAKER

TABLE OF CONTENTS 1.

INTRODUCTION......................................................................................................................................3

2.

PROBLEM STATEMENT.........................................................................................................................3

3.

ANALYSIS..................................................................................................................................................4 3.1 SWOT ANALYSIS....................................................................................................................................4

3.2 PEST ANALYSIS......................................................................................................................................4

3.3 STRATEGIC AND FINANCIAL ANALYSIS..........................................................................................5

4.

LIST OF ALTERNATIVES.......................................................................................................................9

5.

CONCLUSION...........................................................................................................................................9

6.

RECOMMENDATIONS............................................................................................................................9

7.

IMPLEMENTATIONS.............................................................................................................................10

1. INTRODUCTION William Oliver is operating in luxury shoes market. Found in 1849 by an enterprising and lame Cornish farm boy, William Oliver was famous for making shoes for the King Edward V11. William Oliver became a symbol of hand-made shoes and boots with quality and elegance and a holder of Royal Warrant. Although the modern shoes making methods have been introduced, the brand always maintains its high-quality products by employing its traditional craftmanship and fine materials used in manufacturing process. Besides a manufacturing facility in Northampton shire, the company has the outlet in London and retailing outlets in New York. In 1976, the company got acquired by a well- known French fashion house. This allows its products to be sold all over the world through the parent company’s shops. For the financial year ending 2005, the company recorded a loss of £400,000. It raised concerns about its cost structure and pricing system. The company employs historical custom called cost plus pricing approach as its costing and pricing method. The company has to maintain high gross margins in luxury shoes business due to substantial administration and selling and distribution cost. Additionally, the management believes that the value added in the production, especially in materials processing technology, makes its products deserve premium prices and that the company cannot lower its price because its brand name shall be negatively affected. Financial Director of William Oliver, John Philips had arranged a meeting with Geraldine Easton, a management consultant to look for approaches to deal with the current concerns.

2. PROBLEM STATEMENT How can William Oliver, Bootmaker, increase their profitability by improving costing methods and pricing policy along with enhancing their sustainability in the luxury shoes market?

3. ANALYSIS 3.1 SWOT ANALYSIS

STRENGTHS A brand name with good reputation for the craftmanship and fine materials used in manufacturing process. Having top quality materials and distinctive classic design. Exclusivity of the brand makes it distinct among the UK’s wealthiest.

WEAKNESSES Current lack of profitability; High fixed cost; Having highest price in the market; Lacking of profitability of the new retailing outlet at high profile location in London; Only operating from 75% to 80% of its capacity.

OPPORTUNITIES

THREATS

Developing the brand awareness;

Highly competitive market;

Increasing distribution worldwide.

Prices of its competitors are much lower.

Expansion in global market.

If losses are persistent, the company will face bankruptcy.

Mergers and acquisition with similar companies in the industry.

3.2 PEST ANALYSIS POLITICAL

 Vulnerable to tariffs and higher taxes imposition on luxury goods.  Ongoing pandemic could alter access to markets  No significant political affiliation

ECONOMICAL

 Downturn in the economy could discourage purchase of luxury goods  Impact of current exchange rate fluctuations  Strong GDP growth in emerging markets SOCIAL

 Vulnerable to potential changes in fashion trends  Emerging focus on animal rights and protection could harm the company’s image  Geographical and societal influences TECHNOLOGICAL

 Competitors adopting new technology to lower cost can make it harder to compete  Luxury consumers are increasingly shopping online  Advanced customer experience management solutions to deliver a personalized experience

3.3 STRATEGIC AND FINANCIAL ANALYSIS The analysis illustrates the facts that the William Oliver was ranked as one of the leading shoe brands in the UK which pride themselves in offering high quality craftsmanship and fine materials used during the manufacturing process. It can be clearly justified that the reason for passing high prices in the range of £285- £860 to its upper-class customers is because of their high-quality traditional skills in leather grading, colour matching and stitching quality which ensures the exclusivity of the company. Despite operating at the top end of the luxury shoe market, until 2005, when the company recorded losses of £400,000, the company’s turnover had been just about the breakeven point for several years. The high fixed costs associated with this traditional production method is being misrepresented by using a traditional cost measuring system lead the company to acquire the losses in 2005.

However, it seemed impractical that the prices were adjusted for profit maximization because a price reduction strategy depicts that the reduction in the per unit contribution could not be compensated with enough additional volume. On the other hand, there is a highly unacceptable risk in increasing the price as the company’s existing prices were already very high than its competitors. William Oliver Bootmaker has 25% idle capacity which can be utilized by introducing a low- priced range shoes to target the middle-income group to increase market share and help reducing the overhead costs on the exquisite shoes. Additionally, they can also introduce a line of products such as Leather belts, leather handbags and leather gloves under the same brand. This might help in improving the inventory turnover. Also introducing their brands to royalties in UAE and Asian countries to improve their sustainability. Keeping their products in the elite category of customers can also help them charging a high price for customized products. The best option for the company would be to adopt a job order costing method to account for its costs and to determine product prices to keep the prices of every product unique. Using the data given we undertook, the CVP analysis calculated the breakeven point using 100% and 75% of actual capacity.

Particulars

100% capacity

75% capacity

Total fixed costs

$3,000,000

$3,000,000

Variable costs per unit

$146

$146

Revenue to breakeven

$6,500,000

$5,628,000

BEP units produced

24,000

18,000

Sales price for mix

$271

$313

This data calculated is evident that the company have been underpricing their shoes considering all the costs they incur. Further, the analysis down below shows how they incurred a loss of $400k. They budgeted all the costs on 100% capacity, whereas they operated only on 75% capacity due to underestimation of overhead costs.

Particulars

Budgeted

Actual

Act Avg per unit

$

$

$

Revenue

6,500,000

5,550,00 0

308

Units

24,000

18,000

Capacity

%

100%

75%

Direct Material

1,100,000

16.92%

825,000

46

Direct Labour

800,000

12.31%

800,000

44

Manufacturing O/H

500,000

7.69%

500,000

28

Total Manufacturing Cost

2,400,000

36.92%

2,125,00 0

118

100,000

1.54%

75,000

4

2,500,000

38.46%

2,200,00 0

122

3,350,00 0

186

Dispatch Cost COGS

Gross Margin

Fixed Admin. & Outlet Costs Variable Selling costs Total costs Profit/Reported loss

4,000,000 3,000,000

46.15%

3,000,00 0

167

1,000,000

15.38%

750,000

42

6,500,000

100.00 %

5,950,00 0

331

-400,000

-22

0

Also, to take the analysis further, we have formed a table showing how the company would not have suffered a loss if they have estimated the overheads correctly.

Cost profile

£ per unit

Units

Budgeted 100%

Actual 75%

capacity

capacity

24000

18000

DM

55

55

55

DL

40

40

40

Manufacturing O/H

18

21

28

(500k/24,000)

(500k/18,000)

Total costs

113

116

123

Margin 40%

75

77

82

Price

188

193

205

Retailer MU 100%

188

193

205

Retail price

376

386

410

Selling Price incl. VAT 17.5%

442

454

482

After considering all the analysis, the company should consider CVP costing along with job order costing for extremely exclusive shoes to maintain their quality of service and to also continue making profits.

4. LIST OF ALTERNATIVES Introduce automation process into their production line up to reduce the cost of each pair of shoes. Competitive pricing for the shoes. Introduce a substitute brand by keeping more affordable prices to increase their wide range of customers. More geographical expansion of their outlets. Introduce a cheaper version of their brand using automated technologies to reduce cost on labor.

5. CONCLUSION Based on the analysis, it can be seen that William Oliver’s current costing system has been affecting the company’s profitability in a negative manner. However, most luxury companies operate with a purpose to maximize profitability. Thus in attempt to improve the financial performance of the company, this analysis assessed ways in which William Oliver should improve its business strategy and fundamental aspects of its costing methodology and pricing policy in the changing market of customer preferences. This will help the company increase its lost reputation and regain the customer confidence to sustain in the market along with their profitability.

6. RECOMMENDATIONS In addition, it is better to utilize the idle capacity by transforming the material into different types of products such as belts and bags of leather which can preferably match with their original style of boots. This will also increase the inventory turnover rate whilst reducing the issue of excess capacity on the company’s books.

The company is recommended to perform test runs to determine if there are manual operations which can easily be substituted by machines. After replacements, company can develop multi-skilled employees who can run the machines and can do the manual work such as blocking, punching, cutting and sewing. It is strongly recommended that company should adopt the CVP and job order costing method to account for its costs and to determine product prices as this method is more suitable for when products are made based on specific customer orders. If the company considers operating their own outlets, a strong recommendation can be to install boutiques that will allow customers to input their preferable measurements and styles. This is a useful strategy that can be adopted to minimize labour costs and can also be used as a competitive advantage as William Oliver can gather feedback about consumer preference.

7. IMPLEMENTATIONS Job order costing can be implemented by avoiding full traditional cost system where they account for direct material cost, direct labor cost, selling and administrative costs and overhead costs and adding it to the mark-up percentage to determine the final product price. However, job order costing will help the company determine the product cost by each item’s direct materials, direct labor used and assign them to the manufacturing overhead. Since Oliver Williams makes a luxury product, job order costing can help them trace the cost allocated to each manufacturing department. By adding a new complementary product line (belts, bags, gloves and other leather products) they can encourage customers to buy their shoes with a combination of the new product line. This may benefit William Oliver by using their idle capacity and increase sale....