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Description
1.0 Introduc Introduction tion
Haute Coutore Fashion was established in 1974 and started as a small men’s clothing tailoring business in Penang. Over the years it has grown to become maor contract manu!acturing com"any "roviding services to clients !rom #uro"e and $merica. %he com"any had achieved over 1&& million o! sales revenue and has ' !actories in Penang( )itra and Chiang *ai( %hailand. HCF em"loys 11&& labors can "roduce more than ' million o! garments "er year. HCF two maor clients are considering considering loo+ing !or another contract manu!acturin manu!acturing g com"any com"any in China due to its low cost. %his news hit HCF un"re"ared and as its margin and "ro!its are !alling. %he news e,"osed various issues surrounding the com"any which boils down to its business sustainability. -n order to !ind solution( analysis have been conducted using various tools such as /O%( Porter’s 0 Forces and !inancial ratio. "on analysis( 2 alternatives are being !ormulated which are to venture in China 3either by oint venture or F-5 and downsi6e *alaysian o"eration. $!ter care!ul consideration( alternative o! F- in China and downsi6ing *alaysian o"eration is choosen.
2.0 Problem Statement
%he main "roblem !or HCF at the moment o! writing this case study is their business sustai sustainab nabili ility ty.. %he %he com"any com"any !aced !aced variou variouss issues issues that that could could threate threaten n their their surviv survivabi ability lity.. igni!icant issues are highlighted below with e,"lanation on how it will a!!ect the com"any. 1. Possibili Possibility ty of losing losing 2 major major customer customerss
HCF might lose their 2 maor customers with combine 44.2 o! their total sales. hould HCF loses these 2 customers( customers( their bottom8line bottom8line will be signi!icantly a!!ected a!!ected as the loss o! 4& o! revenue will de!initely lead to loss in !inancial statement. 2. Th Thee Eme Emerg rgen ence ce of Chin China a
HCF 2 biggest customers can get a better o!!er in China due to its low o"erating cost. %he cost is marginally lower than what HCF can o!!er. HCF need to be able to o!!er a better deal 3lower cost5 in order to retain their maor customers. Can HCF do this and how will they do it 3. Poor ccoun ccountt !ecei" !ecei"able able Turno"e urno"err
$bout a :uarter o! HCF total revenue was not collected !or the year 2&&7 and 2&&;. %his !igure is huge and alarming. #. !eli !elian ance ce to to 2 Cus Custo tome mers rs
HCF HCF is very very de"e de"end nden entt to their their usinesses will have lower cash !low due to lesser s"ending and di!!iculties in obtaining credit due to tighter regulations. >esi >eside des( s( busi busine ness sses es need need to down downsi si6e 6e by rele releas asin ing g em"l em"loy oyee ee(( caus causin ing g the the rise rise o! unem"l unem"loym oyment ent rate. rate. -n return( return( when when unem"l unem"loym oyment ent rate is high( high( total total consum consum"ti "tion on will will decline which will hurt almost all businesses e,ce"t !or those "roviding goods and services that have autonomous consum"tion. Creditors worldwide will be reluctant and more rigid in gran granti ting ng loan loan due due to high high ris+ ris+ o! de!au de!ault lt and and ban+ ban+ru ru"t "tcy cy.. %hese %hese situa situati tion onss ha"" ha""en ened ed worldwide even though they were countries that are more a!!ected than the others. uyer Power -n high end contract manu!acturing industry( buyers are very "articular in :uality and cost. %here are small numbers o! !ashion !ashion houses as buyers buyers com"ared to large numbers o! contract contract manu!acturing com"any( hence giving them the u""er hand in choosing com"any that can o!!er services o! highest :uality at a lower cost. -n this sense( buyers bargaining "ower are high in this industry. %hreat o! ubstitutes -n this industry( there were no signi!icant substitute to what contract manu!acturing services o!!eredG hence the threat o! substitute is very low. @ivalry Com"etition in this industry is very intense and aggressive. lobally( large numbers o! !irms are "roviding this service. >esides( switching cost is low !or customers as they can um" !rom com"any com"any to com"any to attain lowest cost. %hough it will not be as easy as what being said( customers have lots o! alternatives and changing com"any is not a "roblem !or them i! it is necessary. >arriers to e,it are also high causing the com"etition to become even more intense. %e,tile manu!acturing com"any ac:uire s"eciali6ed assets which will be di!!icult to reali6e( hence the com"any will run even i! it is un"ro!itable to avoid bigger loss.
#.0 lternati"es
>ased on the situation analysis conducted( a !ew alternatives were !ormulated= 1. FF- in China China and and downsi downsi6e 6e *alay *alaysian sian o"er o"eratio ation n 2. )oint venture venture in China and downsi6e downsi6e *alaysian *alaysian o"eration o"eration >e!o >e!ore re we start start to e,"l e,"lain ain each each alter alterna nati tive ve(( a !ew "oin "oints ts need need to be high highli ligh ghted ted.. -t is im"erative !or HCF to venture in China not only because they need to secure their 2 maor customers but rather( this is a "art o! strategic decision to remain sustainable in this industry. /O% analysis revealed that there is an o""ortunity in !oreign mar+et to cut cost in order to retain their customers. Porters 0 Forces revealed that the buyers bargaining "ower is very high in this industry es"ecially in terms o! cost and :uality( hence HCF need to ada"t to this threat in order to o!!er better deal to their customers. China was chosen !or various reasons other than the !act that the country is HCF maor customers’ "re!erence in loo+ing !or alternatives. First( China had the largest e,"ort o! te,tiles and clothing "roducts in the world !ollowed by -ndia( >angladesh and Pa+istan in #uro"ean mar+et as o! 2&& 3re!er a""endi, 25. >esides( China had the largest e,"ort in the $ !ollowed by -ndia( -ndonesia and Iietnam as o! 2&& 3re!er a""endi, '5. %hese !igures are the tell8tale sign o! the world trend in te,tile and clothing "roducts where the #uro"ean and $ "roduction are shi!ted to China. %hese were the current trend at the moment and HCF as a relatively small com"any holding tiny mar+et share strategic move should be to !ollow the trend. -n this situation( the old adage JK-! you canLt beat them( oin themK seems to ma+e sense. >esides( according to an industry re"ort titled J tudy on China’s %e,tiles %e,tiles D Clothing -ndustry and its *ar+etM "re"ared by #uro"ean Comission( China is more advanced in their basic in!rastructure as com"ared to -ndia( Pa+istan and >angladesh. F- and oin venture are both massive "roects( hence the element o! scalability must be included in decision ma+ing. -n!rastructure is one o! the most im"ortant as"ects that need to be considered as it involved mobili6atio mobili6ation n o! resources which consume cost. -n this sense( China is the better alternatives than -ndia( Pa+istan and >angladesh. -n terms o! labour cost( China had higher labor cost com"ared to -ndia( Pa+istan and >angladesh based on study conducted by a consultant based in Eew Aor+( )assin8O’@our+e rou" 3re!er a""endi, 45. However( labor cost is not the only cost that com"anies incur. @aw materials and distribution have large in!luence in total cost o! "roduction. $ccording to $dhi+ari and Aamamoto 32&&75. China is the largest e,"orter o!
te,tile in the world( "roducing a huge range o! raw materials to buyers. %he com"etition is intens intensee and a com"any com"any can e,"ect e,"ect more more bargai bargainin ning g "ower "ower in "rocur "rocuring ing raw materia materials. ls. >esides( with basic in!rastructure in "lace( distribution cost will be lesser in China. HCF two maor customers !avor China as their alternative !or reasons. %hey had done their mar+et research and !ound that China can o!!er them lower cost than HCF( but their research will not only be about cost. $n in de"th analysis must be done !or them to use China as their trum" card in negotiation. For them( China has everything to re"lace HCF and the same line o! thin+ing can be used by HCF which means that China has everything !or HCF to become a better com"any. /e do do not consider maintaining status :uo and not venturing to China. HCF maor "roblem is sustainability( hence our strategy is very much long term oriented. %he com"any can survive one or two years o"erating in *alaysia with aggressive cost cutting but eventually it will not be able to beat China and other chea"er mar+et. %here is nothing could be done since *alaysia are becoming economically better which will lead to the increase o! !actor o! "roduction cost. %his is a sin+ or swim situation !or HCF and they need to venture to China in order to survive and thrive. -! we can "roduce in China( the !actory ca"acity in *alaysia D %hailand will become idle and it comes with cost( hence the right business 3"utting everything else aside5 decision is to close down most o! the !actories Eotice that we did not consider the idea o! starting a new label. )im Collins in his boo+ ood to reat= /hy ome Com"anies *a+e the Bea"... and Others onLt studied 11 com"anies 3illet 3illetes( es( /ells /ells Fargo Fargo(( oarding u" will
cost @* 2&&( &&& and we had a generous estimation that out o! the total @* ' million o! redundancy "ayments( @* 2&&(&&& can be s:uee6ed !ro m it. %o !inance this move( HCF will need to a""ly !or loan. /e will use 0 Cs o! credit to brie!ly evaluate HCF chance o! receiving credit. HCF has outstanding character in a sense that they have a good relationshi" with ban+ers where there is no trust issue between the ban+s and the com"any. -n terms o! ca"ital( HCF !inance maor "art o! its o"eration through e:uity and this is "roven through a very high current and :uic+ ratio. HCF ca"acity to generate cash !low to "ay loan seems not encouraging. till( i! HCF can maintain their 2 maor customers 3which they will5( they will be able to generate enough cash !low to "ay the loans. -n terms o! condition( the ban+er will need to understand the shi!t o! the industry to China and how it a!!ects HCF. %his changes and other issues are addressed by HCF where the will be venturing in China. Finally( !or collateral( HCF has to o!!er )itra !actory "lus their own shares. )itra !act !actory ory alon alonee is not not enou enough gh to cove coverr the the 10 milli million on loan loans. s. %he %he :uest :uestio ion n is weth wether er the the shareholders agree to collateri6e their share %hey have to do it in order to receive credit or the other alternatives are to issue new share which will dilute their sta+es in the com"any. %he shareholders must choose between these 2 alternatives. $ brie! com"utation will show that HCF will able to "ay their loan i! everything goes smoothly as their EPI dis"osal o! Penang Factory will be about 17.9 million 39.4 million ;.0 million5 not accounting the redundancy "ayment recovered by closing two !actories. econd alternative is to issue new shares. -n order to arrive to 10 million( HCF need to issue ;.''' million shares which will signi!icantly dilute the control o! the maor shareholders. @e!er to a""endi, 0 !or EPI com"utation. One o! the ris+s o! this alternative is the currency ris+. %here is nothing could be done to control currency ris+ but to mitigate its e!!ect( HCF needs to hedge in Chinese yuan. %he e,act hedging strategy will not be discussed in this re"ort since both alternatives will have to !ace with this ris+ and it ma+es no di!!erence to which alternative will be chosen. till( currency ris+s can ma+e a huge di!!erence to HCF bottom line and hedging is one way to mitigate this ris+. %he second ris+ o! outsourcing is changes in China law and regulation. $gain there is nothing much can be done other that continuous lobbying. %he %he other ris+ is loss o! business +nowledge to China labour and culture di!!erences. HCF business +nowledge will be trans!erred to China and HCF needs to be able to ada"t to Chinese culture in managing their o"eration in China.
2. )oint Ienture in in China China and ownsi6e ownsi6e *alaysian *alaysian O"eratio O"eration n %he %he second second alternat alternative ive also also involv involves es closin closing g down down most most o! HCF e,isting e,isting !actori !actories es but initiating a oint venture in China. %he "roect will only ta+e 1 N years thus e,isting !actories must be +e"t till "roduction ca"acity can run. HCF needs to o!!er discount to their 2 maor customers customers in order to "ersuade them to stay with HCF. -n order order to cushion cushion the im"act o! the discount the same strategy a""lied( the 2 maor customers clothing manu!acturing should be com"letely shi!ted to %hailand since it has a lower cost com"ared to *alaysia. *anu!acturing o! other e,isting customers clothing should be shi!ted to *alaysia. "on "roduction ca"acity is ready( HCF will need to close their Penang and Chieng *ai !actories. )itra !actory will stay to o"erate and will act as bu!!er to China !actories. %he reason !or closing down Penang !actory is due to its high resale value and its location in Penang where ob o""ortunity !or the same line o! wor+ is relatively high com"ared to )itra. Factory in )itra is not closed because o! *alaysian sentiments and the one in Chieng *ai will be leased at very low rate to attract leasor. -! no lessor is interested( the !actory will be board u". %he cost o! boarding u" will be com"ensate with the !und recovered !rom redundancy "ayment. >oarding u" will cost @* 2&&( &&& and we had a generous estimation that out o! the total @* ' million o! redundancy "ayments( @* 2&&(&&& 2&&(&&& can be s:uee6e !rom it. @e!er to a""endi, 0 !or EPI com"utation. %he cost !or this alternative can be !rom loan. %he 0 Cs analyses will be much the same as the !irst alternative. %he only di!!erence is that( the second alternative only needs 2.4 million( hence the chances o! receiving loan is even higher. %he ris+ will also be the same as discussed above. One additional ris+ is that HCF will not have !ull control o! the o"eration in China( hence the :uality o! a""arel "roduced may be a!!ected.
$.0 !ecommendations
/e will choose alternative 1 in this re"ort. %he main "roblem !or HCF is its sustainability. $lternatives 1 give a long term solution while alternative 2 is only viable !or 08 years a!ter which new negotiation will have to be made. $t that moment( "erha"s
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