Micro Fridge Case Study Analysis
Micro Fridge: Case Study:
1. Central Issue:a) How to produce?b) For whom to produce?c) If he should go with the Sanyo offer?d) If he should only use distributors to supply his product to the market or go with house accounts?e) How much should be the cost of the micro fridge that could fetch him decent % of profit.2. Objectives to be achieved:a) To be able to introduce the micro fridge the market with $50000 capital.b) To convince the dormitories and other targeted customers.
c) To set up a price that earns him return of minimum 15% initially on the selling price.d) To find a manufacturer that fits his budget.3. Situation analysis & alternatives available: Situation analysis:a) Low capital: Robert Bennett has $50,000 in hand to start up his new business which is not enough.b) Manufacturing problem: After speaking with few home appliances manufacturers out of which only SANYO and Samsung agreed to manufacture his product provided Bennett pays all the upfront cost of $170,000.
Being low on budget Bennett has to think over the offer.c) Administration, Legal, Patent & other miscellaneous expenses: Besides upfront and basic product cost Bennett has to pay for these expenses as well.d) Potential buyers: The potential buyers he was targeting were not very sure if they would like to buy the product from an unknown brand like his.Alternatives available:a) The electronic circuitry should be patented and later find the buyer of the concept and keep getting a permanent royalty or a flexible royalty on the basis of increase in sales. This way Bennett can retain his job as well as introduce his concept in the market.b) As Sanyo and Samsung are ready to manufacture the product.
Bennett should negotiate with them, if he can pay the upfront cost of $170,000 once the sales start to pick up and pay the per unit cost with a credit period of 45-60 days after the delivery from the manufacturer. That ways he would have enough time in hand to arrange the money from the sales of the units.c) Taking loans from the financial institutions for the upfront & administration cost.d) If he decides to go for the direct sales the price could be quoted as $350 to $375/unit initially which fetches him a profit of 30% to 40%, after paying $263/unit to the manufacturer but because of direct sales volume would be less and more manpower would be required. Delivery of product in perfect condition in another hassle.
e) If he decided to go to the end user via distributor’s channel, he can share his profit of 30% to 40% with the distributors. In this case he should quote them a price of $309 to $ 315(depending on the volumef) ; the distributors further sell it for $350 to $375/unit. In this case both the will get a profit of 14% to 20% but in return Bennett can ensure to supply in bulk at a time creating high revenue in the long run. Distributors on the other hand will be happy too to save that extra few % of profit by selling the product directly to the end user than through the vendors.4. Suggested Alternative ; Why?The positives of this products: – patentable product, less space consuming, less power consuming, tie up with SANYO or Samsung will ensure good quality product and a large potential market like:- college housing, hotels, motels, military quarters, service apartments, old age homes, Small offices might attract some investor to invest in this idea.
- Step 1: Having a capital of $50,000 look for a partner or a financial institution who could invest equal or more money in this business.
- Step 2: create awareness about the product. Set up a marketing team to do detailed market survey.The marketing people could be Bennett and his partners and besides that he can hire few marketing researchers with his little capital for the process.
- Step 3: Subcontract the manufacturing part to Sanyo or Samsung who will ensure that the labor cost is low due to the offshore manufacturing.
And as this product is patentable, manufacturer according to the contract should not be selling the product to anyone or leaking the concept to any competitor. Negotiate with manufacturer about the credit payment period of 6 months-1 year for upfront cost of $170,000 and 45 days- 60 days for the product per unit cost of $263.
- Step4: He and his marketing team create a market for the product in the initial stage by doing direct marketing with the cost of $350 to $375/unit to the end user.
- Step 5: Once the awareness is created supply the product to the interested distributors at $309 to $ 315. Though going via distributors will result into low margin of profits but will ensure a large volume once the market is created.
Distributors on the other side will be happy too to save some % of profit for not going through the dealers and supplying the product directly. Per nit payment from the distributors is the rapid cash flow that should be recovered within the credit payment of 30 days.
- Step6: The minimum margin of 17. 4% that he gets every month from the difference of $309-$263/unit should be further used to get the product patented within 6 months so that the electric circuitry and the concept is not copied. By the time a big manufacturer comes up with its own electric circuitry and concept Micro fridge will have enough goodwill to sustain in the market.
COST MANAGEMENT: Cash in hand: $50,000 Upfront cost: $170,000Admin;sales cost: $300,000/12=$25,000 Patent cost: $60,000 Price/unit: $263 Selling price: $309 Initial 1 year we cannot expect much of sales as Bennett would be busy marketing his product and as not many people know about it, there will be less buyers.
He should target for a breakeven point in initial year, i. e. selling at least 13,000 units. 13,000*$315 = $4,095,000 13,000*$263 = $3,419,000 (manufacturer payment) Balance = 676000 This amount could be used for paying the upfront cost, admin cost, advertising, patent, rent for office ; misc expenses.Once the market is made he should target for minimum 30,000units/year he gets: Dealer payment : 30,000*$309=$9,270,000 Sanyo payment : 30,000*$263=$7,890,000 Balance : $1,380,000/12= $115,000/month And every semester the sales should improve at least by 10% If x is no. of units: 309x= 263x+476000 263x-309x=476000 46x=476000 X=47600/46=10348pcs 10348*309(selling price) =3.
2 million If 3. 2 million of revenue is reached the recurring cost ; cost price for SANYO will be taken care of.