Wilson Wheels Case Study

Wilson Wheels Case Study

Operating for almost 40 years, Wilson Wheels Company had established itself in the independent bicycle market with competitive quality and price. As the Marketing Vice President of Wilson Wheels, Mary Smith was approached with an opportunity to expand the company into discount department stores in the Northwest. Jim Jones, a buyer from BigBox Stores, Inc, expressed interest in partnering with Ms. Smith, to create a private-label bike for its stores. Alongside this interest, Jones proposed three features to alleviate potential risk from the BigBox standpoint. These features include: approximately 25,000 bikes a year of inventory from Wilson to cover projected sales, which would fall under FOB shipping guidelines; a house-brand bicycle named “Lightning” sold at a lower price than name-brand bicycles, and a different appearance for “Lightning” branded merchandise. To evaluate this proposal, Ms. Smith must consider the financial impacts this new opportunity would have on Wilson’s purchasing, inventory, and production costs. If the proposal is accepted, Wilson is projected to lose about 3,300 units of regular sales volume. If the deal is rejected, Wilson could continue to see declining sales in a poor economy. Despite sales reaching over $10 million in 1993, Wilson Wheels was not considered a top of the line product and was experiencing declining revenues each year.  This has left Ms. Smith with two options, accept the deal or reject the deal.
        There are many added benefits should Wilson Wheels choose to accept BigBox’s deal. First, Wilson was operating its plant at about 75% of one shift capacity, thus indicating that there is available room for more production and thus increased sales.  Projected sales over the next 3 years is about 100,000 bikes a year.  Wilson projects that by taking the deal, there would be additional sales of 25,000 bikes per year.  Based on last year’s sales of 98,791 units, if Wilson capitalizes on their one-shift production capacity and increases utilization to 100% they would be able to produce 131,721 units (Exhibit E). Based on these projections, Wilson has the ability to fulfill BigBox’s order by running their shift at optimal level (100%) without additional production overhead.

Another benefit of accepting this deal would be to ability to leverage BigBox’s good market position and working with them would allow Wilson to expand into a new market segment. Accepting this deal would not only mitigate the risks of a poor economy and the recent sales decline but would also add additional projected profits of $577,250 surpassing opportunity cost $145,794 associated with accepting deal (Exhibit A). However, there are other disadvantages of accepting the deal on top of the opportunity cost. Since inventory could be in BigBox’s warehouses without title being passed from Wilson to BigBox for up to four months, Wilson could experience higher inventory carrying costs and lower inventory turnover indicating that fewer sales are being generated given a certain amount of inventory. This in turn could lead to cash flow issues. Also, there is a possibility that some of Wilson’s current buyers might move to a competitor should Wilson accept the deal.

        In contrast, there are a few advantages to rejecting the deal. First, Wilson would be able to preserve their established relationships with existing buyers and maintain the market value of their current products. Second, by maintaining their current business model and not entering into a new market segment, Wilson would be able to focus on the quality of their existing products.  However, they will have to find a way to address the steady decrease in sales they have experienced over the last few years. Additionally, this deal seems to be heavily favored in BigBox’s interest and they are unwilling to negotiate.  Ms. Smith must evaluate why BigBox is refusing to negotiate the terms of the deal and see if fully determine all of the risks involved.  

        As mentioned previously, we were able to determine that should Wilson accept this deal they would add about $577K in total sales.  We calculated this using the company’s current contribution margin, variable costs, and projected sales of 25,000.  Additionally, we used the previous year’s sales revenue and contribution margin to project an opportunity cost of about $145K from lost sales should the deal be accepted. To further understand the financial impact, we calculated additional costs of added assets and inventory totaling almost $113k.  After evaluating all costs of the deal and accounting for the one-time bike appearance adjustment fee, determined that Wilson Wheels would add about $311k in revenue each year should they work with Big Box (Exhibit A).  While there are some potential risks involved, we ultimately feel that it is in Wilson’s best interest to take this deal as it would increase their revenues by over 30%.

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