Gullermo Guillermo Furniture Store Analysis Situation Overview

Gullermo Guillermo Furniture Store Analysis Situation Overview Guillermo's furniture manufacturing company is located in Sonora, Mexico which was formerly a quiet vacation spot but has undergone a significant amount of development including an international airport. The organization is the largest furniture manufacturing company in this area and has been manufacturing furniture for some time now. Although the company was profitable until the late 1990's, the industry began to change. The competition was composed of firms that implemented the latest automation technology available.

This allowed them reduce expenses in manufacturing which also allowed them to come in with lower prices to the customers. Guillermo has realized that their current strategy is no longer competitive and the company must consider a new direction for the company. They can decide to upgrade and try to compete with the new competition or continue operations as they are with some or no modifications to their strategy.

Furthermore, with the combination of the new competition and the presence of a weak economy, Guillermo could choose to become a distributor of furniture instead of being a manufacturer. This move would allow the company to stay in the industry but take on a different role in their business model. However, in order for Guillermo to determine the most financially beneficial route for the company in the future, Guillermo must first create some financial metrics for their alternatives.

This will allow them the data they need for financial decisions and determine which alternative would the most profitable for Guillermo. Guillermo's Alternatives - Overview Guillermo has been successful for a number of years because of factors such as the location of the business as well as labor being relatively inexpensive in Mexico. However, trends in the industry have shifted the competitive landscape and made these advantages less important than they were previously.

Although Guillermo can probably keep the current model for a while, it doesn't appear that there is much hope for it to be profitable again given the industry changes. Therefore the company must decide how it can continue doing business. The company has identified basically three options in which they must choose from as potentially strategies.

The first option is to keep the bulk of current operations and continue to make as many small performance tweaks as possible to be as competitive as possible while mainly relying on the loyal customers for future sales. The second option is to invest in high-tech equipment and to begin manufacturing new products that will allow the company to streamline current processes. Belgium is one of the leaders in the world in such technology.

In 2009 the Belgian textile, wood and furniture industry realized a turnover of 10.5 billion euros, of which over seventy percent was earned abroad from the country's exports (Economie, 2012). Labor rates in Europe are much higher than in other parts of the world; especially Mexico. However, through automation of various manufacturing processes some manufacturers have overcome this obstacle. One furniture manufacturer in Sweden, for example, manufactures thirteen million drawers a year as a subcontractor with a fully automated factory (Automation World, 2011).

There are even enterprise resources planning (ERP) systems that can integrate with factory automation to automate many of the other business processes as well (ERP Consulting, 2012). However such systems require a significant amount of capital to build and operate and it is unlikely for Guillermo to be able to compete on this level. Yet it is important to recognize what other firms are doing in the industry. The final option is to become a distributor of another product line which will offer a variety of revenue sources.

Since becoming a distributor would be in the same industry then Guillermo would have the necessary industry experience immediately. Furthermore, many of the furniture manufactures in the industry have already made the move to become a distributor as well (Alibaba, 2012). Trading globally has become increasingly easy and there are several sources in which one can source different types of products. Therefore, many manufactures compliment their primary lines with other products which they source from foreign partners. Financial Analysis Guillermo has three basic options available to the company.

If Guillermo wishes to remain a competitor in the manufacturing industry it will definitely have to modernize operations to any chance of creating the types of efficiencies that the foreign competitors have gained. It has been identified that a semi-automated lathe will allow Guillermo's Furniture Store to reduce their operating overhead and create gains in efficiency. Although Guillermo wouldn't anywhere close to fully automated system, this would act to modernize some of their operations and make them more competitive overall.

Therefore the lathe in the manufacturing process will add significant value to the operations. The other alternative considered was ceasing the manufacturing operations and focusing on becoming a distributor of the Norwegian manufactured furniture products. This strategy would increase Guillermo's incremental cash flow, profits, and allow the company another path to future profitability. Furthermore, this option would also allow Guillermo to be competitive against other foreign furniture manufacturers who have created mass quantity efficiencies.

It would also reduce the capital expenditures that the store would no longer require the expensive high tech investments in equipment to modernize its operations. Guillermo's Furniture Store would have to integrate itself with its foreign partner. This would require that Guillermo become a supply chain distributor of the Norwegian furniture manufacturer. This move would also benefit the foreign partner who would benefit by granting them easy access to the North American market; a key market to tap into.

Guillermo could also retain the capabilities to produce a very small amount of custom high end furniture products for their loyal customers or other consumers who prefer the high-end custom furniture products. The Net Present Value (NPV) of this strategy was calculated as $108,812. Additionally, there is an estimated payback period of about six years. The weighted average cost of capital (WACC) was calculated to be 9.27%. This figured was also used as the basis to calculate the IRR which was found to be roughly 15%.

Although this option has financial potential and strategic benefits, it was not the most financially appealing alternative The case also mentions that Guillermo's Furniture had an option to lower the costs per unit of their operation. In its production process, Guillermo uses a patented coating in the assembled furniture that is relatively expensive. This coating requires the use of a flame retardant chemical in combination with a stain resistant final coating.

Therefore Guillermo could purchase a pre-fabricated and less expensive coating material that can be applied to the furniture after assembly which would not significantly alter the products value. This would eliminate the costs associated with the expensive chemicals in the patented coating that is currently applied to the furniture products. The Net Present Value (NPV) of this production change, was calculated as a positive value of $735,142. The.