In May 1983, Susanne Leister, Baldwin Bicycle Company's vice president of sales, was mulling over a

discussion she had had the previous day with Karl Knott, a buyer for Hi-Value Stores, Inc. a chain of discount
department stores in the Northwest. Hi-Value's sales volume had grown so much that the company was
beginning to add private-labelling to the product lines sold in many of its departments. Mr. Knott, Hi-Value's
manager of sporting goods, had contacted ms. Leister to discuss the possibility of Baldwin producing bicycles
for Hi-Value. These bicycles would be called "Challanger," the name Hi-Value had decided to use for its entire
line of sporting goods. Baldwin had been manufacturing bicycles for nearly 40 years and, by 1983, the
production line included 10 models, starting with the simplest model, with extra wheels, for beginners, up to the
deluxe, adult model, with 12 speeds; its sales had reached the level of about $10 ML in 1982. Table 1 shows the
company's balance sheet as of 12/31/1982. Most of Baldwin's sales were through independent stores and
retailers (toy stores, hardware stores, sporting goods stores; these P.V.'s earned a margin of about 40% on the
selling price to the end customer (price including transportation costs--paid by the P.V.--of about $10/bike), and
Baldwin had never distributed its products through department store chains. Ms. Leister felt that Baldwin
bicycles had an image of above-average quality and price, but not at the top of the market. Hi-Value's proposal
had some completely different aspects from Baldwin's normal way of conducting business, first of all because it
was very important for Hi-Value to have quick access to large stocks of bicycles since it had had considerable
difficulty in forecasting bicycle sales, either by individual warehouse or monthly. Hi-Value wanted to manage
these stocks in its regional warehouses, but it did not want to take charge of these stocks until the products were
shipped from one of its regional warehouses to the specific Hi-Value outlet, because only then would Hi-Value
still purchase all of Baldwin's bicycles, making the 30-day payment.
Mr. Knott estimated that, on average, a bicycle could stay in a Hi-Value regional warehouse for about