EPPA 4713

KAJIAN KES INTEGRASI

SEMESTER 2 2022/2023 (SET 1)

NAMA PENSYARAH:
PROF. DR. MOHAMAT SABRI BIN HASSAN

TAJUK TUGASAN:
PRACTICE CASE 2 BABY FREEDOM : STAKEHOLDERS AND STRATEGY

AHLI KUMPULAN:

Bil. NAMA AHLI KUMPULAN NO. MATRIK

1. MUHAMMAD SUFI BIN ZULKARNAIN A180759

2. NURUL NAZIRA BINTI ADNAN A181987

3. NUR BALQIS DAMIA’ BINTI MOHAMAD JAMIL A181232

4. SITI FATIMAH BINTI YUNUS A174179

5. SITI NURASIAH BINTI MOHD AKHBAR A174854

“Mengilham Harapan, Mencipta Masa Depan”

 TABLE OF CONTENT

1.0 MAIN ISSUE............................................................................................................................3

2.0 TECHNOLOGY IN BUSINESS.............................................................................................4
2.1 RELATIONSHIP BETWEEN MANAGEMENT ACCOUNTING SYSTEMS AND
STRATEGY IMPLEMENTATION........................................................................................... 4
2.2 ETHICAL ISSUES RAISED IN ADOPTING RFID TECHNOLOGY..............................6
2.3 BABYFREEDOM’S CONTROL ON RFID TECHNOLOGY...........................................7
3.0 THE QUANTITATIVE AND QUALITATIVE FACTORS............................................... 10
3.1 PRO FORMA INCOME INCORPORATING.................................................................. 10
3.2 MICHAEL PORTER’S GENERIC COMPETITIVE STRATEGIES............................... 13
3.3 DIFFERENCES IN COMPANY’S MISSION AND VALUE.......................................... 13
3.4 EFFECTS ON CONTRACT’S DECISION...................................................................... 13
4.0 THE EFFECTS OF CONTRACT’S DECISION TOWARDS RELATED PARTIES... 14
5.0 RECOMMENDATION ON WALMART’S CONTRACT OFFER.................................. 16
1.0 MAIN ISSUE

BabyFreedom is a company that produces natural clothing lines for children. It is the
fastest-growing market segment with a projected potential demand greater than the combined
“medically necessary” segments. BabyFreedom has invested in a new, integrated system that can
collect, share, and store data across all departments. BabyFreedom carefully sources its raw
materials to ensure that they have not been exposed to chemicals at any point in the growing,
harvesting, dyeing, or weaving processes. BabyFreedom’s customers are extremely loyal to the
company. Surveys indicate that customers greatly value ethical, trustworthy companies that are
socially and environmentally responsible and that they perceive BabyFreedom to have those
qualities. BabyFreedom has emphasized good relationships with suppliers. BabyFreedom also
maintains a policy of selecting suppliers with reputations for being ethical and socially
responsible.

Walmart approached BabyFreedom about carrying the natural children’s clothing line in its
stores. The potential business with Walmart would nearly double sales volume, but some changes
would be required. BabyFreedom would be introduced to the RFID technology where it could be
integrated into the new system, either in addition to or instead of the barcode readers. Walmart’s
offer is for an initial contract of five years with a subsequent renewal option. BabyFreedom’s
projected net cash flows for the five-year contract period, given a 40.00% tax rate and a 6.25%
weighted average cost of capital (after tax discount rate), resulted in a positive net present value
(NPV) calculation.

Although the Walmart contract would result in accelerated growth for BabyFreedom over
the next five years, there are important concerns to be addressed. If BabyFreedom cannot quickly
expand capacity with a second shift, fulfilling the Walmart contract might create shortages and
missed sales from BabyFreedom’s current channels. The relationship could create opportunities
for expansion into other product lines, but management is concerned that Walmart might not be a
good channel for “natural” clothing and that Walmart would also begin to press for a less
expensive, lower-quality product line with the BabyFreedom brand name. Management is also
concerned that shrinking profit margins would significantly alter how the company chooses to do
business and its ability to maintain stakeholder relationships.
2.0 TECHNOLOGY IN BUSINESS

All companies need good information to be competitive. Technology, especially in the

areas of data gathering, analysis, and data warehousing, continues to evolve to meet this need.
Good information enables an organization to successfully develop and implement a strategy to
achieve its mission. Yet there are important qualitative (including ethical) issues that must be
addressed when evaluating investment in, and use of, these technologies.

2.1 RELATIONSHIP BETWEEN MANAGEMENT ACCOUNTING SYSTEMS

AND STRATEGY IMPLEMENTATION

According to research conducted by the IMA® Institution of Management Accountants

(IMA), management accounting systems play a crucial role in implementing a company's
strategy. The IMA suggests that effective management accounting systems provide critical
information for decision-making, help organizations evaluate their performance, and support the
execution of strategic plans. By analyzing and reporting on financial and non-financial data,
managers can identify key trends, opportunities, and threats that can inform the development of a
company's strategic plan.

Secondly, management accounting systems can help to ensure that strategy is

implemented effectively and efficiently. By providing real-time information on performance
metrics such as costs, revenues, and profits, managers can track progress towards strategic
objectives and identify areas for improvement. This information can be used to make
adjustments to the strategy as necessary, and to ensure that resources are allocated effectively to
support its implementation. Finally, management accounting systems can facilitate
communication and collaboration between different departments and stakeholders involved in
strategy implementation. By providing a common set of metrics and data, these systems can help
to align goals and objectives, and to ensure that everyone is working towards the same strategic
vision. This can help to minimize conflicts and ensure that resources are used in the most
effective way to support the successful implementation of the company's strategic plan.
 An accounting information system (AIS) is a software-based system that manages a
company's financial data and transactions. It includes tools for recording financial transactions,
generating financial statements, and providing information for decision-making. The primary
goal of an AIS is to provide timely, accurate, and relevant financial information to managers,
investors, creditors, and other stakeholders. This information can be used to make informed
decisions, evaluate the financial health of the organization, and plan for the future. An effective
AIS should have a number of key features, including data accuracy, reliability, completeness, and
timeliness. It should also be designed to meet the specific needs of the organization, and should
be flexible enough to accommodate changes in business operations, regulations, and technology.

BabyFreedom can use its AIS to implement and monitor a competitive strategy in several
ways. Here are some examples:

i) Cost Control: BabyFreedom can use its AIS to monitor its costs and identify opportunities to
reduce expenses. This information can help the company implement a cost leadership strategy,
where it aims to offer products or services at a lower cost than its competitors.

ii) Budgeting and Forecasting: BabyFreedom can use its AIS to develop budgets and forecasts
for the business. This information can help the company implement a differentiation strategy,
where it aims to offer unique products or services that stand out from competitors.

iii) Performance Measurement: BabyFreedom can use its AIS to monitor its performance against
key performance indicators (KPIs). This information can help the company evaluate the success
of its strategy and identify areas for improvement.

iv) Customer Relationship Management: BabyFreedom can use its AIS to manage its customer
data and identify trends and patterns in customer behavior. This information can help the
company implement a customer intimacy strategy, where it aims to provide a personalized
experience for its customers.
 In conclusion, an AIS can be a powerful tool for implementing and monitoring a
competitive strategy. By providing critical information for decision-making, evaluating
performance, and supporting the execution of strategic plans, an effective AIS can help a
company gain a competitive advantage in the marketplace.

2.2 ETHICAL ISSUES RAISED IN ADOPTING RFID TECHNOLOGY

The Confidentiality section of the IMA Statement of Ethical Professional Practice

requires management accountants to maintain the confidentiality of information acquired during
the course of their work, except when legally required to disclose such information.

Adopting RFID (Radio Frequency Identification) technology raises several ethical issues
related to confidentiality, as this technology involves the use of small electronic devices to track
and identify objects or people. If this technology is used to track customers, it can potentially
collect sensitive personal information such as location, purchase history, and behavior patterns.
There may be concerns about the privacy and security of this information, and the potential for it
to be misused or accessed by unauthorized parties.

To address these ethical issues, there should be limitations on the customer information
gathered and how it is used. BabyFreedom could implement internal controls to ensure that the
use of RFID technology complies with the IMA Statement of Ethical Professional Practice. In
addition, BabyFreedom should ensure that customer data is only accessed and used for legitimate
business purposes, and that it is protected from unauthorized access, disclosure, and misuse.
They should implement strong data security measures, such as encryption and firewalls, to
prevent data breaches and cyber attacks. By implementing these limitations on the use of
customer information, BabyFreedom can demonstrate their commitment to ethical business
practices and build trust with their customers. This can help to enhance the reputation and
sustainability of the organization, and ultimately contribute to its long-term success. Some of
these controls could include:
i) Establishing a clear policy on the use of RFID technology, including what data is collected,
how it is used, and how it is protected.

ii) Ensuring that customers are aware of the use of RFID technology and have the option to opt
out of being tracked.

iii) Limiting access to customer data only to those who need it for legitimate business purposes.

iv) Implementing strong data security measures, such as encryption and firewalls, to protect
customer data from unauthorized access or disclosure.

v) Regularly reviewing and auditing the use of RFID technology to ensure compliance with
ethical standards and legal requirements.

By implementing these internal controls, BabyFreedom can ensure that its use of RFID
technology is ethical and complies with the IMA Statement of Ethical Professional Practice. This
can help to build trust with customers and stakeholders, and enhance the reputation and
sustainability of the organization.

2.3 BABYFREEDOM’S CONTROL ON RFID TECHNOLOGY

BabyFreedom has been using old systems that often need to be added piecemeal as the
company grows. To conclude, it was difficult to share information among the inventory
management, production scheduling, accounting and customer management programs.
BabyFreedom has recently invested in a new, integrated system that can collect, share and store
data across all departments.Although the modules of the systems working well, there are still
issues with the inventory management and production planning modules, since BabyFreedom’s
small suppliers do not have the ability to integrate with the company’s computers systems. As a
result, incoming shipments must still be inspected, compared with invoices and purchase orders,
and then manually entered into the inventory module. The operations manager is testing barcode
readers as a way to automate this process. Once barcodes are integrated into the new inventory
management module, BabyFreedom plans to help its suppliers begin barcoding shipments by
supplying the special printers and labelers.

BabyFreedom is offered with a 5-years contract by Walmart. There are so many huge
differences between them including the barcoding systems. If BabyFreedom accepts the contract,
BabyFreedom will be exposed with RFID technology. Although it takes time and costs
BabyFreedom to practice and adapt with the RFID technology, it gives a lot of advantages
towards the company and customers. If there is a concern among staff and stakeholders whether
BabyFreedom can manage and be able to control the RFID technology, then they can see the
example from Walmart. How they manage to control the technology and benefit them in the
future.

If BabyFreedom has no problem in managing and controlling the old systems that are
much more complicated and difficult not just towards internal users, but also external users, why
not RFID technology? For sure BabyFreeedom will be able to control the use of RFID
technology attached to its merchandise. It is because RFID is flexible, convenient, easy-to-use.
RFID will help Babyfreedom in tracking the merchandise from manufacturing to storage and
allow scanning for any damage at each checkpoint. Traditional tags and barcodes get tempered
and damaged due to wear and tear. But RFIDs are highly durable and long lasting. They don’t get
damaged in harsh environments, heat, dirt and mud. If talking about kids’ safety, some common
uses for RFID applications include healthcare. The RFID tags have a dedicated chip with a
unique number that cannot be copied. Traditional systems and barcodes are vulnerable to data
breach and recording errors. Anyone can easily duplicate a barcode. RFID tags offer advanced
data encryption which hackers cannot copy. There are five main advantages of using RFID
technology which are:

I) It increases operational efficiency: One of the best benefits of RFID is that it requires
less monitoring, which frees up employees to handle other tasks and focus on more
productive efforts. Additionally, it doesn’t require any direct line of sight to read tags,
meaning multiple tags can be read at one time. Companies can even set up the RFID
reader to automatically read the tag data when needed to.
II) It eliminates human error: Manual labor always involves some level of risk for human
error. With RFID, no human intervention is necessary to read data. It can all be
automatically carried out by the reader. The benefits of RFID easily outweigh the costs.
Not only does RFID save on labor, but it increases accuracy by eliminating the errors
that come with manual data logging and product replenishment.

III) It reduces capital costs: The easiest way to keep costs low is to maintain tight control
of companies stock or assets, especially expensive business assets like test equipment,
transport packing, computer technology, field vehicles and more. If any of these suddenly
disappear, replacing them could cost companies significantly. RFID provides an easy and
relatively inexpensive way to keep track of these assets.

IV) It grants access to real-time data: The benefits of RFID go beyond freeing up
employees. RFID offers reliable track-and-trace in tough environments. This technology
can easily track and provide real-time data about inventory and product location. Whether
companies are tracking large asset inventory, individual products or batches, companies
can benefit from automatic real-time data collection.

V) Offers insights for better decision making: Real-time data can be analyzed to give
companies more insight for better decisions. RFID allows companies to stay informed at
all times, which comes in handy when it’s time to make planning and operational
management decisions that can improve companies profits.
While many companies are faced with the need to improve their processes and
efficiency, most of them are unaware of how the functionalities offered by RFID
technology can help them do so. Rather, they see RFID as a unique technology that is
expensive to implement and can cause significant downtime. In reality, it is a relatively
simple data collection technology to deploy, easily integrates with existing data collection
systems and offers benefits and returns on investment beyond all expectations. If
BabyFreedom already has a data collection system integrated with a WMS or ERP
system and wants to increase its efficiency, if barcodes don’t contain enough information
to its liking or if it has new labeling requirements, then it is ready RFID. Requiring
 minimal process reengineering, this technology can bring unparalleled benefits to
BabyFreedom manufacturing and distribution environment.

3.0 THE QUANTITATIVE AND QUALITATIVE FACTORS

3.1 PRO FORMA INCOME INCORPORATING

a. Based on a pro forma income incorporating, the effects of accepting the Walmart contract
by using the assumptions given to BabyFreedom’s management team and an initial
acquisition cost of US$25,000 and mandated Walmart gross margin of 29.8%.
BabyFreedom is assumed to maintain the same gross margin percentage for all revenues
(in other words, it cannot charge a different, higher price to its “medically necessary” or
“natural” clothing customers). For simplicity’s sake, and because BabyFreedom has not
determined its method of financing the RFID implementation. By using the weighted
average cost of capital interest will be calculated as below :-

● Net Sales: $5,013,879 × 2 (volume increase) × 0.85 (price reduction) =

$8,523,594
● Cost of Goods Sold (COGS): This is a fill-in number, providing the maximum
COGS, given that they can only have a gross margin of 29.8%. We realize that the
cost given in Figure 2 must be multiplied by the volume increase (and not the
price decrease) and the ongoing support and maintenance cost for the RFID
technology must be added to overhead and this amount ($5,847,068) leads to too
great a gross profit percentage (31.4%). By using the maximum allowable cost of
goods sold to preserve the 29.8% gross profit figure, BabyFreedom does preserve
some ability to assist its suppliers in adopting the barcode technology and is
protected (for now) from having to press for reductions in the cost of their raw
materials.
● Gross Profit: The maximum allowable under the Walmart contract is 29.8%, or
$2,540,031.
 ● Selling, General, and Administrative (SG&A) Expenses: From the case, SG&A
expenses are to be reduced to 25% of revenue, or $2,130,899. Consequently, this
will significantly reduce BabyFreedom’s ability to fund its employee programs
and benefits.
● Interest Expense: The original pro-forma income statement reported interest
expense of $36,527. BabyFreedom will finance 80% of the required $25,000
investment in RFID technology at 6.25%. This gives BabyFreedom differential
interest of $1,250, for a total interest expense of $37,777.
● Provision for Income Taxes: Students are given a tax rate of 40% on the original
pro-forma income statement (Figure 2)

Table TN-2: BabyFreedom Pro-Forma Income Statement Including Effects of

Walmart Contract :

Total ($) % of Sales

Net Sales ($5,013,879 x 2 x 0.85) $8,523,594 100.00%

Cost of good sold ($5,983,563) (70.20%)

Gross profit $2,540,031 29.80%

Selling, General, and Administrative Expenses ($2,130,899) (25.00%)

Operating Income $409,133 4.80%

Interest Expenses $37,777 0.44%

($25,000 x 0.8 x 0.625) + $36,527

Income before income taxes $371,356 4.36%

Provision for Income taxes (40%) $148,542 1.74%

Net Income $222,813 2.61%

b. The initial report stated that there is a positive NPV for the first five-year contract period
with Walmart. By using Excel and the pro forma income statement constructed in
Assignment Question 2(a), given that a 40% tax rate and 6.25% weighted-average cost of
capital, NPV value will be calculated as below :-
● The initial cash outflow in year 0 is US$25,000 for the purchase of the RFID
equipment.
● Net cash flows for the next five years are:
➔ Differential cash inflows: $3,509,715 (change in revenue)
➔ Differential cash outflows: $3,439,820 (change in COGS + change in
interest + change in SG&A)
● Use the given 6.25% weighted average cost of capital
● The Excel results are shown in Table TN-3

Table TN-3

Net Cash Flow, Year 1 to Year 5

Differential Cash Inflow ($8,523,594 - $5,013,879) $3,509,715

Differential Cash Outflow ($3,439,820)

COGS ($5,983,563 - $2,921,034 = $3,062,529)
Selling, General and Administrative Expenses
($2,130,899 - $1,754,858 = $376,041)
Interest Expenses
($37,777 - $36,527 = $1,250)

Net Cash Flow $69,896

Weighted Average Cost of Capital 6.25%

Initial Cash Outflow (25,000)

Net Cash Flow Year 1 $69,896

Net Cash Flow Year 2 $69,896

Net Cash Flow Year 3 $69,896

Net Cash Flow Year 4 $69,896

Net Cash Flow Year 5 $69,896

 NPV of Future Cash Flows $292,434

NPV of Accepted Contract $267,434

3.2 MICHAEL PORTER’S GENERIC COMPETITIVE STRATEGIES

Michael Porter’s Generic Competitive Strategies are a framework for companies

to achieve a sustainable competitive advantage for a business by choosing one of three
generic strategies. The strategies consist of cost leadership, differentiation, and focus. The
cost leadership is focused on possessing the lowest cost of production at any possible.
This strategy requires companies to design and produce products and services at a lower
cost than its competitors while maintaining acceptable quality standards. Differentiation
strategy focuses on offering unique and superior products or services to the customers in
the industry. The company must identify and develop a unique value proposition that sets
it apart from its competitors. The differentiation can be achieved through product design,
features, quality, brand image, customer service, or other factors that are important to the
target market. The focus strategy involves targeting a specific segment of the market and
tailoring the products or services to meet the needs and preferences of that segment. The
company can focus on a narrow or broad segment of the market and can choose to
differentiate itself based on cost or quality. This strategy allows the company to serve the
needs of a specific market segment better than its competitors.

Based on the article, BabyFreedom might use a combination of Porter’s strategies.

Firstly, BabyFreedom has used “Differentiation Strategy” where they differentiated itself
by offering organic-certified clothing for infants and children, which cater to the needs of
medically sensitive children. This differentiation has led to the company's success and
has allowed it to build a loyal customer base. Secondly, BabyFreedom is also using a
“Focus Strategy” by catering specifically to the needs of medically sensitive children and
developing a "natural clothing" product line for parents interested in sustainably sourced
and organically produced products. By focusing on specific market segments,
BabyFreedom has been able to create a competitive advantage and differentiate itself
from its competitors. On the other hands, Walmart is pursuing a “Cost Leadership
Strategy”, involving reducing production and distribution costs to offer products at lower
prices than competitors while maintaining an acceptable level of quality. Walmart's
requirement for BabyFreedom to lower prices significantly suggests that Walmart is
focused on offering products at low prices to gain a competitive advantage over its rivals
in the retail industry. Walmart's heavy investment in RFID technology in its distribution
chain is also consistent with a cost leadership strategy, as RFID technology can help
reduce inventory costs, increase efficiency and reduce waste in the supply chain.

Even though both companies use different strategies in their business, there are no
problems to be a good strategy when fit together if the contract is accepted by
BabyFreedom. The goal of a “Cost Leadership Strategy '', Walmart strategy, is to achieve
the lowest cost of production in the industry, while a “Focus Strategy”, BabyFreedom
strategy, aims to serve a particular market segment better than competitors. By combining
the two strategies, a company can focus on a particular niche market which is a customer
who supports and loves organic produce and offers the lowest prices to customers in that
segment. This can be achieved by Walmart and BabyFreedom optimizing the production
of the clothes process, negotiating lower prices, and minimizing overhead costs. The key
to success when Walmart and BabyFreedom combine these two strategies is to maintain a
narrow focus on a particular market segment while also keeping costs low. This also
requires careful planning and execution to ensure that the company can compete
effectively against other competitors in the industry.
3.3 DIFFERENCES IN COMPANY’S MISSION AND VALUE

3.4 EFFECTS ON CONTRACT’S DECISION

Qualitative factor that should be considered in the contract’s decision is employee

morale. BabyFreedom should consider this factor because depending on the level of
employee morale in a job, their productivity may fluctuate which will influence overall
output and performance. Employee morale is higher when employees feel encouraged
and motivated at work, this will lead to higher productivity and better work performance.

In order to meet demand for both Walmart contracts and sales through current
channels, BabyFreedom needs to increase their production capacity. As far as we know,
BabyFreedom is still in process of hiring and training a small second shift. But
BabyFreedom needs to bring on a full-second shift immediately and gradually add a third
shift in order to supply the increased demand. This will make the employee morale low
due to the pressure of work in order to meet the production capacity.

BabyFreedom should not accept the Walmart contracts because it will make
changes in BabyFreedom’s operations, prices and cost structure. BabyFreedom could use
other sales channels such as modern marketplaces that are content-driven platforms that
enable commerce. BabyFreedom could create one specific division to this platform such
as sales media division. This sales channel will be successful because buyers are already
there. They just have to constantly create content on social media to stay visible to the
buyers. Next, BabyFreedom also can use a retail channel that includes both permanent
and pop-up shops, like a short-term rental in a mall and a sales booth. This channel
provides the opportunity to build a relationship with the customers in person and get
real-time feedback.
4.0 THE EFFECTS OF CONTRACT’S DECISION TOWARDS RELATED PARTIES

If BabyFredom accepts the contract, the employees will be affected. Accepting the
contract, meaning that BabyFreedom would be using the RFID technology. BabyFreedom would
have to reduce or eliminate its employee benefits and social responsibility programs. In
BabyFreedom mission statement stated, that they provide a work environment where employees
can thrive in an atmosphere of excellence. To meet demand for both the Walmart contract and
sales, BabyFreedom would have to increase production capacity significantly. So, employees
will be pressured to prepare inventories in large quantities in a short time. Employees will also
have difficulty adapting the RFID technology in a short time. This assumption is likely to cause
employees to be unable to hold out causing them to quit. Suppliers would also be affected by the
use of RFID technology. BabyFreedom’s suppliers could begin effectively using printed
barcodes; the suppliers wouldn’t be able to adopt RFID technology. As a result, BabyFreedom
employees would need to scan the barcodes at the dock and then manually apply RFID tags

Most importantly, this decision will have a huge effect on stakeholders. Shrinking profit
margins would significantly alter how the company chooses to do business and its ability to
maintain stakeholder relationships. These are the advantages from the partnership between
BabyFreedom and Walmart towards stakeholders.:

I) Liabilities: In addition to sharing profits and assets, a partnership also entails sharing any
business losses, as well as responsibility for any debts, even if they are incurred by the other
partner. This can place a burden on stakeholders personal finances and assets. Basically,
stakeholders may be responsible for decisions Walmart makes in connection with the business. In
looking at the advantages and disadvantages of a partnership, this may be one of the top issues to
consider.

II) Loss in autonomy: While stakeholders enjoy being in total control of BabyFreedom, in a
partnership, stakeholders would now share control with Walmart’s stakeholders and important
decisions would be made jointly.
III) Emotional conflict: A host of issues can surface that may make working with a partner
difficult. For example, conflicts can arise from differences of opinion or from unequal effort put
into the business. One partner may not pull his or her own weight. Relationships can sour.

IV) Future selling complications: As circumstances change in the future, BabyFreeedom’s

stakeholder or Walmart’s stakeholder may wish to sell the business. This could present
difficulties if one of the partners isn’t interested in selling the shares.

V) Lack of stability: BabyFreedom needs to consider if they are able to cope with
unpredictability. Even if BabyFreedom has a solid exit strategy in the contract, the change
triggered by Walmart’s situation can cause instability in the business.

That’s why BabyFreedom needs to consider the decision in all aspects. It’s very important to
weigh the possible disadvantages in order to protect the good relationship between the third
parties like stakeholders, employees and suppliers.

However, if BabyFreedom does not accept the contract, it will be a big loss to
BabyFreedom. The 5-year contract would give BabyFreedom a 40% tax rate and a 6.25%
weighted average cost of capital (after-tax discount rate), resulting in a positive net present value
(NPV) calculation. These are several advantages of BabyFreedom partnership with Walmart.:

I) Bridging the gap in expertise and knowledge: Partnership gives BabyFreedom access to a
wider range of expertise for different parts of business. A good partnership may also bring
knowledge and experience BabyFreedom may be lacking, or complementary skills to help
BabyFreedom grow the business.

II) More cash: A prospective partner can bring an infusion of cash to the business. This may be
because Walmart has more strategic connections and helps BabyFreedom attract potential
investors and raise more capital to grow the business. Walmart may also enhance the ability to
borrow money to finance the growth of the business.

III) Cost savings: Having Walmart as a partnership can allow BabyFreedom to share the financial
burden for expenses and capital expenditures needed to run the business. This could result in
more substantial savings than by going it alone.
Iv) More business opportunities: Having a partnership is sharing the labor. Walmart may not only
make BabyFreedom more productive, but it may afford BabyFreedom the ease and flexibility to
pursue more business opportunities.

V) New perspective: A partnership can bring in a set of new eyes that can help us spot what
BabyFreedom may have missed. It may help to adopt a new perspective or gain a different
outlook about what BabyFreedom does, who BabyFreedom deals with, what markets
BabyFreedom pursue and even how BabyFreedom prices their products and services.

5.0 RECOMMENDATION ON WALMART’S CONTRACT OFFER

There are several potential risks associated with BabyFreedom accepting the Walmart
contract. The recommendation would be for BabyFreedom to reject that offer. Firstly, Walmart
mandates the use of Radio Frequency Identification Device (RFID) technology, which requires
all suppliers to use the technology. BabyFreedom would have to invest in and implement the new
RFID technology, at least at a basic tagging level, and Walmart would not help with this cost.
This investment would be required to meet the demands of the Walmart contract, and could put
pressure on BabyFreedom's finances. Furthermore, Walmart would require BabyFreedom to
reduce clothing prices significantly, from sector apparel gross margin percentages of
approximately 46.4% to 29.8%. This would effectively eliminate profit margins, and
BabyFreedom would have to reduce or eliminate its employee benefits and social responsibility
programs.

To meet demand both for the Walmart contract and sales through current channels,
BabyFreedom would have to increase production capacity significantly, by bringing on a full
second shift immediately and gradually adding a third shift. It is estimated that using three shifts
would provide enough production capacity for the next five years, after which the company
would need to lease additional production facilities and expand shift size. In addition, the use of
RFID technology would require significant investment in middleware and upgrades to the
inventory module, while significantly expanding server capacity. It is doubtful that
BabyFreedom would use the full level of detail generated by RFID technology, the company
needs only basic data that could also be provided by barcode readers.

There are also concerns about the cultural and strategic fit of the Walmart contract for
BabyFreedom. BabyFreedom is prominent with a reputation for ethical behavior and the trust its
employees and customers have in them. There are concerns that Walmart might not be a good
channel for "natural" clothing and the premium prices required by such products, and that
Walmart would also begin to press for a less expensive, lower-quality product line with the
BabyFreedom brand name. Shrinking profit margins could significantly alter how the company
chooses to do business and its ability to maintain stakeholder relationships.

The Walmart contract presents both opportunities and risks for BabyFreedom. On the
other hand, accepting the contract could nearly double sales volume, potentially leading to
accelerated growth over the next five years. Moreover, the implementation of RFID technology
would require significant investments that would negatively impact BabyFreedom's profit
margins and could potentially compromise its reputation for ethical behavior. It is essential to
review the current pro forma financials, the projected costs of RFID implementation, and the
qualitative and ethical aspects of the Walmart opportunity thoroughly. They should also evaluate
the potential impact on employee benefits and social responsibility programs and the company's
ability to maintain stakeholder relationships.