Guillermo's Furniture Store Recommendation FIN/571

With these two changes profit margins started to diminish and Guillermo recognized the need to change business strategies to remain competitive. Mexico is known as a vacation spot and also a major furniture manufacturing areas for North America because of the supply of timber in the area. In the 1990s. material costs were increasing.GUILLERMO'S FURNITURE STORE RECOMMENDATION 2 Guillermo's Furniture Store Recommendation Guillermo Navallez lives in beautiful Sonora. Following some market research. where he has run a thriving furniture manufacturing business from his home for many years. Guillermo noticed that the labor rates were rising. Sonora. He manufactures standard furniture as well as some custom. Mexico. Guillermo's business was doing well with the readily available timber and the low-cost of labor. Competitive advantage was also realized because the Norway competitor could maintain higher production rates with fewer employees and overhead. Guillermo considered two ideas with the potential to keep his business competitive within the market: . A competitor located in Norway utilizing a high-tech manufacturing process with the ability to build furniture to the exact specifications entered the furniture market. his business began to decline because of two changes taking place. As the local area continued to develop and new businesses opened their doors. high-quality furniture sold at a premium because of the superb craftsmanship. Additional challenges for Guillermo pertained to the available labor force in Sonora. This took business away from Guillermo and he had to lower his prices to remain competitive. and the cost of living in Sonora was experiencing an upturn.

Adopting this option would mean a large capital expenditure that requires financial planning. If this option is chosen. . High-tech manufacturing option The high-tech manufacturing option involves expensive equipment acquisition. this option would also mean reduced labor and operations costs. or 2. The use of robots will not only minimize the cost of labor but also increase productivity time as they can work around the clock. The only downtime necessary would be for routine maintenance and quality control. However. Upgrade Guillermo’s Furniture manufacturing to utilize automated processes similar to those used by the firm in Norway. Which option would result in a more profitable and sustainable business? What financial plans should he make? How would he finance new equipment in the event that the high-tech manufacturing business is the best course of action? Team D has been consulted to help him decide in his new business direction and to recommend financing guidelines that will help him launch successfully. Subsequent equipment would consist of robots that assemble the furniture. Become a local distributor (broker) for foreign manufacturers who have yet to break into the North American furniture market. team D will have to be prepared to give Guillermo some financial guidance in how to obtain the capital required for such equipment to be purchased. Guillermo needed some help in deciding which direction to take.GUILLERMO'S FURNITURE STORE RECOMMENDATION 3 1. Long-term financing will have to be discussed and a cash budget will need to be determined. The main equipment is a computer controlled laser lathe that cuts wood to the exact specifications that the user inputs.

opportunities. Guillermo’s marketing position also lacks competitiveness because of its desire to stay independent. Furthermore. determining its strengths. which potentially could bring many benefits. The company’s current weaknesses are in technology. and threats. access to key resources such as timber and inexpensive labor.GUILLERMO'S FURNITURE STORE RECOMMENDATION 4 How to Address Competition and Labor Costs Guillermo’s strategy to determine their competition and labor costs for each option is to establish a SWOT (Strengths-Weakness-Opportunities-Threats) analysis. However. some of the competitive advantages have shifted because of new technology and global competition. The high-tech manufacturing option will allow Guillermo’s to expand its furniture selection. and in the manufacturing automation. This analysis will provide an advantage for Guillermo to attain survival in its industry. patented process for coating the furniture. the patented furniture coating can be taken to a higher level by using it as a competitive advantage on its furniture. A competitive advantage that Guillermo already possesses is brand recognition. labor costs. Staying independent means there is no room for negotiation for a partnership or merger. Currently Guillermo’s threats include a large global competitor that uses high technology in manufacturing its furniture. weaknesses. which is ideal in attracting new customers who have a distinctive opinion on furniture style. Guillermo has to address competition and labor cost through SWOT for both options. the continued . Guillermo’s strength will always be the proximity to the resources of timber compared to his global competitors and a robust distribution network. Guillermo can take advantage of numerous opportunities to gain competitive advantage. Furthermore. That is.

and payroll. Efficiency is key for Guillermo. technical improvements in the furniture industry have . Outsourcing has taken the burden away from many organizations by removing time consuming jobs such as accounting. An important force that Guillermo cannot ignore is the increase in labor costs. companies should continously upgrade and improve the manufacturing techniques to maintain efficiency and scale. This adjustment to Guillermo’s accounting will alleviate capital for needed investments that will increase its marketability. Additionally. Addressing Advantages of High-Tech Option As mentioned previously. Over the years. The combination of prices falling and labor costs rising is a threat to any business. Guillermo observes that in the furniture manufacturing. Guillermo continues to be in a predicament because of its continuing shrinking profit margins. outsourcing will give Guillermo the ability to focus on its furniture manufacturing or distribution specialty. Guillermo Furniture Store started to observe significant changes because labor rates increased and the entrance of international firms to the market in the early 1990s. The following plan is suggested for both the high-tech manufacturing option and the distributor vendor option. Guillermo has learned that many of its competitors have cut costs by outsourcing labor. distribution. Guillermo is currently losing ground to international manufacturers employing hightech methods to manufacture furniture. which means that outsourcing will bring higher variable costs and less fixed costs.GUILLERMO'S FURNITURE STORE RECOMMENDATION 5 business partnerships and acquisitions are brining more competition to small individually owned businesses like Guillermo Furniture Company.

Automation provides a substantial edge over the other options that the company can choose from. average cost per product.GUILLERMO'S FURNITURE STORE RECOMMENDATION 6 evolved so much that furniture making has become a precision science to avoid waste and thereby reducing expense by applying lean manufacturing techniques. property taxes. Additionally. Some distributors have only a fraction of the space to distribute a small percentage of the furniture on hand. Using the hi-tech option. Distribution Vendor Option Guillermo Furniture distributions vendor option offers a variety of opportunities for Guillermo Furniture Store. Guillermo’s Furniture has also been talking with some of their distributors about what they expect to achieve with . A financial analysis of Guillermo’s Furniture Store indicates a transformation to a high-tech method will lead to increases in overhead. Guillermo’s Furniture also has to look at the advantages and disadvantages of distributing their furniture through different companies while keeping in mind to keep their extended customers happy while attracting new customers. which is producing excellent quality furniture as well as high-end custom furniture. and income tax expenditures. insurance. a transformation to a high-tech method will lead to reduced labor time. and many other advantages. They have to make and keep their reputation that the company stands for. Guillermo will notice a substantial boost in net assets despite a capital investment of $30 Million dollars. utilities. direct labor costs. depreciation. direct costs. So industrial modifications require Guillermo upgrade its production line with high-tech machines to stay competitive.

On the Income Information sheet. The new values for Net Margins were then discounted by the annual estimated overhead costs to yield net income values for before and after taxes as depicted in Table 1. What is the foreseeable strategy for the company? Guillermo furniture is also looking at a second competitor. Would their current employee’s be able to keep their jobs. Would they be able to keep their trade name? 2. production numbers were changed to reflect an estimated 5. and become a broker for the company in Norway. With only a fraction of space available when distributing through another vendor would their furniture be limited to what customers can see on hand? 4.882 high-end units and 30. 1. Guillermo’s Furniture can coordinate their existing distributors’ network. favoring instead to rely on chain distributors. which is currently operating their business out of Norway. The store operating their business did not take into consideration that they did not operate furniture outlets. even if they choose to become a distribution broker? 3. .146 mid-range units.GUILLERMO'S FURNITURE STORE RECOMMENDATION 7 distributing their furniture through another company with a list of ideas on hand that appeal to them and the distributor in mind. Option Selection Reasoning In the spreadsheet provided for Guillermo’s financial position there are some necessary adjustments to demonstrate annual performance metrics for the firm. and looking at other channels to distribute in North America.

If Guillermo were to finance $30 million for the option to upgrade to the high-tech production equipment.680 1. For our analysis.670.293. Comparatively.6M and $12M respectively for the two options.045 1.067. at a discount rate of 15% the payoff period would be six years. the projected sales figures will be used. At less than 11. If the discount rate were to stray from the assumed 15% on the $30 million payback. As the budget sheet clearly indicates. Guillermo would only need to be concerned if the rates were either less than 11.5%.132.533.665 Net Income before taxes 1.487. actual sales figures have fallen below expectations for the high-end products and exceeded expectations for the mid-range products.year objective. At the end of 10 years. Even if we add in time for plant construction.045. the broker option will yield a higher return on the . nine months and eight days. say perhaps two years. Clearly the high-tech option has the advantage.738 $3. and staff training.609 Overhead 1.246.879.999 2. the high-tech option will still be favorable for the 10. The cost of labor for the high-end units can be attributed toward the monthly deficit for the firm. the Net Present Value (NPV) for the current and broker options for a 10 year production effort at an estimated 8% investment value would yield $7.739 388.268.944 Net Income after taxes 1. however.GUILLERMO'S FURNITURE STORE RECOMMENDATION 8 Table 1 (Annual values) Continue Hi-Tech Broker Net Margins $3.368 It is important to understand that these are projected values and not based on actual sales data.952 $10.907 9. assembly.146 5.839. the high-tech option less investment amount and cost of funds would yield almost $17 million in profits for Guillermo.5% or greater than 29% (see Chart 1).

As a broker. Guillermo would become obsolete within a few years as its equipment becomes outdated. With the current situation. an organization will be like a ship without sail. Without a long term outlook on the future. More importantly. the company could be vulnerable to . Guillermo would have to lose its brand and not make use of its patented technology. the high-tech option offers a long-tem solution to Guillermo and offers the ability to maintaining its core assets: branding and manufacturing.GUILLERMO'S FURNITURE STORE RECOMMENDATION 9 ten year objective and at greater than 29% the current option may be more viable after some inefficiencies were corrected. Long-Term growth Based on our reasoning and financial calculations.

and unique finishing materials offer Guillermo’s Furniture a long term plan that will set them apart from any competitors. So high-tech manufacturing option makes financial sense and is the long term growth model of choice. it is critical for Guillermo to keep enough capital ready to be invested in new technology. new technology. Guillermo’s success will continue for many years to come if it stays aware of new ways to cut costs. The R&D lab also can be commissioned to create highly customized furniture that gives a feel that they are “handcrafted.GUILLERMO'S FURNITURE STORE RECOMMENDATION 10 other distributors waging price war.” The combination of high-tech manufacturing. He will also dedicate a R&D lab that can develop more innovative products to build into the line up. Conclusion After analyzing Guillermo’s business options the ideal proposition is for Guillermo to choose the high-tech manufacturing option. If Guillermo is proactive in utilizing the SWOT analysis and the financial evaluation provided in this report. Guillermo will be on the right path to staying competitive. custom made furniture. and continues its brand image. . Guillermo still gets to innovate by leveraging the latest furniture making equipment while increasing productivity and efficiency. however. Guillermo will continue to have industry and economic challenges.

Finnerty. Morristown. J. D. Week Six supplement: Guillermo's Furniture Store Scenario... J. (2007). Corporate financial management (3rd ed. Retrieved from University of Phoenix. University of Phoenix. & Stowe.). FIN/571-Corporate Finance course website.GUILLERMO'S FURNITURE STORE RECOMMENDATION 11 References Emery. . D. NJ: Wohl Publishing Inc. (2012). R. D.

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