The paper provides an analysis of the Case Study for Steinhouse Knitting Mills, Canada Ltd. (Steinhouse). The case is taken from the the work done by Mark Haber (Haber, 2002)
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1. Steinhouse has faced decreased sales and profits and high overheads. The company needs a strategy to survive and increase its sales.
2.There is a prospective market that sees increased sales, but Steinhouse with current product mix is not able to enter the market. The market exists for high end products with named brands and also for low end products made in China and Bangladesh and Steinhouse cannot compete in both these markets.
PEST Analysis of the External Environment
The Apparel industry in general and particularly the Sweater industry is facing problems of declining sales and increased overheads. Steinhouse operates in the higher price band and this sector is dominated by named brands such as Polo and others and departmental stores and the customers prefer such brands over the lesser-known brands such as Steinhouse. Large retailers such as Walmart, prefer to buy directly in bulk from low wage countries such as Bangladesh, China and others. The US market has a very high potential and trade barriers are not present meaning that the company can sell their products freely in the market. They are also allowed to sell in Europe and sales would depend on their quality, brand and price.
The company has seen falling sales and sales have declined from 7.5 million USD in 1968 to 2.7 million USD in 1998 while the US sales alone were 2.4 million USD. From this figure, annual overheads, excluding management salaries would be about 1.2 million USD and there would be a margin of about 7.2 percent as sales commission. It can thus be seen that there is a reduction in the profitability of the company. The market is growing in US were the products can be sold but by using wool yarn of a higher gage (p. 369). The sales people receive a commission of 7.2 percent on the gross sales that they bring in and travel and other expenses are not reimbursed. About 70% of sweaters are bought by Women for their husbands and boyfriends.
All sweaters for the fall line are 70% acrylic and 30 percent wool and this combination contributes 85 % to the annual sales while the spring verities are 50 percent acrylic and cotton. Since the company prints the word acrylic on the sweater label, customers perceive the sweater as inferior and hesitate to buy the product. All sweaters are done as per booked orders from the retailers and distributors and the company has created a huge stock of acrylic raw material that it sources from the same supplier, since 30 years. The supply cycle for the fabric and yarn takes eight weeks hence the company has to create enough stocks. Consequently the company has excess SKUs and money is held up in the process.
Retailers pay between 22 to 70USD for Steinhouse sweaters and the average price is 40 USD. The company makes 40% average gross margin and receivables are after 95 days. Customers of retail stores pay between 80 to 100 USD for a Steinhouse sweater while the average retail price of an imported sweater is 40$ or lesser.
The industry is effected by the amount of cold and if the weather is cold then sales increase and since the past few years, the weather has been less cold and so lesser number of sweaters are bought. Steinhouse does not have its own designers and Abe and Mark, the owners physically travel to Europe, gather the best samples and try to copy them. Consequently, the brand is very weak in originality and creativity. There is a shift in the men’s apparel industry and formal suits are on the decline and casual dresses with sweaters are popular. There obviously is a market for sweaters and needs to be exploited.
The company makes individually cut and stitched items and uses over 27 steps in the manufacturing process. The yarn fabrics are individually cut and this reduces the efficiency but increases the cost while low cost companies cut a number of fabrics in one setting and this produces variations between the top most and the lowest in the pile. The company uses softeners to pre shrink the fabric and also uses presses to create a good crease while other low cost companies do not do this step. Subsequently, Steinhouse incurs greater expenses.
There is an increased demand for higher gauge lightweight sweaters that are made of natural fibers such as wool and cotton. The higher the gauge, the finer the knitting and more lightweight and expensive is the sweater. The machines that the company has are not capable of producing such sweaters and the company does not want to invest in new machinery since fashion tastes keep changing. The capital cost for modem knitting machinery is about 300, 000 USD and about 20 machines would be required to meet the demand. The yarn required for these machines would have to be imported.
Social and Cultural
There are two main categories of sweater buyers, one who are brand conscious and prefer to buy named brands such as Polo and the others who are on budget and buy sweaters from low wage countries such as Bangladesh and China. Walmart and other retailers buy directly from low wage manufacturers and Steinhouse cannot match the prices offered by these companies. There is increase in US markets for high end and economical priced sweaters. Independent buyers are going bankrupt because of retailers such as Walmart.
The industry sees fierce competition both for price and sales. Please refer to the following figure.
Figure 1. Competitors for Steinhouse.
The largest company is Boutique Knitting. In Canada, the major Sweater manufactures are located in Ontario Quebec and Manitoba and in 1996, the Sweater sales was totally about 500 million USD. Current competition is Coopers Knitting, San Remo Knitting in Montreal. In Toronto, Stratton Knitting and in Winnipeg there is Standard Knitting. The competition is surviving because they are concentrating on US markets and by reorienting their products to suit the demands of Walmart and Zellers and they operate in more downtown markets with lower quality of cutting and quality.
Decisions Alternative and Solutions
The following decisions alternatives and solutions are proposed.
Alternative 1: Start outsourcing the production
It is obvious that Steinhouse cannot manufacture at the prices demanded by Tesco and other retailers and must drastically reduce its prices. Since the company has a sound technology and enough marketing experience, it must shift the manufacturing base to China and Banglagesh. Many companies have done this and the products can be manufactured as per Steinhouse specifications. They should develop a partnership with some local partners who can invest the required amount in new machinery. This will help them to cut prices to the $15 or so that Walmart demands. The company should enter into an agreement with Walmart for bulk procurement.
Alternative 1 – Option 1: Build a Viable brand
With the reduced priced products, the company can start a a vigorous advertising campaign to build their brand and create a customer awareness. Since 85% of the products are bough by women for their husbands or other relatives, the company should target such women who are above 40 years.
Alternative 2: Open a Trading and Distribution Company
The competitions and the industry has a very grim picture and it can be seen that Stainhouse cannot match the named brands such as Polo and Hiifigher not can it compete against the low priced manufactures. The best option is to open a large scale distribution center and take up procurement and distribution in US and Canada to large defense contracts, Walmart and other companies. This will ensure that the company is able to survive.
Alternative 3: Exit the Business
A third alternative is that the company should exit the business, sell the company and move on to some other business. It cannot lower the process and compete with low cost manufacturers and it does not have original designs and a name to compete with named brands. Since the financials are sound, it should quickly exit the industry.
Most Favored Alternative
The company should use “Alternative 1: Start outsourcing the production + Alternative 2: Open a Trading and Distribution Company”. This will help to reduce the costs and prices and reduce the overheads.
Profits and ROI
If the alternative mentioned above is used, then the company can have a share of the 500 million USD market and the overheads can also be lower. The investment can also be lower since it can balance the inventory, bill payments and dues so that a constant flow of good and money can be effected.
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