Harimann International

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Figure 1.1

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Evaluation of Alternatives: Risk Profile

According to Merriam-Webster, risk is generally defined as “exposure of someone or something valued to danger, harm or loss.” In order to protect individuals, assets and projects from harm, some organizations prefer to develop risk profiles as an unbiased tool designed to analyze potential market outcomes. In the Harimann International case, Dhawan is faced with uncertain lead times from embroidery vendors and an ambitious delivery schedule from a key customer. Based on facts presented in the case, processing the Pioneer Trading Company’s order possesses greater potential for reward rather than risk. In fact, working to meet Mr. Fuji’s delivery requirements despite payment penalties and uncertain embroidery commitments remains an attractive opportunity.

Dhawan must not overlook potential risks; however in seeking to achieve a significant profit. In addition to the monetary risk involved, Dhawan must also consider possible damages to the company’s intangible assets. For example, if Pioneer’s requested delivery date is not met, it is reasonable to expect Harimann’s reputation to be negatively impacted (in addition to the tangible short payment expected). Intangible assets do not physically exist, and as a result, they possess long-term value if properly maintained. In contrast to Harimann’s tangible assets, an intangible asset like the company’s reputation cannot be damaged by floods, fires or other accidents, but damage to such could produce a significant, long-standing, and detrimental financial impact for the company.

Evaluation of Alternatives: Risk Reduction & Alternatives

In Apology, Plato famously attributes Socrates reputation as a wise man to the belief, “that whatever I do not know, I do not even suppose I know” (Plato, 2011, pp. 21-d). As Socrates alluded, the presence of risk eliminates the certainty so many of us seek. It is reasonable for Dhawan to desire service and lead time guarantees from embroidery providers; however, the risk associated with Harimann’s current reality cannot be ignored. Rather than be victim to risk resulting from the Socratic-paradox, Dhawan should work to implement risk planning measures that mitigate negative impacts to the business. By working with his team, Dhawan can use risk planning as a proactive tool to identify potential pitfalls for production, estimate the likelihood of occurrence and take action to prevent known, avoidable risks and minimize the impact of issues that seem inevitable.

Based on facts presented in the case briefing, Harimann is already beginning to explore some alternatives to reduce risk exposure. For instance, after being notified of production delays from the embroiderer, Dhawan began to explore operational alternatives to reduce the overall lead time. The parallel processing initiative has the potential to reduce lead times from nineteen days to fifteen days (in fact, thirteen days is possible but unlikely) at no extra cost to the company. If all planned components occur as expected, Harimann International can expect to meet the April 6th shipment target; however, in the event that risk becomes part of the company’s reality, the following recommended alternatives should be considered:

- Explore (future) vertical integration by bringing embroidery in-house.

- Contact other embroidery providers to explore possibility of moving the order to a supplier with capacity to fill on-time.

- Offer an incentive program to existing embroidery vendors for early order completion.

- Obtain an insurance policy protecting the company from Pioneer short payments.

- Develop and maintain multiple vendor relationships (for future orders).

- Consider offering Pioneer Trading Company a discount (for future orders) in exchange for providing a demand forecast (to the extent this can be known).

Evaluation of Alternatives: Cost Considerations

According to our textbook (Bodily, 1998), sunk costs are costs that have already been incurred and cannot be recovered. Sunk costs are considered irrelevant pieces of information when making forward looking decisions. As a business owner, Dhawan’s primary goal is to increase revenue and gross profit; not to avoid losses, although they are related. In Harimann’s case, the company has invested 188,400 INR in fabric, lining and other materials for the Pioneer order. If Harimann rejects the order, the embroidered cloth can be resold for 65% of the original cost and the unembroidered cloth can be resold for 90% of its original value. Moving inventory through resellers would allow Harimann to reduce sunk cost to 45,202.50 INR total. Clearly, the more favorable scenario is finishing production and selling these goods to Pioneer for a profit rather than simply cutting losses. In other words, rejecting the order ensures a loss on the inventory investment; while accepting the order at least presents a few profitable scenarios.

Evaluation of Alternatives: Expected Value

In order to make a reliable recommendation to Harimann International, the expected value of available scenarios must be determined. Based on facts presented in the case, the original embroidery timeline provided the company with an 80% chance of receiving the full profit of 315,238 INR. In this instance, even if late shipment penalties are incurred the benefit far outweighs the known risk. Originally, Dhawan’s timeline was based upon a March 10th target, and used Harimann’s standard sequential production process. When all possible variables are considered, the original circumstances (pre-embroidery delay) present 216,084 INR of predicted profitability. Based on the original circumstances, Dhawan should accept the order.

Figure 1.2

Details

Probability of Occurrence

Pre-Delay

Post Embroidery Delays

On-time Delivery

80%

57.5%

57.5%

57.5%

57.5%

Receipts