Colonial Home Case Analysis

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Based on the calculation conducted (Exhibit C), under the approximately percentage change of 5.5% (8% - 2.5%) in price, the number of houses sold has gone down to 120 from 132. The calculation is done only to demonstrate the elasticity of price relationship between demand and supply. Profit remains the same because of the fact that assuming the amount of sales, transportation, and overheads are the same as the projected 1989 (Exhibit 1).

2. Switch to a different supplier - Northland Build-It

Switching to Northland Build-It can only help Colonial make large amount of profit in the short run but it is not the ideal plan for the long run development. The change of every three month increases the risk of lost revenue, lack of parts supply and complications with dealer pricing. In addition, transactional costs could also occur during the process of changing to new supplier for the company. If Noel decides to go with Northland Build-It supply, it would not only break the relationship with Davey Lumber, but also a great potential of losing Davey Lumber as a back up supplier partner if Northland is steadily increasing the prices every three months.

3. Dividing the supply between Davey Lumber and Northland Build-It

Splitting the supply between two suppliers would need extra effort and times to maintain the relationships for both companies as well as keep track of the price changes since they have different price guarantee period. The revision of price list might not be the power selling tool anymore depending since there is a three-month change of price. Moreover, it is curial to find out how many supply to get from each supplier in order to maximize the profit to the company in both short and long term.

4. Conclusion

In conclusion, I would recommend Noel to divide the supply from both Northland and Davey and I believe it will be the most feasible plan for the current situation. With the continuous increase price of the lumber industry, Noel can focus more supply with Northland in the short term first and see how the market price is going after three months. On the other side, keep the contract with Davey so the relationship is still able to maintained. Also, Colonial should take advantage of the low cost from Northland and make more effort on marketing, sales, and customers in order to boost the profit and increase the units of good sold before the building season is over. Sending out the 2.5% revised list is definitely profitable for Colonial, but it would be also helpful if Noel can consider the different price gap between the two suppliers. It is because with the lower cost from Northland, Noel might be able to set out a lower price increase and get more units sold. Last but not least, if sales can go well as expected, Noel should try negotiate or re-discuss the pricing with Davey for the long run benefits of the company. To sum up, Noel would be better off if he can start contacting Northland to work out the details of contract, and find out the amount of units the company needs from each supplier.

Appendix (Calculations refer to Excel)[pic 1][pic 2]

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