CHINA COSMETIC COMPANY LTD. Dongbin Hwang, head of the key account team at China Cosmetic Company Ltd. was contemplating a call he had just received from a major European department store. China Cosmetic, a manufacturer of premium color cosmetics, specialized in the sale of individual cosmetic items, such as eyeshadows and lipsticks, through distributors and wholesalers. However, China Cosmetic's chief executive officer (CEO), Joe Zhu, had recently decided on a strategic shift for the company. He believed the company needed to focus on the growing cosmetic kits segment and to develop closer relationships with end buyers. Hwang had just been on the telephone discussing the possibility of bidding for a new account with a major European department store. The account would involve the manufacture of compact cosmetic kits for the upcoming holiday season. Although the potential benefits from the considerably large order would be significant, it would require one-third of China Cosmetic's nearly full manufacturing capacity. Dongbin Hwang wondered whether bidding on the order was worthwhile. CHINA COSMETIC COMPANY LTD. China Cosmetic had been in operation for 15 years and had enjoyed considerable success, with products being exported to more than 20 countries. When it first began operations, China Cosmetic had a sales office in Macau and a production facility in Shenzhen on the south coast of China. This facility was capable of handling the entire production procedure, including in-bound logistics, quality control, assembly, packaging and out-bound logistics. With increased demand after seven years, China Cosmetic added a new support facility in Chongqing that was responsible for raw materials handling and partial assembly of goods. Although the new facility was located in inner China, far from the south coast, the reduced labor costs offset the increased transportation costs required to ship materials to Shenzhen to be finished. One year after the introduction of the Chongqing facility, China Cosmetic acquired a third facility in Nanjing, which functioned similarly to the Chongqing facility. During the past year, China Cosmetic had been working near full capacity but Zhu believed increased profitability was possible through a re-evaluation of current strategy. He noticed that the industry was shifting its focus to cosmetic kits and away from individually packaged items. Zhu had already been contacted several times throughout the year by purchasing offices of renowned worldwide retailers seeking direct contracts. Because of these new developments in the industry, Zhu decided to set up a key account team to manage potential orders and to try to shift the company's focus from selling individual items through distributors, to selling kits directly to retailers. Dongbin Hwang, a newly graduated business school student was assigned to head this team. THE COLOR COSMETICS INDUSTRY The color cosmetics industry had recently achieved tremendous growth in the European market, and the trend was expected to continue. New product launches were very successful, with consumers responding favorably to color variety and product diversification. In particular, European consumers were responding to the convenience of compact color cosmetic kits. These kits were usually small in size and contained all the essential make-up items necessary for the day, such as eyeshadow, mascara, eyeliner, blush and lip gloss. Consumers enjoyed the idea of being able to slip their compact kits into their purses in the morning and conveniently pulling them out for touch-ups during the day. These compact kits also had the added advantage of color coordination, as consumers were able to choose kits that were specially suited for their skin tone and/or eye color. Retailers had begun merchandising these kits as holiday gifts to take full advantage of the trend THE NEW ACCOUNT OPPORTUNITY The potential client, a major European department store, wanted to offer two different kits, as described in Exhibit 1. Kit A was to provide a complete make-up solution for the day and would include one eyeshadow, one tube of mascara, one