The Johnsonville Sausage Co. ( A )

Ralph Stayer hung up the phone and leaned back in his chair, deep in thought. One of Johnsonville Sausage's private label customers Palmer Sausage was considering a huge increase in its Johnsonville purchases. In fact, the company was talking about placing an order that, if accepted, would account for 25 % of Johnsonville's annual sales volume. Ralph wondered how he should react . --

The Palmer Sausage Decision

The employees of Palmer Sausage had gone out on strike in mid-1985, and the company had farmed out its production of sausage items to a number of subcontractors. Johnsonville had produced ring bologna and wieners for Palmer, and the products had sold so well that Palmer asked Johnsonville to continue making the product even after the strike was settled. Palmer sold these products outside the geographic regions in which Johnsonville competed. In mid-1986, Ralph Stayer received a phone call from Palmer's vice president of manufacturing, informing him that Palmer was thinking of closing one of its midwestern plants and would consider giving the lion's share of the business to Johnsonville. As was standard practice in the industry, any contract for private label production would permit cancellation of the business with 30 days' notice. Ralph described the thoughts that raced through his mind: On one hand, we would love to have the business. We make a 25% return on assets on this private label business is profitable for us. But in our last business plan, we decided that we did not want to push private label business over 15%; after that point, it would begin to compete for capital with the rest of our business. This order alone is for a dollar volume that will represent 25% of our sales. We are running at a very high capacity utilization now. In order to process this business, we will have to run two long shifts, six or seven days a week. Johnsonville could not operate more than 18 hours per day because it was necessary to break down the equipment and clean it on a daily basis.] This will really push us to our limits. It could have a demoralizing impact on our own people and cause the quality of our own products to suffer Longer term, it will force us to build another plant much sooner than we had anticipated. Suppose we build for this business and then they cancel our contract? Our return on that investment will drop dramatically, and we will have to lay off the workers we hired for this business. Ralph wondered what he should do.--

Explain in detail how should Ralph Stayer react to the Palmer request?