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In February 2016. Pack Fodemesi, director of Cloudwalkers Inc. a small Streetsvillle. Ontario manufacturer and retailer of functional (orthopedic) shoes, had just met with a purchasing agent from Sears Canada Inc., agent had approached Fodemesi regarding the possibility of carrying a line of Cloudwalker sandals which involved a potential order of over three times the number of sandals currently being manufactured each year.

However, during the meeting it became apparent that Sears had expected a price much lower than Cloudwalkers was prepared to offer Rick was wondering if it would be possible to agree upon a price, and if so, was it in the best interests of his company to supply sandals to a large retailer such as Sears. As he left the meeting at the Sears office, Rick was aware that he would have to contact the purchasing agent within a few weeks.

COMPANY BACKGROUND

Cloudwalkers was started in 1990 by Frank Fodemesi, Rick's father. Frank, an experienced shoemaker. decided to specialize in footwear for people with sore feet, a market that had not been fully developed He originally concentrated on children's and custom-made shoes, but eventually expanded into footwear for women. As time passed women's shoes became his major retail segment.

Over the years, the company’s image had evolved from catering to "foot problems ' to one of providing "functional" styles. As these styles became more popular. Cloudwalker’s reputation for value ( good quality at a reasonable price) attracted a base, That while not very large, was loyal and was growing gradually.

In 1996, Rick In 1996. Rick Joined his father in the small family business, after studying Business Administration at Sheridan College.

The manufacturing and retail facilities were in the same building Streetsville. Two product lines were manufactured: Cloudwalkers, a casual sandal with moulded insoles and designed to "let you walk as if in bare feet"; and Reactivators, a dress sandal for women.

These lines sold in the company's own retail store and were also distributed to a small number of selected stores in southern Ontario, Other lines carried in the retail store but not manufactured by Cloudwalkers included Alden, Miller, and Gantner, all imported.

For some time, Rick had wanted to increase the company's manufacturing activities, to make better use of its underutilized plant facilities. Expansion was also planned on the retail Side, including an increase in both the number of retailers and additional product lines, by adding footcare products such as Insoles and arch supports.

MEETING WITH SEARS

A representative from Sears had been impressed by an advertisement for Cloudwalkers in a footwear trade journal Fodanesi was contacted, and a meeting was arranged at Sears Jarvis Street headquarters in Toronto in February 2016. Sears purchasing agent expressed interest in distributing Cloudwalkers sandals to all their major retail stores and featuring it in their catalogue.

First year volume was estimated by Sears to be as high as 20.000 pairs. However, when the topic of price was raised, it became apparent to Rick that Cloudwalkers' regular wholesale price of S2600 was totally unacceptable to Sears. Although the meeting ended without a counteroffer from Sears, Rick got the impression that Sears wanted a price in the to $23.00 range. It was decided that the two parties would be in contact in a few weeks when Rick would send the agent several pairs of sandals for closer examination.

THE COSTING OF CLOUDWALKER’S SANDALS

The costs of a pair of Cloudwalkers sandals consisted of materials, labour and overhead-

Material costs included.

• Outsoles: 2.50 per pair
• Insoles: 4.50 per pair
• Leather: 4.00 per pair
• Packaging: 1.00 per pair
• Labour cost: 6.00 per pair
• Overhead Cost: $4.00 per pair. calculated as follows: overhead (fixed) costs of $24,000 per year divided by the current production level of 6.000 pairs per year.

Although only 6,000 pairs of Cloudwalkers were currently being manufactured annually (about 500 pairs per month), production of 26,000 pairs per year (over 2,000 pairs per month) could be accommodated by the plant.

Rick estimated that if production were increased to the level required by the Sears contract, the costs of gearing up production capacity to the higher level would be about 0.80 per pair produced to cover the extra labour costs.

THE DECISION FACING RICK

One of Rick's major corporate objectives was to increase the company’s manufacturing activities as eve plant was underutilized. However, he was not sure whether the contract with Sears was the best way to do this. He was extremely reluctant to lower his wholesale price since he was already undercutting his major competitor by 20%.

On the other hand, he realized that a contract with Sears would allow the Cloudwalkers brand to become established across Canada within a year. He felt that being carried by a major department store could enhance his company s image, and that It would be easier to deal with one customer with a large volume of sales. However, Rick was also concerned by the prospect of devoting about 80% of his capacity to one customer.

He might also face problems with his suppliers, especially his insoles from Germany, shipments of which tended to arrive late. At the current low level of production, this was not a major problem. However, Rick was unsure how this problem would affect his company at the much higher production levels involved in the Sears contract.

He also wondered whether a functional shoe was suitable for mass merchandising, and what effect the possibility of a lower retail price by Sears might have on his own retail business and on his sales and prices through other retailers. In addition, expansion would mean the hiring of additional workers.

As he back from Toronto to Streetsville Rick realized that his decision could drastically change the nature of his company. His initial reaction was that he could not afford to lower the wholesale price, but he wanted to expand production and knew that could not be an acceptable price to Sears. Within a few weeks, he had to contact Sears. and wondered what he should do.