Tucker Hansson, Hansson Private Label, Inc.’s. (HPL) founder, has the task of reviewing and if possible, implementing a proposal presented to him by the manufacturing team. The proposal suggests investing a $50 million in the expansion of the company production capacity. This is the very first investment of its magnitude that Hansson would take. Being a private company, $50 million investment is a huge one, the last huge investment was made about a decade ago. The founder expects that there will be huge risks associated with this magnitude of the expansion. First, a $50 million investment would mean that the company would have doubled its debt and would also have significantly increased customer concentration, which would demand a bigger team. Hansson’s major problem is determining whether the returns would be big enough to be worth the risk and effort. Hansson also wonders the best approach towards evaluating the viability of this investment.
Hansson Private Label, Inc. has implemented private label brands where the retailers and not manufacturers are controlling the production, packaging, and selling of the goods. Some bigger retailers in the Label chain have integrated vertically and have their own manufacturing facilities for their private label products (Starford, Heilprin & Devolder, 2010). The majority of the retailers, however, bought their products from third-party manufacturers. Some of the manufacturers manufactured the private labels besides their branded products, while others did not produce any private label products. The new proposed change in manufacturing would solve this problem for the company.
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The HPL team also agreed that the projected posed risks that the company had never experienced before. First, the team felt that making such a huge investment and incurring the related debt would increase the company’s annual fixed costs significantly. The team also observed that there would be financial distress risk in case the company experienced a drop in sales, or should the costs rise or both. The second problem the team was worried about is that the sales in the initial years would originate from the company’s largest customer base. There are chances the demand could decimate after the first three years of a contract even though HPL has positive and long-standing relations with the customer.
To answer the question whether this project would give returns, Hanson asks the questions about payback and risk issues was more inclined to a “macro” focus than normal; Hanson wondered the value the new project would really create, how much risk the company will tolerate, and how the company could mitigate the related risks to expansion and the emerging risks along the way. He also wondered what the backup plans would be in case unforeseen risks strike. It meant that making the wrong decisions would impact the company negatively leading to higher fixed costs, increased capacity, and debt service (Starford, Heilprin & Devolder, 2010).
Another major problem Hanson was worried about was the fact that his team was not pleased with his uncertainty which was delaying the implementation process. As the manager and company director, he was fearing change, thus skeptical of implementing it because of not being sure of what it would bring forth. The team also had started feeling worried about their carriers, the company was not growing, and as a result, their careers are stagnant. Employees lack confidence in the company and do not see a bright future because no serious investment or growth is anticipated. The company seemed to lack ambition, and the future uncertain because of the director’s comfort in the current position and lack of drive for future growth.
Erick Starford, Heilprin J. & Devolder J. (2010). Hansson Private Label Inc. Evaluating an Investment in Expansion. Havrd Business School.
