Colonial Home Case Analysis

1. Problem Definition  

The president of Colonial Homes, Noel Desautels is struggling with setting up the new price list to its dealers due to the unexpected and insisted huge price increase (8%) across-the-board from their only supplier – Davey Lumber. Besides dealing with the price issue with the dealers, Noel needs to make up his mind and decide whether or not it would be more feasible for the company to switch to a new supplier under these conditions. However, the change of supplier could potentially damage the long term relationship Colonial has with Davey. Most importantly, all of these decisions he is about to make have to ensure that the company to have a positive profit for the year of 1989.  

1. Alternatives

There are two alternative options Noel already had in minds: accepting the new price change from Davey Lumber and revising the new price list to dealers or switch to a different lumber supplier that provides a much lower price such as Northland Build-It. Meanwhile, a third option is also available for the situation: splitting the supply between the two suppliers.

1. Accepting the new price change and revise the price list  

One of the biggest advantages if Noel decides to continue the contract with Davey Lumber is that they provide a six-month price guarantee while most of the suppliers don’t. The six month guarantee from Davey matches the time for Colonial updates their price list to dealer, it could keep the company continue using the revision price list as a selling tool for their business. According to the data presented in Exhibit 1 from the case, there is a possibility that the price of lumber will keep increasing in the future years. The graph and equation in Exhibit B indicates the positive slope between the market price as the number of year increases. Thus, accepting the price change now would avoid the company from facing much higher increase in the future. Last but not least, keeping the business with Davey would save the long-term partnership between the two companies.

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

As Colonial was not even close to back on a profitable track, eight percent of price increase on supply would not support the company to achieve the positive profit for the year. Although the price for the new supplier, Northland Build-It’s are only three months guarantee, the prices are 5% lower than Davey’s Lumber even before the 8% increase. Based on price history from Davey (Exhibit 3), the predicted estimated selling prices in 1989 from Northland is significantly lower than Davey (Exhibit A). With the change of supplier, the company would generate more profit from spending less money on the cost of goods sold.

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

        Davey was the only supplier for Colonial and about 50% of the revenue are coming from Colonial. At the same time, Colonial do not need to worry about the supply of parts since Davey stocked the majority of the parts for them. The two companies have build a very healthy, and strong partnership in the past years, and it is hard to find another longstanding relationship with new suppliers. Accepting the contract with Davey provides the company an opportunity to pressure Davey for future price negotiation and stabilization. On the other hand, developing a partial contract with Northland helps offset the high price from Davey, and it is always helpful for the company to have a backup supplier in the long run.  

Critical Issues

1. Accepting the new price change and revise the price list  

It is true that working with Davey Lumber provides many guarantees for the company in terms of pricing and supply during the building season. However, there are many close substitutes in the building industry. Data from the estimated sales responses (Table A) illustrates that Colonial has a very high price elasticity, which means the changes of price could have a large impact on demands. In other words, if Colonial continually increases the price because of price change of Davey supplier, they will get the company into bad situations, such as losing the number of dealers, have less units of goods sold, and low revenues in the long run for the business.