Vikram Dhawan is the president of Harimann International that he established in May of 1990. Vikram established the business in an effort to fund his impending Masters in Business Administration in the United States. The business is located in Delhi, India where tax incentives are offered for business who export goods and materials to targeted countries including Japan, Canada, and France. Incentives in India include no tax on goods shipped to target countries, incentives on shipments exceeding 150,000 INR, partial rebated duties taxes on raw materials imported for the use of exported goods, cash incentives, and license renewals for materials used in production. Harimann International in its first year, 1990, focused on the exporting of linen household goods. Business was slow and profits were low until 1991 when a particular type of hand-embroidered table linen became very popular. Sales and orders increased.
Dhawan was then faced with the inability to rely on his supplier after the demand exceeded their ability to provide material need for the impending orders. Dhawan then established a second manufacturing facility employing over 100 employees and producing an average of 1,000 garments a day. In January of 1992 one of Harimann International’s first clients Pioneer Trading Company requested samples and later placed an order with Harimann for six styles of garments. The order well exceeded the 150,000 INR requirements and qualified for other incentives provided by the Indian government. Pioneer Trading Company also placed a stipulation on the order that it had to be provided by the deadline of April 6th. This deadline would give Harimann International about two months to fulfill the order. Placing the order would allow Harimann to make a large profit, but also allow him to continue to employ workers for an extend period of time that would be furloughed in other cases.
What should Harimann International choose to do? Should they accept the order and potentially make a high profit deal, continue the relationship with Pioneer Trading Company, and benefit Harimann International employees or deny the deal and not suffer the potential for a lose by not meeting the April 6 deadline established by Pioneer Trading Company?
Analysis of the Industry and the Company
Textile production and trade is the leading industry in India. According to India Brand Equity Foundation (ibef.org) the textile industry provides “14% of the industrial production, 4% of India’s Gross Domestic Product (GDP) , and 10.63 % of export earnings.” The textile industry is second only to agriculture in providing employment to the people of India proving over 35 million employment opportunities. The textile industry in India produced over 7.58 billion in revenue compared to the United States at 7.21 billion between April and July of 2010. Indian government provides incentives to organizations exporting large amounts of textile products. Incentives include tax breaks on imported raw material as well as exported finished goods, cash incentives, and insurance benefits to employees of the organization.
Possible Decision Alternatives
Harimann International is faced with a number of decisions to be made. First Vikram Dhawan can reject the order entirely and risk losing an established customer who has helped his organization grow over the past year. A second alternative is to accept the order as well as the deadline of April 6th leaving the risk of not meeting the deadline. This alternative has the potential of making a substantial profit due to the size of the order and the incentives provided by the Indian Government. This alternative also provides more work for employees of Harimann International that would not have been provided if the order is not accepted. The alternative also has the potential for disaster in that it if the deadline is not meet the respected client could and future profits could be lost. The third is to accept the order, not meet the deadline, and sell at a reduced price to Pioneer. This alternative also has the risk of losing an established customer and future business.
Evaluation of Alternatives
Three alternatives face Vikram Dhawan of Harimann International. The first is to not accept the offer and reject the proposal of delivering the product to Pioneer Trading Company. The decision would have lasting repercussions with the relationship between the two companies and inevitably cost Harimann International future profits. Harimann International will also incur a loss due to purchasing the product already and having to resale. The decision trees found in tables 3 and 4 show the loss after selling the embroidered product at 65 % of cost and the unembroidered product at 90% of cost to be a loss of $45,202.50. The second is to accept the offer with two different outcomes. The first outcome is that the order is completed and delivered on time. This outcome of alternative two will gain a profit of $315,238.
The completion of the order will also keep a good relation between the two companies with the possibility of further profit for Harimann International in the future. The second outcome is some what more complicated. The second outcome consists of probabilities that Dhawan believes will occur. As seen in tables 3 and 4 the probabilities will be applied if the shipment is not delivered on time. If the order is not delivered on time Dhawan believes that the probability of 50% payment will occur 40% of the time. The payment for this occurrence will create a loss for Harimann International of $72,081. The probability of 30% payment Dhawan believes is 40% netting a loss of $311,380. The final probability is 20% of a 20% payment of $360,720.
After careful review of the two alternatives Dhawan should proceed with the order. With an 80% chance of completing the order and a profit of $315,238 he should take the risk. Tables 3 and 4 both show the probability in dollars of accepting the order to be in the positive at $270,132.32. Table 3 uses color codes to label the arithmetic occurring and 4 is a more simple way of presenting the decision tree. Table 1 shows the total profit that can be made by achieving the order on time. Table 2 shows the loss that will be incurred if the order is not delivered on time. Even though the possibility of incurring a $360,720 loss is possible, the probability of it occurring is very small. With an 80% chance of completing the order on time Dhawan should take and complete the order with Pioneer Trading Company for a profit and securing future business that will also bring in more profit for Harimann International.