Mr. Jack Bonus, Purchasing Coordinator
Big Bucks International
Bonanza Boutiques Inc.
52 Billeil Road
New York, NY 08129
U.S.A

Reference: your letter, June 15, 2002

SUBJECT: Transactions of Raincoats with selling companies in Korea

Dear Mr. Bonus:

It was good to talk with you over the phone the other day, and I was especially grateful for the encouragement and helpful advice you gave. You asked me to keep you informed of results of transactions on purchasing raincoats and of the way to increase profits in future transactions, and I hope that you find that the following report meets your needs.
The purpose of this report is to inform you both of the way we performed in our transactions with Korean raincoat-selling companies and of the reason we performed in that way, so that we could be of service to Bonanza Boutique in increasing profits in future transactions. In the transactions, even though our team failed to make a healthy profit, we learned much of new purchasing techniques through our experience.

A brief background on transactions

Some background information on our initial strategy for purchasing raincoats will help you understand more clearly of the results of the transactions with Korean sellers. As for our initial strategy, the general attitude was that we, as a matter of course, should get certain number of raincoats to our destinations by certain dates so that we can make the largest profit as possible when the raincoats are resold to American retailers. The tactics were as follows:

1. We would buy maximum of 20,000 raincoats, in order to make the total profit largest. We decided to do this since we saw that purchasing maximum number of resalable raincoats would result in the increase of total profit through accumulation of the profit per unit.
   
2. Regarding the delivery dates, the earlier--but later than 10 weeks--the better. Within 10 weeks or within 11 weeks are to be preferred. (In this report, the 10, 11, and 14 weeks respectively indicates delivery date of 13, 14, and 17 weeks--which is September 16, September 2, and October 15, respectively, since we realized that additional 3 weeks are needed to deliver the raincoats from Pusan, Korea to New York harbor where our customers are.) The early delivery schedule would maximize not only the money that we would receive from retailers but also the number of raincoats that we could sell to retailers. This strategy stemmed from our concern that, as you already know, both the reselling price and the number of resalable raincoats decrease as time passes.
   
3. We would purchase raincoats on a C.I.F. basis with special packaging, so that we, by paying the already fixed price for shipment, insurance, and pressing, would avoid risk of spending more money on them.
   
4. Each raincoat should be purchased under $32.48 within 10 weeks, under $28.91 within 11 weeks, and under $25.34 within 14 weeks, lest we have any loss after paying landed costs. To help your better understanding of the maximum price of the purchase, I provided a table below.

Table 1: Maximum purchase price according to the delivery dates.
(including $.55 for special packaging)

In short, our original strategy was to purchase 20,000 raincoats on a C.I.F. basis including special packaging, with preference of early delivery within 10 or 11 weeks. We were more than ready to buy each unit under $32.48 within 10 weeks, under $28.91 within 11 weeks, and under $25,34 within 14 weeks.

Steps to the goal & results

During the transactions with Korean raincoat-selling companies, we had to adjust the initial strategy to reality, which was different from our expectations. Above all, we weren't able to get 20,000 units of raincoats due to our poor understanding of competition among buyers and the insufficient supply of raincoats in market. There was left only 16,000 units of raincoats when we were ready to purchase. While we were investigating the price and the quantity of each selling company, many of raincoats were sold to other buyers. As far as the delivery dates are concerned, we couldn't help postponing the dates to within 14 weeks, since, under our close inquiry, there was no company that offered lower than $32.48 within 10 weeks or than $28.91 within 11 weeks. The sellers proposed lower price at later delivery dates and the proposed price for early dates--within 10 or 11 weeks--was rather high than we anticipated. Unlike the adjustments of the above two points, as for purchasing on a C.I.F. basis, we kept on our plan thanks to no objection of the sellers selling on C.I.F. basis. The reason seems to have been that our additional choice of shipment and insurance was more beneficial to the sellers by getting more money. Other than units, delivery dates, and C.I.F. basis, our team changed our initial choice for special packaging to standard packaging since we found little need of special packaging for ordinary raincoats. This decision was caused by our lack of understanding of factors and conditions--we thought that we should pay additional $.55 to $3 for standard packaging--and later proven to be the fatal mistake of our team, and resultantly led our whole contracts to a failure.

Finally, after considering information about the price and the quantity of raincoats, our team bought total of 16,000 raincoats in a $14,880 profit by two contracts both with Dunn Trading Company and with Stones Trading Company. As for the profit and loss, these two contracts on raincoat-purchase together yield $14,880 in profits; the contract with Dunn brings us a loss of $2.52 per unit and total loss of $15,120, and that with Stones brings us a $3.00 profit per unit and a $30,000 profit as a whole. For better understanding of the detailed contract contents and of the profit and loss from purchase, please see the table below.

Table 2: Profit calculation of Contracts on purchasing raincoats (Unit: US $1)

Evaluation of the transactions

Our assessment of the result of the transactions with Korean raincoat-selling companies is not very positive. Even though we have potential to increase our profit in the future with many new purchasing techniques through these transactions, we haven't accomplished our initial goal and failed to make a healthy profit. The reality of transactions and our lack of understanding of factors and conditions resulted in a failure that we purchased only 16,000 raincoats within 14 weeks, and even without special packaging from Dunn company, which is contrary to our original objective--20, 000 coats within 11 weeks with special packaging. The reason for our not achieving goal is that we did not ensure that every member of our team clearly aware of all the factors and the conditions about these transactions, especially the competition in market and the special packaging. And consequently, the misunderstanding of the competition and special packaging resulted both in failures of purchasing 4,000 raincoats and in a big loss on the contract with Dunn by choosing standard packaging. And, as a result, the additional charge of $3 for pressing, which could have been avoided if we had known each packaging correctly, limited the total profit from the purchase of raincoats only to $14,880, much less than that we expected.

Recommendations for Future Efforts

To help Bonanza Boutique increase profits in the purchase of raincoats in future transactions, our team recommends that our company bear in mind two points. It would be the most important that we ensure each member fully understand and know all the factors and conditions before having transactions, so that our company can avoid many trivial but big mistakes and improve much in increasing profits in next transactions. If we had known the conditions on the packaging and pressing fully this time, we would have definitely chosen special packaging and would have much larger profit from the purchase of raincoats by avoiding pressing charges. In addition to the awareness of factors and conditions, it would be very wonderful if Bonanza Boutique makes a good information department accumulating latest information of selling companies so that we make a good strategy when it comes to the future transactions and also we reduce the total purchase cost. According to a report released by Johnson's Research, the lowest price for shipment and insurance was proven to be $0.70, which is much cheaper than $1.30 and $1.45-the price we paid to Dunn and Stones.

Conclusion

Our team regards that we can make more profit in future transactions thanks to the failure in these transactions. At last, our team bought total of 16,000 raincoats in a $14,880 profit by two contracts both with Dunn Trading Company and with Stones Trading Company. Even though we haven't succeeded in our initial goal and made a healthy profit, we can make use of this experience and the skills that we have learned in these transactions. At last, I'd like to remind you of our recommendations that Bonanza Boutique ensure the team members' full understanding of the factors and conditions and make a good information department for the latest information of selling companies so that Bonanza Boutique can improve day by day in its profit.

Everyone on the team hopes that the business is not keeping you too busy, as you were last time we met. And we really appreciate your concern and help during the transactions. If you have any questions or suggestions, please don't hesitate to contact me, at 123-7777. We are planning to be at this hotel until Sunday.

Very truly yours,

Lee Og-young
Member
Big Bucks International
Bonanza Boutiques Inc.
52 Billeil Road
New York, NY 08129
U.S.A

LOY/coe

Enclosures:

1. Copy of the contract with Dunn Trading Company
   
2. Copy of the contract with Stones Trading Company
   
3. Profit Calculation sheet