Entrepreneurial Small Business 2nd Edition by Jerome Katz , Richard Green

Exercise 25

S Z EAST COAST IMPORTERS OVERVIEW
Herbie Shapiro has worked as a retail footwear salesman in the New York City area for nearly 20 years. The New York City native has always worked for someone else but knows the business and its people very well. Herbie has always felt that the supply side of the retail footwear business is poorly organized, and that few if any distributors provide good service to the hundreds of retail outlets in the metropolitan area.
Mei Zhao, a native of China, is a long-time acquaintance of Herbie, and a manufacturer's rep for several of the Pacific Rim footwear manufacturers. Mei functions primarily as a foreign agent and freight forwarder for the Asian manufacturers, overseeing the unloading and trucking of container ship cargo.
Mei shares many of the same views as Herbie when it comes to the distribution and supply side of the retail footwear business. Both men are at the midpoint of their careers, have built a solid business and personal relationship with each other, and following several meetings, have decided to form a partnership. S Z East Coast Importers has the opportunity to lease a 60,000-square-foot warehouse with a buy option in northern New Jersey for purposes of establishing a distribution center for the metropolitan area retail footwear business.
Mei already has many good links and relationships with the major suppliers and shippers of retail footwear. The partners plan to import a wide range of products including casual shoes, athletic footwear, fashion and outdoor boots, slippers, socks, laces, pads and inserts. Mei has access to all the major national brands as well as the bargain priced no-name lines.
In addition to his long association and membership in local and national footwear organizations, Herbie knows many store owners and employees within the New York-New Jersey metro area. Herbie is well liked and well respected. The partners believe that their strong combination of supply side and retail experience will provide them with access to many good markets.
As is the case in many industries, there are a very small number of large suppliers of manufactured products coupled with a very large number of small retail stores. One of the major keys to success therefore is the existence of an efficient, wellorganized system of distribution. Herbie and Mei are focusing their efforts on doing a better job than the competition and on filling that niche in the footwear market.
LOGISTICAL ISSUES AND CHALLENGES
Most of the aforementioned footwear products arrive at the West Coast on giant container ships. After clearing customs, the containers are offloaded onto tractors for local (western) delivery and onto railcars for Midwestern and East Coast distribution. Herbie and Mei plan to set up their building as a warehouse and distribution center.
Warehouse and distribution centers must purchase virtually all their products in large quantities. Herbie and Mei will be faced with buying stock shipments ranging from no less than 1,000 to as many as 50,000 to 100,000 units of laces, shoes, socks, running shoes, and so on.
Retailers on the other hand typically must purchase very small quantities of mixed loads of products, primarily because of a lack of retail and storage space. Herbie and Mei will be faced with orders that call for 50-150 pairs of laces, shoes, socks, running shoes, and so on.
Warehouse and distribution centers must therefore be set up to receive, unload, and store large shipments of product (railroad cars/tractor trailers), to "break bulk" (unpack, count, inventory, and repack) and to load and deliver small mixed loads to retail establishments. Many metro area retailers are located on cramped and busy streets with limited access.
The financial side of Herbie and Mei's business looks very promising. Thanks to Mei's connections with suppliers and Herbie's connections with the New York-New Jersey metro market, the partners anticipate an average markup of 30-40% for their products. That is about twice as much as Mei earns as a manufacturer's rep.
In order for their business to succeed, several variables and logistics must fall into place and be properly managed. Their warehouse and distribution process, quality of service, and financial management must operate at maximum efficiency. In addition to in-house efficiency and cost control, the company must also buy and sell enough volume of product to cover all costs and generate profits.
Retail customers are looking for timely and frequent deliveries of small quantities of very specific products. Some of those customers may need merchandising help as well. If their products are not selling, the distribution centers and manufacturers will soon be backed up with product as well. Retail sales are the key to avoiding a "bottleneck" in the process and flow of manufacturing and distribution.
The financial side of this business requires close and careful management of receivables and payables. Many manufacturers expect and receive payment for their products in about 10 days. This is essential to the sustained cash flow of their operations (primarily for payroll and raw materials purchases). Some manufacturers are in a position to offer credit terms of up to 30 days. Retailers on the other hand often require accounts payable terms ranging from 30 to 60 days. This is essential to the sustained cash flow of their operations, as customer sales are the primary source of funds.
So while the prospect of a 30-40% markup is clearly attractive, there is a cash flow situation and challenge that must be met.
Herbie and Mei are unsure about the best way to facilitate and manage trucking and insurance. They have the option of buying or leasing their own trucks on both the supply and delivery side and also have the option of using independent trucking companies. They could select some combination of those two options. In addition, merchandise must be insured, but who exactly is responsible for that coverage and when does that "ownership" change hands
The partners project monthly warehouse operating expenses of $55,000 (building, payroll, administration, and salaries). This does not include merchandise, trucking, or insurance. The partners have conservatively projected first year sales to be $3 million.
Their warehouse inventory capabilities are in excess of $30 million. Herbie and Mei realize that it will take some time to approach that level from both a sales and cash flow perspective. Their facility and market base clearly present the potential to achieve sales of $40 million or more. Cash flow is the current obstacle. They have just over $4 million in cash and working capital (line of credit) for their start-up and believe that that will accommodate first year sales of $3 million given their logistics of inventory purchase, sales, and cash flow.
From a distance, the prospect of success is promising. The partners have the opportunity to buy low and sell high in large volume. There is a market niche to fill. The partners have the experience and the connections on both the supply and sales sides of the business.
How can the principals use technology to achieve success in their new venture Be sure to address each of the major categories presented, i.e., purchasing, transportation, operations, distribution, and financial management.