Business Management Prac ces

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1 Business Management Prac ces for Small to Medium Sized Forest Products Firms Omar Espinoza Robert Smith

2 Preface Oneofthemostexcitingandfrighteningchoicesanindividualcanmakeistostarta smallbusiness.yetthisentrepreneurialspiritisthebackboneofoureconomyand thefreeenterprisesystemthatdrivesmanyindividualstogreatsuccess.from HenryFordtoFrederickWeyerhaeuser,individualswithagoodideacanhelpshape anation.thisbookiswrittentoprovidetheinformationyouwillneedtostartyour smallforestproductscompany.however,businessplanningisnotwhatyoureally wanttodo.ifyouarelikemostentrepreneurs,youhaveaproductorservicein mindandwanttosellitwithoutalotofformalplanninginmind.yet,sincethe majorityofsmallbusinessesfailwithinfiveyears,themoreyouplanbeforeyou startthebusiness,thegreaterthechancesofsuccess.comingfromafamilythatran successfulandnotdsodsuccessfulsmallbusinesses,iamconfidentthatifyouapply theconceptsinthisbook,youwillhaveabetterchanceofcapitalizingonyour businessideaandhaveasuccessfulenterprise.thisbookisa workplan foryou.if youanswerthequestionsattheendofthechaptersanddevelopthesuggested businessplan,youwillhaveanideaoftheworkthatisneededtobesuccessful. Acknowledgments RobertSmith TheauthorswouldliketoacknowledgetheDepartmentofSustainableBiomaterials atvirginiatechandthedepartmentofbioproductsandbiosystemsengineeringat theuniversityofminnesota.anumberofstudentshelpedinthepreparationofthis manuscript,includingscottlyonandchrisrideratvirginiatechandmaria FernandaLaguardaMalloattheUniversityofMinnesota.Finaleditorial contributionsweredonebyhelenthompsonatvirginiatech. ThisprojectwassupportedbytheWoodEducationandResourceCenter, NortheasternAreaStateandPrivateForestry,ForestService,U.S.Departmentof Agriculture,awardnumber:2010DDGD148. VirginiaTechdoesnotdiscriminateagainstemployees,students,orapplicantsonthebasisofage,color, disability,gender,genderidentity,genderexpression,nationalorigin,politicalaffiliation,race,religion, sexualorientation,geneticinformation,veteranstatus,oranyotherbasisprotectedbylaw.forinquiries regardingnonddiscriminationpolicies,contacttheexecutivedirectorforequityandaccessat540d231d 8771orVirginiaTech,NorthEndCenter,Suite2300(0318),300TurnerSt.NW,Blacksburg,VA Frontcoverphotocredits:RobertSmithandOmarEspinoza. Backcoverphotocredits:RobertSmithandMariaFernandaLaguardaMallo. Coverdesign:MariaFernandaLaguardaMallo. ii

3 BusinessManagementPractices forsmalltomediumsizedforestproductsfirms OmarEspinoza AssistantProfessor ForestProductsManagementDevelopmentInstituteChair BioproductsandBiosystemsEngineeringDepartment UniversityofMinnesota St.Paul,Minnesota RobertSmith ProfessorandHead,DepartmentofSustainableBiomaterials andassociatedeanforengagement CollegeofNaturalResourcesandEnvironment VirginiaPolytechnicInstituteandStateUniversity Blacksburg,Virginia Publishedby: VirginiaPolytechnicInstituteandStateUniversity PrintingServices Blacksburg,Virginia June2015

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5 Table&of&Contents& Introduction...1 Chapter1:TheU.S.ForestProductsIndustry...3 ProductsandMarkets...4 Lumber...5 PulpandPaperProducts...10 StructuralWoodDBasedPanels...11 NonstructuralWoodDBasedPanels...11 EngineeredWoodProducts...12 WoodEnergyProducts...15 ValueDAddedWoodProducts...16 IndustrialWoodProducts...19 ChapterQuestions...20 Chapter2:WhatIsBusinessManagement?...21 TheManagementProcess...21 Planning...22 Organizing...22 Implementing...23 Controlling...23 Manager schecklist...23 EmployeeEngagement...24 ChapterQuestions...25 Chapter3:StrategicPlanning...27 MissionandVisionFormulation...28 Mission...28 Vision...29 SWOTAnalysis...29 LongDTermStrategiesandObjectives...31 ShortDTermStrategiesandObjectives...31 StrategyImplementationandEvaluation...32 ChapterQuestions...33 Chapter4:HumanResourceManagement...35 HumanResourcePlanning...35 JobDescriptionsandSpecifications...36 RecruitmentandSelection...37 TrainingandDevelopment...40 CompensationandBenefits...42 ChapterQuestions...44 Chapter5:MarketingManagement...45 MarketingFundamentals TheFourP s...45 Product...46 Promotion...47 Price...48 Placement...51 iii

6 MarketResearch...52 TalktoCustomers...53 WatchCompetitors...54 ReadTradePublications...54 AccessInformationFromAcademicInstitutions...54 ContactGovernmentAgencies...55 MarketCustomizationandNicheMarketing...55 OnlineMarketing...58 Websites Marketing...58 OnlinePromotionsandAds...58 SocialMedia...59 CommunicatingtheEnvironmentalAttributesofWoodProducts...60 ChapterQuestions...63 Acknowledgment...63 Chapter6:OperationsManagement...65 ProductDevelopment...65 ManufacturingStrategy...66 ProductDOrientedStrategy...67 ProcessDOrientedStrategy...69 CellularProductionStrategy...70 MassDCustomizationStrategy...71 ProductionPlanning...73 AggregatePlan...73 MasterSchedule...73 ShortDTermScheduling...75 InventoryManagement...75 QualityandProcessControl...77 Maintenance...78 RecentTrendsinOperationsManagement...79 LeanManufacturing...80 SixSigma...82 SupplyChainManagement...83 ChapterQuestions...84 Chapter7:FinancialManagement...85 FinancialPlanning...85 FinancialStatements...86 IncomeStatement...87 BalanceSheet...87 CashFlowStatement...89 FinancialRatios...90 AssetManagementRatios...90 LeverageRatios...91 LiquidityRatios...92 ProfitabilityRatios...92 iv

7 BreakDEvenPointAnalysis...93 CapitalExpenditureEvaluation...93 PaybackPeriod...93 NetPresentValue...94 InternalRateofReturn...95 SourcesofFinancing...97 PersonalSavings/FriendsandFamily...97 BankLoans...97 VentureCapital...98 FederalorStateGovernmentFinancialAssistance...98 SmallBusinessInnovationResearchandSmallBusinessTechnologyTransfer Program...98 ChapterQuestions...99 Chapter8:WritingaBusinessPlan ExecutiveSummary GeneralCompanyDescription ProductsandServices MarketingPlan MarketDefinitionandOpportunity CompetitionandExternalForces MarketingStrategy MarketResearch SalesForecasts OperationalPlan ManagementandOrganization FinancialPlan FinalRemarks ChapterQuestions References AppendixA:UsefulLinks NationalTradeAssociations RegionalTradeAssociations TradeandMarketPublications FederalAssistance ExportingAssistance EnvironmentalOrganizations UniversityResearchCenters AppendixB:BusinessPlanforTheHouseofPine TableofContents ExecutiveSummary Mission KeystoSuccess CompanySummary CompanyOwnership CompanyLocationsandFacilities v

8 StartDupSummary ProductsandServices MarketAnalysisSummary MarketSegmentation StrategyandImplementationSummary CompetitiveEdge SalesStrategy ManagementSummary PersonnelPlan FinancialPlan BreakDevenAnalysis ProjectedProfitandLoss ProjectedCashFlow ProjectedBalanceSheet BusinessRatios vi

9 Introduction& ThereisnobetterdeterminantforlongDtermbusinesssuccessthanfollowinggood businesspractices.however,manysmalltomediumsizedforestproducts companiesdonotstartwithadequatetraininginthisarea.thedevelopmentofthe businessinmanycasesisbasedupontheowner spassionforworkingwithwood. Therunningofaprofitablecompanymaynothavebeenintheowner sinitialplans. Inothercases,thedayDtoDdaypressuresofrunningabusinessmaynotallowthe ownertimetodevelopsoundbusinesspractices.thepurposeofthisbookisto provideaneasydtoduseguideforbusinessmanagementintheforestproducts industry. Thecontentsofthisbookarebasedontheauthors managementexperienceinthe forestproductsindustryandaseducatorsandresearchers.theideaforthiseffort arosefromourinteractionswithindustry,inwhichmanyownersandmanagers identifiededucationinbusinessmanagementandplanningasamajorneedfor companies. Thisbookisorganizedintoeightchapterscoveringmajortopicsinbusiness management.althoughthechaptersfollowthebusinessplanningprocess,theydo notneedtobereadinsequence.conceptsandcalculationsareillustratedwith examplesfromtheforestproductsindustry.throughoutthebook,examplesthat illustratethedifferenttopicsareprovidedinboxes;linkstorelevantwebsitesare alsoincluded.alistofquestionsisprovidedattheendofeachchaptertohelp managersandentrepreneursthinkaboutthecriticalaspectsofbusiness administration. Chapter1providesabriefintroductiontotheU.S.forestproductsindustry, includingitsimportanceanditsmajormarketsandproducts. Chapter2brieflyintroducesbusinessmanagementandthebusinessplanning process.theremainderofthebookisorganizedfollowingthebusinessplanning process. ThelongDtermsuccessofabusinessdependsingreatpartontheowner sabilityto formulateandexecutestrategy.chapter3introducesthemostimportant componentsofstrategicplanning,fromformulatingthemissionandvisionofthe enterprisetostrategyimplementationandevaluation. Peoplearethemostimportantcomponentofanorganizationandarecriticalfor successfulstrategyimplementation.chapter4discusseshumanresource managementindetail,fromrecruitmentandselectiontocompensationstrategies.

10 Chapter5describestheprocessofmarketingmanagement,includingthe fundamentalfourp s(product,price,promotion,andplacement),methodsto conductmarketresearch,andstrategiesforcustomizationandnichemarketing. Sincetheimportanceofsocialmediaandonlineadvertisingisgrowingforall industries,includingwoodproducts,thischapteralsoincludesanintroductionto onlinemarketingstrategies.strategiestoincorporatetheenvironmentalattributes ofwoodintothecommunicationsstrategyofthefirmarealsodiscussed. Forestproductsfirmsmustcompetenotonlyagainstotherfirmsinthesamesector butalsoagainstcheaperimportsandsubstitutematerials;thus,streamlining operationsandbecomingmorecustomerorientedismoreimportantthanever. Chapter6discussesoperationsmanagement,includingproductdevelopment, manufacturingstrategy,operationsplanning,inventorymanagement,qualityand processcontrol,andmaintenance.thechapterendswithadiscussionoftherecent trendsinoperationsmanagement,suchasleanmanufacturingandsupplychain management. Chapter7providesadetaileddescriptionofthefinancialmanagementprocess, startingwithfinancialplanning.thischapteralsoprovidesaguidetofinancial statementsandratios,andhowtousethemtomeasureandimprovebusiness performance.businesseshavelimitedresources,andinvestmentdecisionsmustbe madebasedoncarefulevaluation.chapter7includesanexplanationofthemajor capitalexpenditureevaluationmethodsused.financingoptionsfornewventures arealsodiscussed. Anynewbusinessventureormajorprojectwithinanexistingbusinessshouldstart withawrittenanddetaileddescriptionofthebusinessgoalsandthewaytheowner planstoaccomplishthosegoals;suchdocumentiscalledabusinessplan.chapter8 describestheprocessofpreparingabusinessplanandlistsusefulresourcestoaid inthewritingofsuchadocument. Finally,AppendixAincludeslinkstoorganizationsthatthereadermightfinduseful duringbusinessplanpreparationorduringthedaydtoddayrunningofthe enterprise.appendixbincludesanexampleofacompletebusinessplanfora forestproductscompany. 2

11 Chapter&1: The&U.S.&Forest&Products&Industry& Fromthedawnofthecivilizationtomoderntimes,woodhasbeenusedfor countlessapplications,fromenergytotoolstoshelter.inessence,forestproducts havebeenoneofthekeystothesuccessanddevelopmentofhumans.historically, fewindustrieshavecontributedmoretothedevelopmentoftheu.s.thanthe forestproductsindustry.timberproductswereactuallythefirstu.s.exportwhen thepilgrimssenttheshipfortunebacktoenglandin1621 ladenwithgood clapboardasfullasshecouldstow [1].Woodhasplayedanimmenselycentralrole inallaspectsoftheu.s.economy,fromtransportationtoconstruction,andenergy tocommunications. TheUnitedStateshassomeofthemostproductiveforestsintheworld.The country sforestproductsindustryisalsooneofthemostdynamicsectorsofthe economy.althoughtheu.s.hasonly7.5percentofthetotalglobalforestarea,it produces22percentofalltheindustrialroundwood,andamericansusefivetimes moretimberpercapitathantherestoftheworld[2].andyet,thecountry s forestedareahasnotchangedinmorethanahundredyears theresultofsound forestmanagementpracticesandastrongwoodculture[3].theforestproducts industryisamongthetop10employersin47states,generates4.5percentofthe manufacturingoutput,andemploysnearly1millionpeople[4].theindustryisalso theleaderinrenewableenergygeneration,producingmorethanafifthofthe renewableenergyconsumedinthecountry[5]. TheU.S.forestproductsindustryhasbeenfacingsubstantialchallenges.Domestic woodproductsmanufacturershavelostmarketsharetolowdcostproducers overseas,withsomesectors,suchashouseholdfurnitureandflooring,particularly affected[6,7,8].furthermore,theeconomicrecessionof2008andthedeclinein thehousingmarkethavenegativelyaffecteddomesticdemand,resultingin thousandsoflayoffsandplantclosures[9,10,11].substitutematerialssuchas steel,plastic,andconcretearetakingmarketshareawayfromwooddbased productssuchassiding,framing,ordecking.also,theincreaseinelectronic communicationshasimpactedthepaperindustry[12],reducingthedemandfor fiberconsiderably.u.s.softwoodandhardwoodlumbershipmentsdroppedby morethan40percentbetween2005and2009[13,14].whilemarketshavestarted torecover,joblossesintheforestproductssectorareestimatedtobeinthe hundredsofthousands[15],withsmallbusinessesandruralcommunitieshit particularlyhard[16,17]. Toevaluatethemarket(s)youareabouttoenter,itisimportanttohaveagood understandingoftheexistingindustry.theforestproductsindustryisasdiverseas anyonearth.productsrangefromthepaperwewriteontothehouseswelivein. Productsfromtheforestcanbefoundintoothpastetojelly,andfromcancerdrugs 3

12 topizzacrust.thischapterwillintroducethemostcommonmarketsintheforest productsindustry. ProductsandMarkets TheU.S.forestproductsindustryhasevolvedintoacomplexnetworkofsuppliers, customers,materials,products,andrelationships,asillustratedinthegeneralized supplychainmodeshowninfigure1. Lumber Secondary products manufacturing Millwork, furniture cabinets, flooring, etc. Fiber, lumber, bolts, etc. Logs Sawmills Wood chips Engineered wood products manufacturing Glulam, OSB, MDF, trusses, CLT, etc. DISTRIBUTORS, RETAILERS, CONTRACTORS Distributors, retailers, contractors Final Customer Pulp and paper manufacturing Paper products Figure1.Generalizedwoodproductssupplychain. Logsareharvestedandmerchandisedtomaximizetheirmarketvalue.Accordingto theirquality,logscanbedesignatedforpulpandpaperproducts,construction lumber,veneerorpanelproducts,andlumberforfurtherprocessingintovalued addedproducts.afterconversion,woodproductsaresoldtowholesalers,retailers, orcontractors,whointurnsellthemtothefinalcustomer.differentchannelsof distributionareusedforeachproductcategory.forexample,mosthousehold furnitureissoldthroughindependentretailers[18],whilehardwoodlumberis shippeddirectlytousersorsoldthroughdistributors.housingcontractorscanbe suppliedbywholesalers,retailers,ordirectlyfrommanufacturers.throughoutthe supplychain,woodresiduesareusedasfuelorasrawmaterialforengineered woodproducts,woodpanels,landscapingproducts,orwoodenergyproducts. Forestproductscanbeclassifiedbroadlyintoprimaryproducts(thosethatare obtaineddirectlyfromlogs)andsecondaryproducts(thosethatarederivedfrom primaryproducts).intheremainderofthischapterweprovideabriefdescription ofthemajorproductcategories,basedontheproducttreeinfigure2.thisisnot intendedasacomprehensivelist(manyproductsarenotlisted)butprovidesa goodrepresentationofthedifferentmarketsegmentsandproducts. 4

13 5 Figure2.Majorforestproductsclassification. Lumber& Lumberhasbeenmanufacturedandusedformanycenturies;thebasicprinciplein whichlogsareconvertedintolumberhasnotchangedovertheyears.beforethe useofsteamandelectricsaws,earlylumbermanufacturingwascarriedout through pitsawing, inwhichatwodpersonteam,oneontopofthelogandthe otherbelowitinapit,wouldholdalargesaw(whipsaw)andalternatepullingthe Forestproducts Primaryproducts Lumber Hardwoodlumber Sonwoodlumber Paperandpaper products Structuralpanels Plywood Orientedstrandboard Nonstructuralpanels Decoraoveplywood Parocleboard MediumDdensityfiberboard Hardboard Engineeredwood products Glulam Laminatedveneerlumber EngineeredIDjoists CrossDlaminatedomber Woodenergy products Woodpellets Woodbriqueqes Secondaryproducts ValueDaddedwood products Furniture Kitchenandbathcabinets Millwork Flooring Deckingandrailingproducts Windowsanddoors Industrialwood products Palletsandcontainers Railroadoes Cranemats Roadconstrucoonproducts Uolitypoles Miningsupplies

14 sawthroughthelog.thisprocessrequiredalotofphysicaleffortandtime,andthe volumeoflumberproducedwassmall:atwodpersonteamcouldsawonlyabout 200boardfeet 1 oflumberperday[19].waterddrivenpowersawingmechanized theprocessbymeansofawaterwheel,greatlyincreasingproduction.steamd poweredbandsawswereintroducedintotheunitedstatesduringthe1800s.the early1900sbroughtmaterialhandlingmechanizationtothesawmillprocessand, duringthelatepartofthecentury,scanningandprocessoptimizationtechnology greatlyenhancedefficiencyandaccuracy.today smodernsystemsenablean averageu.s.hardwoodsawmilltocut7.6millionboardfeetperyear[20],anda softwoodsawmillover50millionboardfeetperyear[21].in2005,u.s.lumber productionreachedarecordof51billionboardfeet,78percentofwhichwas softwoodlumber[22]. Althoughthetransformationprocessfromlogsintolumberisfundamentallythe sameforbothhardwoodandsoftwoodspecies,therearesignificantdifferencesin thewaytheyaregraded,traded,anddistributed.thesedifferencesarisefromthe differentfinalusesforhardwoodandsoftwoodlumber,asexplainedinthe followingsections. HardwoodLumber Hardwoodlumberproducersformahighlyfragmentedindustry,withalarge numberofsmallcompanies,primarilyconcentratedintheeasternandcentral UnitedStates.Hardwoodlumberisusedforavarietyofpurposes,fromfurnitureto flooringtopallets.itisusuallycuttorandomwidthsandtouniformthickness, whichusuallyrangesfrom1to3inchesandisexpressedinincrementsofquarters ofaninch(4/4,5/4,6/4,8/4,10/4,and12/4).lengthsrangefrom4to16feet. 6 Figure3.Atthehardwoodsawmill s greenchain, processedlumberisclassifiedinto gradesandlengths,andsortedaccordingly.photocredit:robertsmith. 1 Aboardfootistheamountofwoodinaboard12incheswide,12incheslong,and1inchthick.

15 Hardwoodlumberismarketedusingaqualityclassificationsystemdevelopedmore thanacenturyagothatismaintainedbythenationalhardwoodlumber Association(NHLA)[23].Lumbercomesfromalivingorganismandtherebyis susceptibletodefectsandimperfections;noticeabledefectsincludeknots,stain, cracks,rot,andwane.thenhlalumbergradingrulesarebasedonthepercentage ofthetotalfacedareaoftheboardthatisclearofanydefects[24].asampleofthe NHLAgradingstandardsispresentedinTable1;furtherexplanationfollows. Table1.NHLAgradingrulesforhardwoodlumber[25]. Criteria Minimum board Minimum sizecuttings %clear #clear cuttings Lumbergrades FAS F1F SEL 1Com 2ACom 3ACom SM 10 (83⅓%) Betterface mustmeetfas requirements. Poorfacemust meet1com requirements SM 8 (66⅔%) SM 6 (50%) SM 4 (33⅓%) SM/4 (SM+1)/3 SM/2 Unlimited ThecolumnheadingsinTable1listthelumbergradesfromhighesttolowest(left toright).thefollowinggradedefinitionsarebasedon TheIllustratedGuideto AmericanHardwoodLumberGrades, publishedbytheamericanhardwoodexport Council[26]. FASstandsforFirst&and&Seconds.Thisisthehighestlumberqualityunderthe NHLAgradingrules.BoardsgradedFASprovidelong,clearcuttingsthatextendto bothfacesoftheboard.theseboardsaresuitableforhighdqualityfurniture, doors,interiorjoinery,andsolidwoodmouldings. F1FgradelumberissimilartoFASexceptthatonlyonefaceisrequiredtomeet thefasspecifications.theotherfacemustmeetalloftherequirementsforthe Number1Common(1Com)grade(seebelow). SELstandsforSelects.ThisgradeisverysimilartoF1F;theprimarydifferenceis thatlumberthatfallsintothisgradeallowsaminimumboardwidthof4inches andalengthof6feet. 1ComstandsforNumber&1&Commonandcanalsobereferredtoas cabinet grade. 1Comgradelumberiscommonlyusedinmanufacturingfurnitureand cabinetparts. 2AComstandsforNumber&2A&Commonandcanalsobereferredtoas Economy gradeowingtoitslowerpricepoint.2acomlumberisusedtomakeavarietyof furnitureparts. 7

16 3AComstandsforNumber&3A&Commonandisoneofthelowestgradesthatcan beassignedtolumber.itwillhaveaverylowpricepointandwillhavetobe reworkedintensivelyforfurnitureparts. ThefarleftcolumnofTable1providesinformationregardingthewayeachgradeis established. Minimumboardreferstotheminimumboardwidthandlengthassociatedwith eachgrade. Minimumsizecuttingsreferstotheminimumsizeofthecuttingsrequiredtoget aclearpieceofwoodfromtheboard. %clearlistssurfacemeasure(sm)equationstocalculatetheamount,asa percentage,ofclearfacethatneedstobeshowing. #clearcuttingsistheminimumnumberofclearcuttingsthatcanbetakenfroma boardandiscalculatedbydividingthesurfacemeasurebythecorresponding numbershownintable1. Whileindividualcompaniesmayusecustomgradesfortheirlumberpurchasesor sales,thenhlagradingrulesforhardwoodlumberarethenationalstandardfor understandingthequalityoflumberbeingsold.manycompaniesusenhlagrades andpricesasabasisforpricenegotiation.hardwoodlumberpricesarepublished bythehardwoodmarketreport[27]andthehardwoodreview[28];bothare subscriptiondbasedpublications.thehardwoodmarketreportisasmallbooklet producedweeklycontainingtheaveragepriceforhardwoodlumber(indollarsper thousandboardfeet)ofspecificgrades,thickness,andspecies.thehardwood Review,publishedeveryFriday,providespricinginformationonmorethan700 hardwooditems.importantly,someselectspecies,suchaswalnut,requirea tailoredgradingsystembecausetheyareusedinspecialapplicationsandsome typesofdefectsmaybedesirableforcustomers. Figure4.Agradeinspectorgradeslumberasittravelsonahardwoodsawmillconveyor. Photocredit:PhillipAraman. 8

17 SoftwoodLumber Mostsoftwoodlumberisintendedforstructuralapplications,suchasframing memberslikejoists,studs,rafters,andplanks.structurallumber,alsocalled constructionlumberordimensionlumber,iscertifiedtobearweightinabuilding structure.dimensionlumberissoldinnominalsizessuchas2x4,2x6,2x8,2x10, and2x12.(theactualwidthsandthicknessesaresmaller.forexample,theactual dimensionsofa2x4studare1.5by3.5inches.)softwoodlumberisalsoutilizedin themanufactureofsecondaryproducts,suchasmouldings,flooring,andfurniture. LumberforsuchusesisknownasappearanceDgradesoftwoodlumberor shop lumber. CurrentsoftwoodlumberpricesarepublishedbyRandomLengths[29]. Figure5.Softwoodlumberbundlesreadytoship.Photocredit:RobertSmith. Qualitygradesforsoftwoodlumberaredeterminedinafundamentallydifferent waycomparedwithhardwoodlumber.whilethegradingofhardwoodlumberis basedonthepercentageof clear cutsthatcanbeobtainedfromanindividual piece,thegradingofstructurallumberisbasedonitsstructuralintegrity grades arebasedonthepresenceofdefectsthatreducethemechanicalstrengthofthe element(e.g.,knotsorsplits).whilethereisonlyoneuniversallyacceptedgrading systemforhardwoodlumber(thenhlagradingrules),thereareseveralfor softwoodlumber.forexample,southernpinelumberisgradedaccordingtothe SouthernPineInspectionBureau(SPIB)[30],andtheWesternWoodProducts Association(WWPA)developsandpublishesthegradingrulesforsoftwoodlumber inthe12westernstates[31].therearesevencertifiedagenciesthatdevelop gradingrulesforsoftwoodlumber(includingspibandwwpa).general requirementsfordevelopingsoftwoodlumbergradeswereestablishedbythe VoluntaryProductStandardPS20,createdbytheU.S.DepartmentofCommerce 9

18 andmaintainedbytheamericanlumberstandardcommittee(alsc)[32].table2 includessomeofthequalityrequirementsfortwogradesofsouthernyellowpine. Table2.SPIBselectedgradingrulesfor2]inchsouthernyellowpinedimensionlumber[30]. Characteristics Compression wood Grades No.1 No.2 Notallowedindamagingformforthegradeconsidered Slopeofgrain 1 in10 1 in8 Decay Notpermitted Heartcenter, ⅓thickness ⅓width Splits Equaltothewidth Equalto1½timesthewidth Bowallowed perlength Skips 10 D1⅜ ;12 D1½ ;14 D2 ;16 D2½ Hitandmissin10%ofthepieces 10 D1⅜ ;12 D1½ ;14 D2 ;16 D2½ 5%ofthepiecesmaybehitor missorheavyskipfor2 Softwoodlumberappearanceisclassifiedintwomajorgrades( finish and selects )andsubgrades(designatedwithlettera,b,c,andd)basedonthe prevalenceofvisibledefectssuchasknots. ASelect, forexample,issuitablefor useincabinetsorrunningtrim,while DSelect couldbeusedforunexposedparts orpaintgrade. Anotherdifferencebetweenhardwoodandsoftwoodlumbergradingisthe locationofthegradersintheproductionprocess.softwoodlumberisgradedafter dryingandinfrontofthetrimsaw(whichgiveslumberitsfinallength),whereas hardwoodlumberisgraded green offthesawandbehindthetrimsaw.grading ofsoftwoodlumbercanbecarriedoutbyeitherinspectors(visualstressgrading)or machines(machinedgrading),whilehardwoodlumbergradingiscarriedoutbya gradeinspector. Pulp&and&Paper&Products& PaperwasfirstproducedfromwoodpulpinthemidD19thcentury.Untilthatpoint, paperwasobtainedfromrecycledfibersthatcamefromragsofhemp,linen,and cotton.woodfibersforpaperproductionwereinitiallyobtainedbythephysical grindingoflogsections;chemicalmethodsweredevelopedlater[19]. TheUnitedStatesisbyfarthelargestconsumerofpaperproducts.Americansuse about69milliontonsofpaperandpaperboardproductseveryyear;percapita 10

19 annualpaperuseis750pounds[4].inpapermanufacturing,woodisbrokendown intofibers,formedintoamat,andthendried.thereductionofwoodintoitsfibers canbeaccomplishedbytwobasicmethods:mechanical(thermodmechanicaland groundwoodpulping)andchemical(sulfite,kraft,andsodapulping).paper productscomeinmanyforms,suchasnewsprint,printingandwritingpapers, corrugated,paperboard,andtissuepaper.giventheeconomiesofscaleneededto makepapermanufacturingaprofitablebusiness,largeamountsofcapitalare requiredtoenterthisindustry.therearecurrentlyapproximately350papermills operatingintheu.s.[33].inrecentyearsthepaperindustryhassufferedadecline; productionin2013wasdown14.5percentfromitspeakof94milliontonsofpaper andpaperboardin2000[34].however,papermanufacturingcontinuestobea largeshareofforestproductseconomicoutput,with$176billioninvalueof shipmentsin2011,whilewoodproductsandfurniturereachedacombined$132 billion[35,36]. StructuralwoodDbasedpanelsareusedinconstructionassheathingforroofs, floors,andwalls.theengineeredwoodassociation(apa)[37]isanindustry associationthatdevelopsstandardsforthemarkingandperformanceratingof structuralpanels.therearetwobasictypesofstructuralpanels:plywoodand orientedstrandboard. Plywoodisastructuralpanelcomposedofwoodveneersheldtogetherand laminatedinlayersofalternatingorientation.structuralplywoodisalmost invariablymadefromsoftwoodspecies,suchassouthernyellowpineand Douglasfir,andismanufacturedintostandardsizesheets4feetwideby8feet longby¾inchthick[24].plywoodisusedinflooring,roofing,andsidepanelsfor bothresidentialandnonresidentialconstruction. Oriented&strand&board&(OSB)ismadefromsmallDdiameterlogsthatareprocessed intoflakes,strands,orwafers,whicharethenformedintomatsandbondedwith anadhesiveunderpressureandathightemperature.likeplywood,thematsare layered;theorientationofthestrandsisalternatedineachlayer.osbissimilar toplywoodindimensionsandpurpose.osbpanelsaremadefromsoftwoods suchasspruceandpine,andhardwoodssuchasbeechandpoplar. NonstructuralwoodDbasedpanelshavecountlessapplications,suchasfurniture andkitchencabinets,laminatedflooring,millwork,doors,wallpaneling,carparts, andsiding.producersinnovateconstantlyanddeveloppanelstofitallkindsof requirements,fromhighresistancetomoistureandtemperature,tomolded productsofallkindsofshapes.combinedwithcomputerdcontrolledequipment, wooddbasedpanelshaveallowedmanufacturerstoproducecustomizedproducts 11

20 atamassivescaleandwithlittlewaste.belowarebriefdescriptionsofthemost commontypesofnonstructuralwoodpanels. Decorative&plywoodismadeinthesamebasicwayasstructuralplywood,butitis intendedfordifferentuses,suchasfurnitureanddecorativepaneling.decorative plywoodismademostlyusingappearancedgradehardwoodveneers.most decorativeplywoodismadeforinterioruse,butitispossibletofindplywood madewithwaterproofadhesiveforoutdoorapplications. Particleboardisapanelproductmadebycompressingandbondingparticlesof woodinseveralforms,suchasflakes,shavings,chips,sawdust,orstrands.much oftherawmaterialisthebyproductofwoodprocessing.particleboardisoneof themostversatilewoodproductsandcanbeengineeredtofitawidevarietyof usesbychangingparticlesizeandgeometry,theadhesiveused,themat configuration,andotherparameters.someusesofparticleboardareascore stockforpanelstobeusedinfurnitureandkitchencabinetmanufacturing, shelving,flooringunderlayment,soundinsulation,andconcreteforms. MediumCdensity&fiberboard&(MDF)ismadefromwoodthathasbeenreducedto individualfibers,whicharethenformedintomatsandbondedunderpressure. ThemajorusesofMDFareforfurnitureandkitchencabinets.Thankstoits smoothsurfaceanduniformdensity,profilescanbecutandfinishingapplied directly;unlikeparticleboardandplywood,edgedbandingisnotneeded.these propertiesalsomakemdfagoodmaterialforwallpaneling,millwork,store fixtures,embossing,andlaminateflooring.mdfpanelsarecommercially availableinmanythicknesses,suchas⅛,¼,½,¾,1,and1½inches. Hardboard,similartoMDF,ismadefromwoodreducedtoindividualfibersand bondedunderpressure.hardboard,however,hasahigherdensity(800d1,400 kg/m 3 )comparedwithmdf(600to800kg/m 3 )[38],andistypically manufacturedinthicknessesrangingfrom2.1mmto15.9mm(1/12to5/8 inches).majorusesforhardboardarefurnitureandkitchencabinets(for backing),perforatedboardsfortoolsandstorefixtures,wallpaneling(unfinished orprefinished),andunderlayment.hardboardcanbemoldedintodifferent shapes,forexample,forcarcomponents(e.g.,doorpanels),andtosimulate raisedpanelsindoorskins. Engineered&Wood&Products& Engineeredwoodproducts(EWPs)weredevelopedtoaddresswoodvariabilityand tomoreefficientlyutilizetherawmaterial.ewps,whicharegenerallymadeby breakingdownwoodintosmallerpiecesorparticlesandthenreassemblingthem togetherusingspecialadhesives,aredesignedtomeetprecisestandardsand specifications.somecommonewpsaredescribedbelow. GluedClaminated&timber&(Glulam)ismadebyfaceDlaminatinglumbertoform largeandverystrongbeams[24].glulamproductsaretypicallyusedinstructures 12

21 suchasfieldhouses,sportsarenas,bridges,churches,andresidentialand commercialbuildings[24]. Laminated&veneer&lumber&(LVL)iscomposedofveneeredsheetsthatarefaceD laminatedandpressed.lvldiffersfromplywoodinthatitisnormallymuch thickerandtheveneerlayersdonotalternateorientation[24].lvlbeamscanbe madetocustomerspecifications. Engineered&ICjoistsuseacombinationoftwoengineeredwoodproducts.TheID joistiscomposedoftopandbottomflangesandawebjoinedtogethertoforma structuraljoist(figure6).typicallythewebstockismadeofosbandtheflanges aremadeoflvlorsolidwood.whencombinedandgluedinthisshape,thetwo productsformastructurallysoundjoistusedforconstruction[24].anidjoistcan carrylargeloads,anditsmanufacturerequiresmuchlessmaterial(andweight) thananequivalentsoliddwoodjoist.sinceitsinventioninthelate1960s,the woodidjoisthasquicklygainedmarketshareandisnowusedinthefloorsofhalf ofnewsinglefamilyhomes[39]. CrossClaminated&timberisafairlynewengineeredwoodproductmadeof multiplelayersofwoodboardsthatareorientedperpendiculartotheadjacent layers[40].seemoredetailintheboxonthenextpage. Figure6.Engineeredwoodproducts:parallelstrandlumber(topleft),laminatedveneer lumber(bottomleft),andi]joists(right).photocredit:mariafernandalaguardamallo. 13

22 Cross]LaminatedTimber CrossDlaminatedtimber(CLT)technologywasdevelopedinEuropeintheearly1990s.CLT quicklygrewinpopularityoverthepasttwodecadesasthemarketbegandemanding moreenvironmentallyfriendlyproducts.thecrossdlaminatedconfigurationofclt(figure 7),inwhichadjacentlayersofCLTelementssupporteachotherandactasreinforcement, resultsinexcellentmechanicalproperties.thus,cltcanbeusedasaloaddbearing elementandashearpanel,somethingthatdistinguishescltfromotherwooddbased panels.cltpanelshavebeenusedinawiderangeofapplications,suchashouses,barns, powerlinetowers,churches,bridges,andhighdriseapartmentandofficebuildings.the structuralcharacteristicsofcltallowforshapesandopeningsofthemostdiversesizes andformswithoutcompromisingthestructuralintegrityofthestructure. Figure7.Cross]laminatedtimberlayout(left)andfinishedpaneldetail(right). Drawingandphoto:MariaFernandaLaguardaMallo. OneofthemostprominentcharacteristicsofCLTisitsmassiveuseofwood,whichactsas arepositoryofcarbon.lifecycleanalysis(lca)researchonclthasconsistently demonstratedthatcltmanufacturingproduceslessgreenhousegasesandrequires smalleramountsofwater,energy,andfossilfuelsthanconcreteandsteel.alsoimportant fromanenvironmentalperspective,cltcanbemadefromlowdvalueforestresources, suchassmallddiameterlogsandinsectdkilledtrees.otheradvantagesofcltincludethe following. TheprefabricatednatureofCLTmakesitanattractivealternativetosteelandconcrete. Itallowsforhighprecisionandaconstructionprocesscharacterizedbyfaster completion(asshortasthreetofourdaysperstory,comparedwithmorethan28days forconcrete). CLTstructureshavebeenshowntoprovideexcellentfireresistance,owingingreatpart tothepredictablefirebehavioroflargewoodsectionsandthetightnatureofclt buildings,whichlimitsthespreadoffiretoadjacentspaces. TestshavealsoshownthatCLTbuildingshavegoodseismicperformancebecausethey arelighterandmoreductilethanstructuresbuiltwithtraditionalmaterials. CLTpanels,bothinthebuildingenclosureandininteriorfloorsandwalls,actasa thermalmass,whichcangreatlyreduceheatingandcoolingloads,shiftthetimeof peakloads,loweroverallbuildingenergyuse,andenhanceoccupants comfort. 14

23 Wood&Energy&Products& Morethanhalfofallthewoodharvestedgloballyisusedforenergy,primarilyas firewoodforcookingandheating.halfofeurope srenewableenergycomesfrom woodbiomassinitsvariousforms[41].intheu.s.,woodisthesourceof3percent oftotalenergyuse[42]andistheprimarysourceofbiomassenergy.thepulpand paperindustrygeneratesagreatpartofitsenergyinputsfromwoodresiduesand processbyproducts,generatingelectricityandthermalenergy.anincreasing numberofmunicipalitiesareadoptingwoodenergysourcesfortheirheating needs.atthehouseholdlevel,woodisthefastestgrowingfuelforheating,with2.1 percentofhomesusingwooddderivedsourcesasaprimaryfuelforheatingand7.7 percentusingwoodtosupplementheat[43].concernsfortheenvironment,energy costs,andenergyindependencearefactorsintherecentexpansionofthisindustry. ExamplesofwoodDtoDenergyproductsforresidentialheatingaredescribedbelow. Wood&pelletsaremadefromsmallwoodparticles,whichcanbesourcedfrom millbyproducts,smallddiametertrees,orloggingresidues.inwoodpellet manufacturing,woodparticlesaredriedandreducedinsizeusingachipper and/orhammermilltoreachuniformmoisturecontentandparticlesize. Materialsarethenforcedthroughadieatahightemperatureandcuttoa designatedlength.woodpelletshaveuniformdiameter(¼to⅚inches)and rangeinlengthfrom¼to1½inches.theu.s.woodpelletmanufacturingindustry hasexperiencedconsiderablegrowthduringthelastdecade,mostlydrivenby exportstoeurope. Wood&briquettesareproducedinasimilarwaytowoodpellets smallwood particlesareextrudedthroughanarrowopeningbutatalowerpressureand temperature.woodbriquettes,however,aremuchlargerinsizethanpellets, approximatelythesizeofconstructionbricksorfirewood. Figure8.Woodpellets(left)andwoodbriquettes(right). Photocredits:MariaFernandaLaguardaMallo. 15

24 ValueDaddedwoodproductsaremadeusingtheoutputsofprimaryoperations,like lumber,veneer,andwooddbasedpanels.althoughsmallandmediumsized companiescanfinditverydifficulttocompetewithlargeproducersofvaluedadded products,itispossibletoservenichemarketsegmentsandremaincompetitive. SomeexamplesofvalueDaddedproductsaredescribedbelow. Figure9.Ahardwoodpanelgluingoperation.Photocredit:UrsBuehlmann. Furniture.Thissectorhasfacedgreatchallengesduringthelasttwodecades, especiallycompetitionfromlowdcostimports,withhouseholdfurniture producershitparticularlyhard(morethan70percentofthefurnituresoldinthe U.S.isimported).Companiesthatweatheredthistrendhaveradicallychanged theirpracticesbystreamliningtheirsupplychains,automatingproduction processes,outsourcingcomponents,andconsolidatingtoachieveeconomiesof scale.therearepositivesignsthatsomeoftheindustryisreturningtotheu.s.,in partowingtoincreasinglaborcostsinchinaandotherpreviouslylowdcost locations[44].thisindustrycanbeclassifiedintotwomajorgroups:household furnitureandofficefurniture.householdfurniturecanbefurtherclassifiedinto upholstered,nonupholstered,andhomeentertainmentfurniture.oneadditional categorythatisgainingmarketshareis readydtodassemble furniture,whichis almostinvariablymadeofreconstitutedwoodpanels. Kitchen&and&bath&cabinets.Thissectorhasfaredbetteragainstglobalcompetition thanfurniture,inpartowingtothenatureoftheproduct(forthemostpartitis madeandinstalledtoorder)andthecapacityoftheindustrytoimproveits internalprocesses.theseproductscanbecategorizedintothreemajorgroups: 16

25 Stockcabinetsarelowestcostoption,soldassembledandinstandardsizesat largehomecentersandotherretailerswithverynarrowoptionsoffinishesand hardware. Semicustomcabinetsoffermorechoicesofsizes,finishing,andaccessories thanstockcabinets.customersusuallyplaceordersathomecentersand dealers,andtheproductismadetoorder. CustomDmadecabinetsarethemostexpensiveoption.Thecustomerspecifies dimensions,materials,design,andaccessories;theproducermakesandusually installsthecabinets. Millwork.Themillworkindustryisprimarilyconcernedwiththeproductionof woodcomponentsforinteriorfinish,suchasrunningtrim,mouldings,paneling, andstairwork.thisindustrynormallybuyslumberofhighergradessincemostof themillworkisexposedandrequireslongboards.however,thereisanincreasing useofalternativematerials,likewooddbasedcomposites(mdf)andsomeplasticd basedmaterials.companiesinthemillworkindustrycanbecategorizedintwo majorgroups: Custommillworkshopsreceiveordersdirectlyfromarchitectureandinterior designprofessionalsorfirms.theymake,finish,and,manytimes,installtheir products.highprofitmarginsarepossible,butthissectorisparticularly vulnerabletomarketforces(especiallyinthecommercialconstructionsector). Firmsinthisindustryrequirehighlyskilledpersonnel,andtrainingistypically carriedoutindhouse.salesandmarketingarebasedmostlyonwordofmouth. Standardmillworkfirmsareusuallyofmediumorlargesize,andmake standardproductsforbothresidentialandcommercialconstruction.firmsin thissectorrequirehighexpertiseformarketinganddistribution. Wood&flooringhasbeengrowinginpopularityduringthelastdecadeowingto styletrendsandhealthconcerns.woodflooringisimportantfortheefficient utilizationoftimber,asitprovidesanoutletforlowergradesoflumber.itcomes inawidevarietyofshapesandmaterialsbutcanbeclassifiedintwomajor groups: Solidwoodflooringisusuallyshippedunfinishedandrequiresskilledpersonnel forinstallationandfinishing,whichincreasesitscostsignificantly.mostsolid woodflooringismadeofhardwoods,withoakandmaplethedominant species,andis¾inchesthick.therearetwotypesofsolidwoodflooringbased onwidth:stripflooring,from2¼to3¼inchesinwidth;andplankflooring,from 3to6inchesinwidth. Engineeredflooringisusuallymadebylamination,withonlythetoplayerof thehighestqualityveneer.themarketshareoftheseproductsisincreasingat ahighrateowingtotheirlowercostrelativetosolidwoodflooring, dimensionalstability,andeaseofinstallation.engineeringflooringcomes prefinishedandthuscanbeinstalledasadoditdyourselfproject. Decking&and&railing&productsincludethematerialsthatgointoresidentialdeck construction,suchasdeckboards,railposts,andrails.thereareapproximately 30millionresidentialdecksintheU.S.,andabout3millionneworreplacement 17

26 decksarebuilteachyear[45].historically,themajorityofresidentialdeckshave beenbuiltwithpressuredtreatedsoftwood,mostlysouthernyellowpine,and naturallydurablesoftwoods,suchaswesternredcedar.however,thisindustryis undergoingrapidchange.alternativematerials,suchaswoodplasticcomposites andplasticlumber,arerapidlygainingmarketshareawayfromsolidwood deckingowingtoaperceivedadvantageindurabilityandmaintenance requirements. Windows&and&doors.SimilartoothervalueDaddedproducts,substitutewindow anddoormaterialssuchasvinyl,plastic,aluminum,fiberglass,andwooddplastic compositeshavetakenmarketshareawayfromwhatusedtobealmost exclusivelywooddbasedproducts.itiscommonforlargewindowanddoor manufacturerstooutsourcethemanufacturingofasignificantpartoftheir components. Woodwindowsaremoreprevalentinresidentialconstructionthanin commercialbuildings,andthehomeremodelingmarketisgrowingin importanceasthenumberofnewhomestartsisbelowthehistoricalaverage. Ponderosapineisthedominantspeciesforwoodwindows,althoughradiata pineandothersoftwoodsaregainingmarketshare. Althoughnineoutof10entrydoorsaremadeofsteelorfiberglass,theratiois reversedforinteriordoors;morethan90percentofinteriordoorsarewood. Interiorwooddoorscanbeclassifiedintwogroups:stileandrail,andflush doors.softwoodsaretheprevalentmaterialforwooddoors,buthardwoods makeupaboutathirdofthemarket.althoughlargemanufacturersdominate themarketwithstockdoors,aprofitablecustomdoormarketstillexists. 18 Figure10.Custom]madeentrydoors,inprocess(left)andinstalled(right),areavalue] addedwoodproduct.photocredit:dianamourin]ayish.

27 Industrial&Wood&Products& Industrialwoodproductsaremadetosupporttransportationandlogistics operationsaswellascommunicationsinfrastructure.preservativetreatmentis commonforindustrialwoodproducts,manyofwhichneedtowithstandtough handlingorharshoutdoorconditionsandarereplacedafteranumberofusecycles oryearsinoperation.theseproducts,describedbelow,aregaininginimportance aslogisticsbecomemoreglobal,theoilandgasindustryintheu.s.prospers,and theoutletsforlowerdgradehardwoodsshrink(e.g.,lowerdemandforsoliddwood flooring). Pallets&and&containers.Palletsareacriticalcomponentofthelogistics infrastructureastheyreducehandlingtimeandcost.althoughtheuseofplastic andmetalpalletshasincreasedinrecentyears,morethan90percentofpallets aremadeofwood,primarilyhardwoodspecies[46].palletsandcontainers,as wellasrailroadties(seebelow),areimportantforhardwoodtimberutilizationas theyprovideanoutletforthelowerdgradematerialfromlumbermanufacturing. ThemostcommonpalletsizeintheU.S.is48 40inches,whichisknownasa grocerypallet.thisindustryishighlylocalandfragmented,with2,700firms, morethan70percentofwhichhavewithlessthan20employees.someindustry trendsincludethesteadygrowthofpalletrecyclingandanincreaseofpallet rentalsystems. Railroad&ties&(or&crossties).TheUnitedStateshasover140,000milesofrailroadin use[47],andover20millionrailroadtiesareproducedeveryyear[48].like pallets,over90percentofrailroadtiesintheu.s.aremadeofwood,mostly easternandmidwesternhardwoods.crosstiesaretreatedwithcreosote solutionstoenhancetheirdurability.dimensionscomeinfivecategories;the mostcommonis7 9inchesby8.5Dfeetlong[48]. Crane&matsarelargewoodenplatforms(6D24inchesthick,4D8feetwide,andup to40feetlong),reinforcedwithsteelrodsandbuilttoprovideground stabilizationforheavymachineryinseveralindustries,suchasoildrillingand explorationoperations.bothhardwoodsandsoftwoodsareusedintheir manufacture. Road&construction&productsaretypicallymadefromsmallDdiameterlogsand requireminimumtransformation.preservationtreatmentisrequiredsincemost oftheseproductsareexposedtoweatherandhavesoilcontact.examples includesoundbarriers,guardrailposts,retainingwalls,signposts,andtrailand roadbridges. Wood&utility&poles,whichprovideanexcellentsupportforoverheadtransmission, distribution,andcommunicationslines[49],arereasonablypriced, nonconductive,andeasytoinstall.thereareapproximately135millionwood utilitypolesinstalledintheunitedstates.theyarereplacedatarateof1.5 millionperyear,andtheaveragelifespanforaconventionalwoodutilitypoleis 30D40years[50].Mostwoodpolesare45feetinlengthwithabuttDenddiameter 19

28 of12inches[51].commonspeciesforwoodpolesaresouthernyellowpine, Douglasfir,jackpine,lodgepolepine,Pacificsilverfir,redpine,andwesternred cedar[52].themostcommonchemicaltreatmentsforwoodutilitypolesare pentachlorophenolinheavyoil,chromatedcopperarsenate,andcreosote. Mining&supplies.Woodintheformofprops,capboards,wedges,and cribbing pieceswasusedextensivelyinmining;aconsiderableamountisstillbeingused forthispurpose.forexample,thecoloradominingindustryaloneusesabout5.8 millionboardfeetofwoodproductsperyear[53]. Figure11.Palletstock,usuallyproducedfrominteriorportionsofhighergradesawlogs. Photocredit:BrianPerkins. ChapterQuestions 1. Describetheproductorserviceyouplanonproviding. 2. Inwhatmarketsdoyouplanonsellingthisproduct? 3. Doyouhaveaccesstotherawmaterialneededtoproduceit?Whowillbeyour suppliers? 20

29 Chapter&2: What&Is&Business&Management?& Management&is&about&human&beings.&Its&task&is&to&make&people&capable&of&joint& performance,&to&make&their&strengths&effective&and&their&weaknesses&irrelevant.& PeterF.Drucker AccordingtothelatemanagementguruPeterDrucker,withoutgoodmanagement practices,thereisneithermaterialnorhumanprogress.managementisthe allocationofresourcestoachievetheorganization sgoals[54,55].thenatureof thesegoalsvariesdependingwhethertheorganizationisaprivateenterprise (maximizeprofit),anonprofit(maximizesocialimpact),oragovernmentagency (provideservicesinatimelyandefficientfashion).resourcesincludefinancial resources(bonds,stocks,loans,cashonhand),physicalresources(buildings, processingequipment,land,transportationequipment),naturalresources(raw materials,forestland),andhumanresources.thereisrelativelylittledifference amongbusinessesinthesameindustrysubsectorregardingtherawmaterialthey use,thetechnologyforprocessingthoserawmaterials,theproductstheyproduce, andthemarketstheyserve.thedifferenceinorganizationalsuccessliesinthe managementofthehumanresource.effectivemanagersunderstandwhat motivatesemployeesandwhatemployeesconsidersuccess,andcommunicate effectivelywiththem.realandsustainablecompetitiveadvantage,whichisdifficult toreplicate,comesfromthequalityofacompany sworkforce,thequalityofits relationshipwithcustomers,andthewaythehumanresourceismanaged.the basicfunctionsofmanagementareexplainedinthischapter. TheManagementProcess Themajorresponsibilitiesofamanagerfallwithinfourfunctions:planning, organizing,implementing,andcontrolling(figure12).thissectionbrieflyexplains eachofthesefunctions. Controlling Planning Implemenong Organizing Figure12.Themanagementprocess[54]. 21

30 Planning& Simplystated,planningistheprocessofsettinggoalsandformulatingactions neededtoachievethosegoals itisprobablythemostimportantmanagement activity.studieshaveshownthatsuccessfulcompaniestendtohaveaformal planningprocess(i.e.,formalplansarewrittenandfollowacertainstructure). However,planningisoftenneglected,inpartbecauseoftimeconstraints,lackof trainingonplanning,andalsobecausesomepeoplebelieveuncertaintyistoo significanttoplanfutureactions. Therearedifferentlevelsofplanning.The planningpyramid (Figure13)illustrates thedifferentlevelsoftheplanningprocess[56],startingatthetopwithformulating thevisionofthebusinessandthestrategicplantoachievethatvision.the marketingplanandtheoperatingplanareinputstothefinancialplan,andthereis aconstantfeedbackamongthesethreecomponents.theorganizationalplanisat thebottomofthepyramidsinceachievingthegoalssetbythestrategicplan dependsontheabilitiesandmotivationofthepeopleintheorganization[56]. Chapter3ofthisguidedetailsthestepsinstrategicplanning,andChapter8covers theprocessofdevelopingabusinessplan,includingmarketing,financial,and operationsplanning,aswellasplanningtheorganization. Organizing& Figure13.Theplanningpyramid[56]. Managersmustdeterminewhatresourcesandactionsareneededtoachievethe goalssetintheplanningprocessinthemosteffectiveandefficientmanner. Organizingincludesestablishingtheorganizationalstructure,providingtherequired physicalconditionstoaccomplishwork,andassigningmanageableamountsof worktoemployeesaccordingtoeachone strainingandabilities.employeesmust begiventheauthorityandresponsibilitytheyneedtosucceedinacertaintask. 22

31 Organizingalsocomprisesfindingtherightemployees(humanresource),training them,andassigningthemrolesinwhichtheircontributiontotheorganizationcan bemaximized.chapter4includesdetailedinformationonplanning,recruiting,and retaininghumanresources. Implementing& Duringtheimplementationprocess,managersguideandmotivateemployeesin implementingtheactionsformulatedduringtheplanningprocess.managersalso directthebusinessoperations,whicharetheessentialactivitiesabusiness performstoachieveitsgoals.operationsmanagementisthesubjectofchapter6. Controlling& Themanagementprocessisacycle,andthiscycleisclosedbymeasuring performanceandtakingcorrectiveactions.itismanagement sjobtoestablishthe standardsforeachoftheorganization sgoals,assesstheorganization s performance,identifygapsbetweencurrentanddesiredperformanceinatimely fashion,andformulateactionsforimprovement[54].performancestandardsare setfordifferentareasoftheorganizationandtakedifferentforms.someexamples include: Qualitystandards(e.g.,maximumdefectrateof5percent,measuredatthefinal productinspection,basedon10qualityattributes) Timestandards(e.g.,anonDtimecompletionrateof97percent,measuredasthe percentageofordersshippedcompleteandonorbeforetheduedate) Coststandards(e.g.,reducescrapby10percentrelativetothepreviousyear) Quantitystandards(e.g.,increaseproductionvolumeby20percentrelativeto thepreviousperiod) Chapter6containsinformationonmethodstoassessprocessperformance,and Chapter7coversaspectsoffinancialperformance. Manager schecklist Mostofamanager sactivitiesareaimedatmaximizingthebusiness sprofitability. Managershavetwooptionstoincreaseprofitability:reducecostsorincrease revenue.optionstoreducecostsincludethefollowing. Implementnewtechnologies. Increaseyields. Purchaserawmaterialsatalowercost. 23

32 However,theseactionscanonlyprovideashortDtermcompetitiveadvantagesince theycanbecopiedbythecompetition.actionsthatresultinamoresustainable advantagebyincreasingrevenueandimprovingprofitsincludethefollowing. Identifyyoursustainablecompetitiveadvantage. Serveyourcustomersbetterthanyourcompetition. HaveapeopleDdrivenorganization. Theseactivitiesrequirethatyouadoptsoundmanagementpractices.Thefollowing aregenerallyacceptedpracticesofeffectivemanagers[54]. Demonstratecommitmenttotheorganization ssuccess. Takeresponsibilityfordevelopingandimplementingplanstoachievethegoalsof theorganization. Identifytheresourcesneededandensuretheseresourcesareavailableina timelyfashion. Organizeandcoordinateworkinsuchawaythatoperationsareconducted efficientlyandeffectively. Recognizetheimportanceofemployeesandbalancetheirneedswiththe organization sgoals. Monitoractivitiesandperformance,andidentifyactionsforimprovement. Demonstraterespect,offerencouragement,andvalueinputfromothers. EmployeeEngagement Asmentionedatthebeginningofthischapter,thewayinwhichhumanresources aremanagedisthekeytobusinesssuccess.therefore,havingemployeesengaged intheirworkisone,ifnotthemostimportant,taskofamanager.accordingtoone definition,engagedemployees workwithpassionandfeelaprofoundconnection totheircompany;theydriveinnovationandmovetheorganizationforward [57]. Researchsupportsthisassertion,withhigheremployeeengagementstrongly correlatedwithlowerturnover,highercustomerloyalty,andhigherprofitability, amongotherperformancemetrics[58].thefollowingtipsfromjoannabrandiin PowerUpPerformance:9WaystoKeepEmployeesEngaged [59]cancreateand sustainemployeeengagement. 1. Letgoofanynegativeopinionsyoumayhaveaboutyouremployees. 2. Makesureyouremployeeshaveeverythingtheyneedtodotheirjobs. 3. Clearlycommunicatewhatisexpectedofemployees,includingthecompany s valuesandvision,andhowthecompanydefinessuccess. 4. Gettoknowyouremployees,theirgoals,whatexcitesthem,andhowthey definesuccess. 24

33 5. MakesuretheyaretrainedinproblemDsolvingandconflictDresolutionskills. 6. Constantlyaskhowyouaredoinginyouremployees'eyes. 7. Payattentiontocompanystoriesandrituals. 8. Rewardandrecognizeemployeesinwaysthataremeaningfultothem. 9. Beconsistentforthelonghaul. ChapterQuestions 1. Statethevisionofyourcompany. 2. Whatisyourpersonalmanagementphilosophy? 3. Whoarethekeypersonnelandwhatarethekeypositionsyouwillneedtostart yourcompany? 4. Describehowyouwillapplythefourmajorresponsibilitiesofamanagertoyour organization(planning,organizing,implementing,andcontrolling). 25

34 26

35 Chapter&3: Strategic&Planning& Strategicplanningisacriticalactivityforthesuccessofanyorganization.Research hasshownrepeatedlythatthereisapositivecorrelationbetweenstrategic planningandfirmperformanceforbothfinancialandnonfinancialmeasures(e.g., marketshare,reductioninemployeeturnover,newproductdevelopment)[60]. Morethan75percentofU.S.companiesreporthavingsomeformalprocessfor strategicplanning,accordingtoasurveyamongexecutives[61].surprisingly,less than50percentofthoseexecutivesindicatedsatisfactionwiththeirfirm sstrategic planning[61]. Thepurposeofdevelopingastrategyistoachievesustainablecompetitive advantage.thebusinessstrategyputsyourbusinessintothecontextofits competitiveenvironment.abusinessstrategyanswersthequestionswherearewe now,wheredowewanttogo,andhowdowegetthere. Table3.Strategicmanagementactivities. Strategicplanning Missionandvisionformulation SWOTanalysis LongDtermstrategy ShortDtermstrategy Implementationandevaluation Tounderstandstrategicplanning,weneedtofirstdefinecorporatestrategy.There arecountlessdefinitions;thisonecoversmostoftheaspectsthatwillbeaddressed inthischapter[62]. Corporate&strategy&is&the&pattern&of&decisions&in&a&company&that&determines&and& reveals&its&objectives,&purposes,&or&goals,&produces&the&principal&policies&and&plans& for&achieving&those&goals,&and&defines&the&range&of&business&the&company&is&to& pursue,&the&kind&of&economic&and&human&organization&it&is&or&intends&to&be,&and&the& nature&of&the&economic&and&noneconomic&contribution&it&intends&to&make&to&its& shareholders,&employees,&customers,&and&communities. KennethAndrews TheprocessofstrategicplanningisillustratedinFigure14.Thefollowingsections detaileachofthestepsinthestrategicplanningprocess. 27

36 Missionand vision formulaoon Implement, evaluate Internaland external analysis(swot) ShortDterm strategy formulaoon LongDterm strategy formulaoon Figure14.Thestrategicplanningprocess. MissionandVisionFormulation Strategicmanagementstartswiththeformulationofthecompany smissionand vision.thesesetdirection,guidetheorganization sefforts,andsetthecompany apartfromthecompetition. Mission& Inshort,themissionisastatementofanorganization sreasonforexistence.a missionconveysthefirm sphilosophyandselfdimage.ataminimum,themission shouldincludewhatservice/producttheorganizationprovidestoitscustomersand whatgoalsarepursuedasanorganization.amissionstatementshouldanswerthe question, Whatbusinessarewein,andwhy? [61].Othercomponentsthatcanbe includedinamissionstatementarethemarketorcustomerstheorganization serves,thetechnologythattheorganizationusestomeetcustomers needs,the firm sphilosophy,itsapproachtoandgoalforquality,andthecompany sselfd image.asforphilosophy,manycompaniesincludethevalueswithwhichthe companyiscommittedandreflecttheorganization scharacterandculture,aswell asthedesiredbehavior.accordingtohoweandbratkovich[63],mission statementsshouldaddressthreeareas:(1)whoisyourcustomer,(2)what customerneedsshouldyousatisfy,and(3)howcanyoumosteffectivelysatisfy thoseneeds.missionstatementscanbeconcise,suchasthefollowingexamples. HermanMiller,manufacturerofofficefurniture: Inspiringdesignstohelppeople dogreatthings [64]. ColumbiaForestProducts,manufacturerofveneerandplywood: Ourideaswill begroundbreaking,andourstewardshipwillbeforevermindfulofthegroundwe liveon [65]. 28

37 Vision& Thevisionstatementdescribesadesirablefuture,includingthegoalsofan organizationinthemediumorlongterm.avisionstatementtypicallydescribes howthefirmwantstobeperceivedbycustomersandotherstakeholders.the purposeofavisionstatementistoprovideaunifyinggoal,whichallofthe organization seffortsandresourceswillbefocusedonachieving.thusavision needstobemeasurable.accordingtokasowskiandfilion[66],avisionstatement should(1)befuturelooking,(2)identifyamarketspace,(3)bespecificand realizable,and(4)involvechange.canyouevaluatethefollowingvisionstatements usingsuchcriteria? Weyerhaeuser,anintegratedforestproductscompany: Ourvisionistodeliver superiorsustainablesolutionsfortheworld.wedothisthroughstrong leadership,unwaveringvalues,andatalentedemployeebase.weinviteyouto learnmoreaboutourcompany srichhistoryofenvironmentalstewardship, customercommitment,andcommunityinvolvement [67]. InternationalPaper: Tobeoneofthemostrespectedandsuccessfulcompanies intheworld [68]. SWOTAnalysis Strategydoesnotexistinisolation;itsformulationshouldbeinformedbyaninD depthanalysisoftheorganization sexternalenvironmentanditsmain competencies.thisprocesscanbecarriedoutusingalogicalframeworkknownas SWOT analysis,whichincludesthefollowingcomponents. Strengthsaretheorganization suniquecompetenciesrelativetoitscompetitors thatneedtobeleveragedtothefirm sadvantage.forexample,avertically integratedforestproductsfirmcanhavesomeadvantagescomparedwith competitors,suchastheavailabilityofrawmaterialsandefficienciesinaspects suchasqualitycontrol(e.g.,noneedforinspectionofinterdplantdeliveries)and controlofthesupplychain. Weaknessesarelimitationsinthecompany scapabilitiesthatinhibititsabilityto meetcustomerneeds.forexample,acompany sinabilitytocollect,implement, andrewardemployees improvementsuggestionscanleadtoadisadvantage withcompetitorswhohavesuchprograms. Opportunitiesaretrends,events,andideasintheexternalenvironmentfavorable tothecompany.forexample,anincreasedinterestinenvironmental sustainability(e.g.,greenbuilding,forestcertification)presentsanopportunity formanufacturersofwooddbasedbuildingmaterials.astrongerenforcementof regulationsaboutillegaltimbertrading(e.g.,thelaceyactintheu.s.)presents 29

38 30 SWOTAnalysisatTimberFrameHomes[69] TimberFrameHomes,whichstartedoperationsintheearly1980sasageneral contractor,hastwofacilitiesand45employees.itbuildssolidwoodtimberframe structures,usingmostlyoak,southernyellowpine,douglasfir,andwhitepine.the averagesizeofthehomesconstructedis3,500squarefeet,withpricesrangingfrom$150 to$500persquarefoot.thecompanyhasexperiencedsustainedgrowthandnowholds about3percentofthenationalmarketinitsproductcategory.aspartofitsstrategic planningefforts,thecompanyhasidentifiedthefollowinginaswotanalysis.& Strengths& Thereisaperceivedhighqualityofthecraftsmanship. Thecompanyhasdirectcontactwithitscustomers,fromdesigntoconstruction. Thedesignisfullytailoredtocustomerneeds:auniquestructureforeachindividual. Operatingitsownsawmillallowsthecompanytohaveabettercontrolofthequalityof itsrawmaterials. Arecentlyacquired5DaxisCNCcuttingmachinecanimproveproductivityandefficiency.& Thecompany sshowhomeisaonedofdadkind2,700dsquaredfoottimberframehome thatprovidesavisualexampleofthecompany scraftsmanship. Thecompany swebsiteallowscustomerinteractionandprovidesagreatdealof informationtopeopleinterestedintimberframehomes. Thecompanycurrentlyhasanexcesscapacity,whichcanallowittoincrease productionwithoutgreatinvestment. Weaknesses& Themarketingandsalesfunctionsarenotfullydeveloped.& Thecompanydoesnotprovidefinancialoptionstoitscustomers,whichcanrepresent somecompetitivedisadvantage.& Thecompanylacksarelationshipnetworkwithcontractors,whichcouldhelptogreatly increasesales. Opportunities& Thetimberframehomemarketandtheconstructionindustryingeneralhave experiencedsustainedgrowthoverthelasttwodecades.& Thereisapotentialtotakemarketsharefromsimilarmarketsegments,suchaslog homeorgreenhomemarkets.& ThereisapotentialtoexpandthemarketgeographicallyintheU.S.andinternationally.& Threats& Thetimberframemarketisfastgrowingandthebarriersofentryarerelativelylow, whichmakesitveryattractive.manycompaniesmaywanttoentertothemarket.& Thereisalackofdifferentiationfromloghomes;peopletendtobelievethattimber framehomesandloghomesarethesame.& Basedonthisinformation,whatstrategicstepsdoyouthinkthecompanyshouldtaketo leverageitscapabilitiesandtheopportunitiesintheexternalenvironment?&

39 anopportunityforu.s.hardwoodlumbermanufacturers,asimportsoftropical hardwoodsarelikelytodecrease,atleasttemporarily. Threats,theoppositeofopportunities,aredevelopmentsintheenvironment thatareunfavorabletothecompany ssuccess.thefirmneedstoplanhowto mitigatetheeffectsoftheseforces.forexample,theforestproductsindustryis facedwithconstantthreatsfromsubstitutematerials,suchassteelstuds,vinyl siding,andplasticpallets. Long]TermStrategiesandObjectives LongDtermobjectivesaresetformorethanoneyearandareformulatedformore strategicallyorientedareas,suchasprofitability,productdevelopment,competitive position,corporatesocialresponsibility,andhumanresources[70].toaccomplish longdtermobjectives,strategiesareformulatedthatcanfallintooneormore genericcompetitivestrategies,suggestedbymichaelporter[71]asillustratedin Table4.Acostleadershipstrategyemphasizeslowcostcomparedwithcompetitors (e.g.,walmart).inthedifferentiationstrategy,acompanyaimsatbeingrecognized ashavingauniqueproduct,superiortothecompetitionandthusachievinghigher pricesandcustomerloyalty(e.g.,apple).afirmpursuingafocusstrategy concentratesitseffortsonanarrowlydefinedmarketsegment(e.g.,pepsico). Table4.Genericcompetitivestrategies[71]. Targetscope& Competitiveadvantage Lowcost Customizedproduct IndustryDwide Costleadership Differentiation Marketsegment Focus(lowcost) Focus(differentiation) Short]TermStrategiesandObjectives ShortDtermobjectivesprovideguidanceforconductingthefirm soperationswithin oneyear.theseobjectivesshouldbequantitative,measurableoutcomesthatthe firmintendstoattainintheshortterm.shortdtermobjectivesshouldbeconsistent withthelongdtermgoalssetinthecompany sstrategy.examplesofshortdterm objectivesaretoreduceleadtimetofourdaysbyjuly1,reducescrapby10 percentbytheendoftheyear,orincreaseondtimecompleteordersto99percent bymay30.inordertoachieveshortdtermobjectives,companiestypicallyformulate shortdtermstrategiesfortheirfunctionalareas,suchasmarketing,human resources,manufacturing,andsales[70].foreachshortdtermobjective,anaction planisformulatedthatspecifiestheactivitiestobecarriedouttoaccomplishthe objectiveand,ultimately,thestrategicgoalsofthecompany. 31

40 & StrategyQuestionsforStart]Ups Thereareanumberofquestionsthatneedtobeansweredbeforestartingyourcompany. Theyfallintothreeareas:thecompany,thecompetition,andthemarketplace.& The&Company& Whatisyouruniqueness? Howareyougoingtofindcustomers? Whatisyourcompetitiveadvantage? Whereisthevalueaddedforyourcustomer? Whatarethepotentialproblemswithyourplan? The&Competition& Whoareyourcompetitors? Howdoyouplanoncompetingagainstthem? Whataretheirstrengthsandweaknesses? Howdoyoucompareonthe TotalProduct offering(explainedinchapter5)? The&Marketplace& Howcanyourcompanytakeadvantageofcurrenttrends? Howisthemarketchanging? Isyourmarketacommodity,differentiated,ornichemarket? Whatisthegreatestgrowthpotentialforthismarket? Howwillyouestablishgoodcustomerrelationships? StrategyImplementationandEvaluation Onechallengeorganizationsfacewhendevelopingstrategiesistranslatingthem intooperationaltermsandmeasures.nortonandkaplandevelopedahighly successfulperformancemeasurementframeworkthatrelatesthecompany slongd termstrategywithgoalsandmeasuresknownasthe balancedscorecard [72].It classifiesmeasuresintofourperformanceareas:(1)customer(howdocustomers seeus?),(2)internalbusinessprocesses(whatmustweexcelat?),(3)learningand growth(canweimprove?),and(4)financial(isthecompanymakingmoney?).this frameworkhelpsmanagerstohaveabalancedperspectiveofwhatisimportantfor thefirminsteadofthecommonoveremphasisonfinancialmeasures.firmsshould trytohaveobjectives,measures,targets,andinitiativesforeachoftheseareas. Thelaststepinthestrategicmanagementcycleistoevaluatestrategy implementation,detectingdiscrepanciesandmakingtherequiredoperational adjustments.managersshouldalsoaskthemselveswhethertheirassumptions abouttheinternalandexternalenvironmentswerecorrect.unfortunately,very 32

41 fewcompaniesregularlycomparetheirstrategicgoalswithactualperformance [73],andmostemployeesreportthattheircompaniesarepooratexecution[74]. Researchhasalsoshownthat,ingeneral,moststrategiesresultinonlyabout60 percentoftheirpotentialfinancialperformance[73].commonreasonsarethat companiesfailtoallocatetheneededresourcesinatimelyfashion,poor communicationofgoalsandplans,poorshortdtermplanning,andunclear accountability[73].somerecommendationsforsuccessfulstrategyimplementation aretokeepthestrategystatementsimple,clearlydefineresponsibilities,challenge assumptions,planresourcedeploymentearlyintheprocess,clearlydefine priorities,andcontinuouslymonitorperformance[73]. ChapterQuestions 1. Writeyourmissionstatement. 2. Whatisyourvision? 3. ConductaSWOTanalysisofyourenterprise. 4. WhatareyourlongDtermgoalsforthecompany? 5. Identifyindividualswhocanprovideyouwithanobjectiveevaluationofyour enterprise. 33

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43 Chapter&4: Human&Resource&Management& Itiscommontoreadincorporateliteraturetheclaimthat ouremployeesareour mostvaluableasset, yetwordsandactionsdonotalwaysgohandinhand. Executivesoftenfailtofocusenoughattentionandinvestmentinrecruitment, training,retention,motivation,andcompensationofhumanresources[75].itisthe employeeswhoimplementthestrategicandoperationalplans,andcreateand delivertheproductsandservicestocustomers.humanresourcemanagement contributestoafirm sperformancebyenhancingemployees skills,knowledge,and abilities,andbymotivatingemployeestousetheirskills,knowledge,andabilities forthefirm sbenefit[75].humanresourcemanagementpracticesmustsupport theoverallbusinessstrategyandthusshouldbepartofthestrategicplanningmix. Themajorresponsibilitiesofhumanresourcemanagementaretoattracttheright peopletojointhecompany sworkforce(planning,recruitment,selection),develop aqualityworkforce(training,development),andmaintainthatqualityworkforce (careerdevelopment,compensationandbenefits,labormanagementrelations). Thefunctionofhumanresourcemanagementanditsmajorsubfunctionsare coveredinthischapter. Table5.Humanresourcemanagementactivities. Humanresourcemanagement Humanresourceplanning Jobdescriptionsandspecifications Recruitmentandselection Traininganddevelopment Compensationandbenefits HumanResourcePlanning Regardlessofthesizeoftheorganization,longDtermplanningofhumanresource needsandwaystomeetthoseneedsisofgreatimportanceinordertoattainthe strategicgoalsofthecompany.humanresourceplanningincludesforecasting personnelneeds,intermsofbothnumberandqualifications;assessingthe availabilityofcapablehumanresources;andforecastingwhenthoseresourceswill beneeded.forecastingcanbeconductedbasedonjudgment,rulesofthumb,or quantitativemethodssuchaspersonnelratios(e.g.,productivityratios). Theoutputfromthisprocessisastaffingplan,whichincludesactionsaimedat recruiting,selecting,andretainingtherequiredworkforce.veryimportantly,a humanresourceplanshouldaddresswhetherstaffingneedsaregoingtobemetby recruitingindhouse(promotionortransfers)orbyexternalhires.thesedecisions mustbebasedonathoroughanalysisoftheinternalandexternalworkforce. 35

44 Alternativestoconsidertoclosethegapbetweenneedsandavailabilitywhenthere arestaffshortagesincludehiringtemporaryorfulldtimeworkers,overtime, automation,subcontractwork,andincreasingworkerproductivity(e.g.,byprocess redesign,incentives,orequipmentupgrading).potentialstrategiestodealwith staffsurplusesincludetemporaryorpermanentlayoffs,attrition,jobdsharing(the dutiesandresponsibilitiesofonepositionaresharedbytwoormoreemployees), andacompressedweek(aworkweekoflessthanfivedaysbutwithsamenumber ofhours).similartooperationsplanning,thetimehorizonforhumanresource planninghasdifferentlevels,fromshortterm(sixmonths)forimmediateneeds,to mediumterm(uptothreeyears)andlongterm(morethanthreeyears). Planninghumanresourcesinsmallcompaniesistypicallycarriedoutinaless systematicway.sinceitiscommoninsmallbusinessesforfamilymembersto participateinmanagementandoperations,specialattentionshouldbeplacedon successionplanningandincorporationofnonfamilymembers. JobDescriptionsandSpecifications Jobdescriptionsandjobspecificationsarecarefullyprepareddocumentsused extensivelyinhumanresourceactivitiessuchascompensation,training,and performanceevaluation.ajobdescriptionidentifiestheresponsibilities,tasks,and dutiesofajob.jobspecifications,whicharetypicallyincludedinjobdescriptions, listthequalifications,skills,behaviors,andabilitiesneededtoperformajobina successfulmanner.spendingtimeinpreparingjobdescriptionsandspecificationsis agoodinvestmentbecausetheyestablishwhatisexpectedfromtheemployeeand areabasisforperformanceevaluationsaswellastrainingandcompensation purposes.also,thesedocumentscanhaveimportantlegalimplications.for example,theamericanswithdisabilitiesactrequiresemployerstomaintain accuratejobdescriptions[76]andensuresthatthosedescriptionsdonotunfairly preventqualifiedcandidateswithdisabilitiesfromgettinghired.also,overtime paymentiscloselyrelatedtothetypeoffunctionthatanindividualperforms, whichshouldbedetailedinajobdescription[77].otherlegalaspectsthatshould beconsideredarethecivilrightsact,theagediscriminationinemploymentact, andthepregnancydiscriminationact.thecomponentsofajobdescriptioninclude thefollowingelements. Job&title.Abriefdescriptionreflectingthescope,purpose,andcontentofthejob. Identification.Reportingrelationships,location,dateofanalysis,paygrade,and otherinformation. Summary.Ashortdescriptionofthesignificanceofthejobanditsmajor responsibilities.suggestedlengthis30wordsorless. Job&functions&and&duties.Description,inorderofimportance,ofthejob expectations,essentialtasksandduties,andresponsibilities.itisperhapsthe mostimportantsectionofthejobdescription. 36

45 Job&specifications.Adescriptionofthequalificationsthatanemployeeneedsto performthejobinaproficientmanner.thissectionhasfourmajorcomponents: (1)educationandcertificationsrequired;(2)minimumexperienceneededand acceptablesubstitutions;(3)skills,abilities,andknowledge;and(4)physical requirements. Disclaimers&and&signatures.Disclaimersareusuallyincludedtogivetheemployer flexibilitytochangeaposition srequirementsandtoaskemployeestoperform dutiesnotlistedinthejobdescription. Somerecommendationswhenpreparingjobdescriptionsincludethefollowing. Focusonwhatthebusinessneedstheindividualtoaccomplish(i.e.,resultsand performance)ratheronhowyouwanttheemployeetospendhisorherday. Focusonthejob,nottheperson. Differentiatebetweencredentials(e.g.,abachelor sdegreeinwoodtechnology orcomparable),skills(e.g.,intermediateproficiencyinmicrosoftexcel),andtraits (e.g.,attentiontodetail). Makesureyouareincompliancewithlegalrequirements. Someonlineresourcesforinformationtoaidthejobdescriptiondevelopment processarelistedbelow. TheDepartmentofLaborcreatedadatabasewithhundredsofdetailed occupationdescriptions,whicharecontinuouslyupdated.visit Anexcellenttooltoaidinjobanalysiscanbefoundatwww.jobDanalysis.net. RecruitmentandSelection Recruitingistheprocessofdevelopingalargeenoughpoolofsuitablecandidates foreachjob.recruitmenteffortsshouldbebasedonstrategicplanning.when recruitmentiscarriedouteffectively,qualifiedindividualsareidentifiedbeforethey areneeded.companiescanresorttointernalrecruitmenttofindsuitable candidatesforajoborlookfortalentoutsidetheorganization.internalrecruitment includeshiringfromwithintheorganizationandusingemployeereferrals,which mayincluderewardsforsuccessfulreferrals.sourcesforexternalhiringincludethe following. Different&forms&of&media(e.g.,newspapers,magazines,radio).Bearinmindthat themoretechnicaltheposition,thewideryouneedtoexpandthesearch geographically. 37

46 Trade&associations.Someindustryassociationsmaintaina CareerCenter on theirwebsiteswherejobseekerscanpostresumesandemployerscanpostjob openings. Trade&publications.Forexample,Wood&Windowmagazinemaintainsan EmploymentCenteronitswebsite(jobs.windowanddoor.com). State&employment&agencies.Eachstatehasanemploymentagency,suchasthe Minnesota sminnesotaworks.netandvirginia svirginiaworkforceconnection ( Private&employment&agencies.Thesecompaniesnormallycollectafeefromthe businessorthecandidateonacontingencyorretainerbasis.specialtypesof privateemploymentagenciesincludeheadhuntersandoutplacementfirms.the formertypicallyspecializesinmanagementorprofessionalpositions;thelatter assistspeoplewhohavelosttheirjobs. Educational&institutions.Mosteducationalinstitutionshaverecruitment resources,suchascareerplacementcenters.internshipshavebecomemore commonandcanbeaconvenientwayforstudentstolearnaboutacompanyand foremployerstoevaluatepotentialemployees.other,lessformalroutesinclude maintainingrelationshipswithspecificdepartmentsandparticipatinginadvisory boardsorasguestspeakerforclassesorevents. Job&fairs.Theseeventsarenormallyusedbycompaniesinneedoffillingalarge numberofopeningsandaretypicallyorganizedbystateorlocalgovernments, educationalinstitutions,ortradeassociations. Oncealistofcandidatesforajobopeninghasbeencompiled,thecompanyneeds toselecttheindividualwiththebestqualificationstofilltheposition.notraining cancompensateforapoorselectionprocess,thuseffortsshouldbemadetoselect therightpersonforthejob.aneffectiveselectionprocessmatchestheknowledge, skills,andabilitiesofindividualswiththejob.theselectionprocessisbasedonwell thoughtdoutselectioncriteria;thesecriteriainturnmustbebasedonpredictorsof goodperformance.effectiveselectionrequiresthatcompaniesadoptastructured processsothefirmcanensurethatallfactorsareconsideredandthattheprocess isexplicitanddocumentedforfuturereference. Thefirststepintheselectionprocessistypicallytoaskthecandidatetofilloutan applicationinordertocollectrelevantinformationtoaidinthedecisionprocess. Cautionshouldbetakenregardingthespecificinformationthatisrequestedfrom theapplicanttoavoidconflictingwithrelevantlaws.informationnormally requestedincludesname,address,phonenumber,education,experience,and references.permissionisalsoaskedfromthecandidatetocheckreferences. Disclaimersareincludedattheendoftheapplicationforlegalprotectionandmay includeemploymentdatdwill(therightoftheemployeeoremployertoterminate employment),informationaccuracy(rightofemployertoterminateemploymentif falseinformationisprovided),andnotificationoffurthertests(e.g.,drugtesting, physicalexam). 38

47 Aftercheckingthequalificationsfromanumberofapplicants,thesecondstagein theselectionprocessistypicallyascreeninginterview,usuallyconductedbyphone, therebysavingtimeforboththeapplicantandtheemployer.oncethescreening interviewiscomplete,somecompaniesconductaselectiontesttoassesswhether anapplicanthaspotentialforsuccessinthejob.selectiontestscaninclude personalitytraits,abilities,aptitudes,honesty,andmotivation.toguaranteeafair selectionprocess,testsshouldbereliable(yieldconsistentresultsallthetime)and valid(actuallymeasurewhattheyareintendedtomeasure).testshelptofurther screencandidatesandeliminatethosewhodonothavetherequiredabilitiesor skills.oneexampleofapersonalitytestistheminnesotamultiphasicpersonality Inventory.Abilitytestsmayincludecognitive,physical,psychomotor,and situationaljudgmenttests.thereareanumberofstandardtestsdevelopedby specializedorganizationsthatcanbepurchasedbyemployers. Followingtheselectiontests,aninDpersoninterviewisscheduledwithseveralof thetopcandidates.theinterviewcanbeconductedbyoneindividualorbyapanel, whichmayormaynotincludethepeoplewithwhomthecandidatewouldinteract ifhired.thepurposeoftheinterviewistolearnhowthecandidatewouldbehave inthejob.unlikeastandardizedtest,therearetypicallynorightorwronganswers inaninterview,sotheinterpretationoftheresponsescanbehighlysubjective.to avoiderrororbias,awelldpreparedjobdescriptionisextremelyimportant,andits contentsshouldserveasthechecklistagainstwhichthecandidate sresponsesare compared.interviewsmayincludeacombinationofseveraldifferentinterviewing methods;afewexamplesaredescribedbelow. Structured&interview.Asetlistofquestionsisaskedtoallcandidates,allowing followdupquestionswhenneeded. Situational&interview.Asthenamesuggests,candidatesarepresentedwiththe descriptionofasituationandaskedhowtheywouldhandletheproblem. Candidatesareaskedtosupporttheirresponseswithdescriptionsofpastactions insimilarsituations. Nonstructured&interview.AminimumnumberofopenDendedandverybroad questionsareasked,resemblingmoreacasualconversation.sometimes questionsaredevelopedbasedonresponsestopreviousquestions. Aftertheinterview,thecandidate sreferencesarecheckedandhisorher backgroundisverified.unfortunately,applicantsarenotalwaystruthfulabouttheir credentials.bysomeestimates,about40to70percentofapplicantsexaggerate theirresumes[78].checkingreferencesfrompastemployerscanbedifficult,as fearoflegalprocess(i.e.,adefamationlawsuit)canpreventapreviousemployer fromdisclosingnegativeinformation.however,notconductingproperreference checkscanresultinlegalproblemsforthepotentialemployeraswellifthenew employeewouldharmacodworker(i.e.,negligenthiring).somecompaniesconduct 39

48 criminalbackgroundchecksorcreditchecks,uponwrittenconsentfromthe candidate. Thefinalstepintheselectionprocessismakinganoffertothechosencandidate. Offersareusuallymadebyphone,accompaniedbyawrittenofferwithclearly describedtermsandconditions.firmsshouldensurethatoffersarecompatible withapplicablelaborlaws. Manyresourcesareavailableonlineforhumanresourcerecruitingandselection. GuidanceonhowtoconductinterviewsandselectioncanbefoundattheSociety forhumanresourcemanagement swebsite( 40 RecruitingviatheInternet CompaniesareincreasinglyresortingtotheInternettoconductrecruitmentactivities.More than100millionjobsareadvertisedand20millionuniqueresumesarepostedonlineatany givenmoment[79].advantagesofonlinerecruitmentincludemuchlowercostsandshorter timesforhiring(87percentlower,byoneestimate[79])andtheabilitytoreachamuch largeranddiversepoolofpotentialcandidates.italsoenablesemployerstomovefrom batch hiringtoamorecontinuoushiringprocess,whichisespeciallygoodforreaching capablepeoplewhomaynotnecessarilybeactivelylookingforajobbutmaybeinterestedif agoodopportunityarises[79,80].internethiringisnotwithoutitschallenges.onemajor drawbackisthatbecauseofitswiderreach,itcancreateanadditionalworkloadfor recruiters.& TherearetwobasicwaysinwhichyourcompanycanusethepoweroftheInternettorecruit qualifiedpersonnel:(1)usinginternetjobboards,suchasmonster.com,yahoo,or indeed.com;and(2)usingyourcompany swebsite.anadditionalwaycompaniesare recruitingisthroughonlinesocialnetworks,suchasfacebook,twitter,andlinkedin.online socialnetworkscanbeapowerfultoolforstartdupbusinesseswithoutlargebudgetsfor recruitment.insomecasestheuseofthesetoolscanreducethecostoffindingaviable candidatetozero.itisimportanttobearinmindthatregardlessoftheonlinetoolused, potentialcandidateswhoseeyourpostingwillverylikelyvisityourcompany swebsiteto learnmoreaboutthebusiness.thusitisimportanttopayattentiontothemessagethatthe websiteisconveying.foradviceononlinerecruitmentandrecruitmentingeneral,visit TrainingandDevelopment Nomatterhowqualifiedandcapableanewlyhiredindividualis,heorshemust receivetrainingforsuccessfulperformanceinthejob.thistrainingcanberequired bylaw(e.g.,safety)orbythecompany spolicies(e.g.,orientation).equally importantistofacilitatetrainingwithalongdtermperspective(i.e.,employee development)andtoenhancetheemployee sproblemdsolvingandinterpersonal skills.researchhasshownrepeatedlythattrainingispositivelycorrelatedwith employeecommitmentandorganizationalperformance[81,82].thereisgeneral agreementthataneducatedworkforceismoreproductiveandinnovative.in

49 particular,forestproductsbusinessesneedtoinvestintheiremployeestoremain competitiveintoday schangingbusinessenvironment. Figure15.Traininghumanresources.Photocredit:RobertSmith. Aswithanyinvestment,trainingprogramsshouldbecarefullyevaluatedbasedon theirexpectedoutcomes.businessesshouldassesstheirtrainingneedseither formallyorinformallybeforecommittingresources.trainingneedscanbe identifiedbycomparingtheorganization sactualperformancewiththedesired performance.otherindicatorsoftrainingneedsarecustomercomplaints, absenteeism,andlowemployeeperformance.whenjobdescriptiondocuments arewellpreparedandmaintained,theycanbeusedasabasisforcomparisonwith currentperformanceandtoidentifywheretrainingisneeded. Oncetrainingneedsareidentified,adeliverymethodneedstobeselected.Two basicoptionsexistregardingtrainingdelivery internalorexternal.internal trainingmayincludeondthedjoblearningandcrosstraining.ondthedjobtrainingis themostcommonmethodandcanbeveryeffective.crosstrainingisusedwhenit isdesirableforemployeestoexecutemorethanonejob(seeboxonnextpage). Externaltraining,inwhichlearningoccursoutsidethecompany,canbeacostD effectiveoptionforsmallfirmswithalimitednumberofstaff.anumberof organizationsprovidetraining,suchassuppliers,universityextension,industry associations,governmentagencies,nongovernmentalorganizations,andconsulting companies.freeonlineeducationisanothersource. 41

50 Cross]TrainingAssessment Inmodernmanufacturingtechniques,suchasflexiblemanufacturingandcellular manufacturing,employeecrossdtrainingisveryimportanttorealizethebenefitsofsuch productionphilosophies.onesimpletechniquetomonitorcrosstrainingofemployeesis thecrossdtrainingchart,whichisadoubledentrytablewithemployeenamesinrowsand machines/tasksincolumns.theleveloftrainingofeachemployeeonaspecificmachine ortaskismarkedwithasymbol.thechartisusuallypostedintheworkarea.& Assemblycell2 Name Lathe Sander Router Packing Employee1 Employee2 Employee3 Employee4 A2012surveyofforestproductscompaniesinMinnesotaandVirginiaconducted bytheauthors[83]identifiedthemostimportanttrainingneedsamongsmalland mediumsizedenterprisesinthissector.companiesindicatedthatqualityand processcontrol,processimprovement,marketing,sales,andplantmaintenance weretheirmostimportanttrainingneeds.companiesalsoindicatedthattheir currenttrainingsuppliersweretradeassociationsandprivateindustry(including consultingfirms)and,toalesserdegree,universityextensionprograms.for trainingdelivery,companiespreferredindpersontraining(personalvisitsandshort courses).onlinedeliverywasnothighlyrankedasaneffectivetrainingmethod.for moredetailedinformationaboutthesurveyresults,visitfpmdi.bbe.umn.edu. CompensationandBenefits Choosingtherightcombinationofcompensationandbenefitsisadifficulttaskfor anycompanybutparticularlychallengingforaneworsmallbusiness.abalance shouldbereachedbetweenofferingcompensationpackagesattractiveenoughto findqualitypersonnelandensuringthefinancialviabilityofthebusiness.paylevels thataretoohighcanalsodiscouragepotentialinvestors.whendesigning compensationschemes,businessesshouldevaluatehowthealternativeswill impactcashflow(criticalforstartdups),compensationandincentivesofferedbythe competition,andthetaximplicationsofthecompensationalternativesbeing evaluated(e.g.,securedorunsecureddeferredcompensation)[84]. 42

51 Itisadvisabletothinkofcompensationasa totalrewardssystem thatincludes directcompensation(baseannualorhourlywageplusbonuses),indirect compensation(socialsecurity,healthinsurance,retirementprograms,moving expenses,paidleave),andnonmonetarycompensation(jobsecurity,recognition, flexiblehours).employersneedtobecreativeanddesignatotalrewardssystem thatbestfitsemployees expectations. Employeesexpectthattheirbasewagewillcoverbasiclivingexpensesplussome discretionaryspending,andthatitwillincreaseovertimetocompensatefor inflationandreflectboththeircontributionstothefirmandtheirseniority[85]. Employeesexpectthecompensationsystemtobefair,bothinternally(between employeesinthesamefirm)andexternally(comparedwithotherbusinessesinthe sameindustry).aperceptionofunfaircompensationpracticescanleadtolow employeemorale,absenteeism,highturnover,andlowproductivity.bearinmind thatexpectationsforcompensationandbenefitschangewithemployees ageand thestageoftheircareers.typically,youngemployeesvaluehavingtimeofffor otheractivitiesandprefer ondthedspot rewards.asworkersstartfamiliesand reachthemidpointintheircareers,theyplacemorevalueonfamilyhealthcare andwealthaccumulationbenefits;childandeldercaremightalsobeontheirradar. Employeesapproachingthelatterpartoftheircareersvalueinsuranceandhealth carebenefits.flexibleschedulesarealsoattractiveforolderemployees,asthey maywanttopursuehobbiesorcommunitydrelatedactivities[86]. Thechangingnatureoftheworkplaceisresultingindifferentexpectationsforpay andbenefits.employersneedtobeawareofthesetrendstoattractandretaina competentworkforce.someofthesechangesasidentifiedbydychtwaldetal.[86] arelistedbelow. Payisshiftingfromsystemsbasedontenuretoperformancebased. Retirementplansaremovingfrombeingadefinedbenefittoadefined contribution. Rewardsystemsarealsochanging.Itismorecommonnowtofindinformal rewardandrecognitionsystemsratherthanformalandperiodicsystems. Healthbenefitsusedtobepredominantlymanagedandprovidedbythe employer.itisnowbecomingmorecommonthatbenefitsarefundedand managedbyboththeemployerandtheemployee. Ingeneral,thereisatrendtocustomizecompensationandbenefitspackagesto individualrequirements.thismakesitnecessarytocommunicatewithemployees tolearnabouttheirneedsregardinghealthinsurance,vacation,childcare,and retirementplans. 43

52 JobSecurityataNorthernMinnesotaCompany Nonmonetarycompensationincludesbenefitsthatarenottangible.Howmuchvaluedo employeesplaceonjobsecurity?u.s.forestproductsmanufacturersfacedgreatchallenges duringthelasttwodecades,resultingfromdramaticdropsindemandfortheirproducts. Oneofthefirstresponsestosuchchallengesistoreducetheworkforce.Between2005and 2009,1.1millionjobswerelostintheforestryandforestproductssectors[15].Marvin WindowsandDoors,afamilyDownedcompanyinMinnesota,decidedtokeepits4,000 employeesonthepayrollandmaintainhealthinsurancebenefits.employeesagreedto reduceweeklyworkinghoursfrom40to32andsuspenda401(k)match.thecompany s executivesreferredtothispolicyasa longdtermbusinessstrategy thatallowedthemto retainvaluableemployees.thecompanyreceivedpraisefrompresidentobamainseveral speechesin2012[87].& ChapterQuestions 1. Writeacompletejobdescriptionforthepositionsinyourcompany. 2. Wherewillyouadvertiseforemployees? 3. Compilealistofinterviewquestionsthatyouwilluseforeachposition. 4. Whatarethetrainingneedsofeachnewemployee? 5. Wherewillyoufindcompetitiveinformationforwagesandbenefitsforeach position? 6. Howwillyouevaluateemployeeperformance? 7. Howoftenwillyouhaveastandardevaluationofeachemployee? 8. Howwillyoudeterminesalaryorwageincreasesforemployees? 44

53 Chapter&5: Marketing&Management& Entrepreneursoftenoverlookmarketingwhentheywanttostartabusiness.In manyinstancesanindividualhasagreatideaforaproductorserviceandassumes thattherewillbedemandforit,ortheindividualmaybeverygoodatmakinga product.unfortunately,quiteoftenmanyotherpeoplearealsogoodatmakingthe product,andtheindividualhastoidentifywhyhisorherproductisbetteror different.allgoodbusinessstartdupsthoroughlyevaluatethemarketbefore investinginthebusiness.theyneedtocompletelyunderstandtheircompetitive advantageinthemarketplace.bytheendofthischapter,readersshouldhavean understandingofthemarketingmixfortheirproduct,knowhowtoconducteasy marketresearch,knowhowtoreachpotentialcustomers,andhavean understandingofonlinemarketingmethods. Table6.Marketingmanagementactivities. Marketing management Marketingfundamentals thefourp s Product Promotion Price Placement Marketresearch Talktocustomers Watchthecompetition Readtradepublications Academicinstitutions Governmentagencies Marketcustomizationandniche marketing Onlinemarketing Websites marketing Onlinepromotionsandads Onlinesocialmedia MarketingFundamentals TheFourP s Anymarketingstrategyshouldincludespecificplansforthecompany smarketing mix,whichisthesetofactionsthatthebusinesscantaketoincreasethedemand foritsproducts.thesepotentialactionscanbegroupedintofourcategories product,promotion,price,andplacement(ordistribution) knowncollectivelyas thefourp sofmarketing. 45

54 Product& Aproductisanyphysicalobject,service,place,organization,idea,orpersonality thatsatisfiesacustomerwantorneed.thethreemaintypesofproductsare commodityproducts,specialtyproducts,anddifferentiatedproducts. Commodity&productsaremanufacturedtoamoreorlessstandardsetof specifications.examplesofcommodityitemsincludehardwoodlumber, dimensionlumber,andplywood.thereislittledifferentiationincommodity productsbetweenmanufacturers.forthisreason,competitioninthe commoditiesmarketisbasedprimarilyonprice.itisoftenasurprisetosmalland mediumsizedmanufacturersofhardwoodlumberjustenteringthemarketplace howlittlecontroltheyhaveoverthesellingpriceoftheirproducts. Specialty&products,ontheotherhand,aredevelopedandofferedtoasmall groupofcustomersorasmallmarketsegment.competitioninthespecialty productsmarketistypicallybasedmoreonproductfeaturesandlessonprice. Becausethereisgreaterproductdifferentiationwithspecialtyproducts comparedwithcommodityproducts,thepotentialforhigherprofitmargins increases. Differentiated&productsareproducedwithdifferencesorvariationsinorderto satisfydifferentmarketsegments.comparedwithcommodityandspecialty products,differentiatedproductsprovidemanufacturerswiththegreatest amountofcontroloversellingprice.productdifferentiationisoneofthemost effectivemethodsforincreasingthevalueofyourproduct. Productdifferentiationinvolvesdevelopingarealorperceiveddifferencebetween yourcompany sproductandthatofyourcompetitors.forasmalltomediumsized firm,oneofthemosteffectivemethodsofproductdifferentiationisto manufactureaqualityproductandprovidesuperbcustomerservice.inthe hardwoodlumbermarket,forexample,buyerswantconsistencyinthickness,color, andgrade.manylargedvolumehardwoodlumberproducersdonothave proceduresinplacetoidentifywhentheirequipmentisproducinginconsistent lumberthicknesses.atlargersawmills,lumberthatissawnbelowatargetthickness isoftennotidentifieduntilitisattheendoftheproductionline.dependingonthe accuracyofthelumberinspectorsatthesawmillandthemotivationlevelofthe lumberstackers,lumberbelowthethicknessspecificationswillendupbeing packedandshippedtothecustomer.asalowdvolumemanufacturer,yourabilityto inspectyourproductforconsistentthicknessandcolorenablesyoutobettersatisfy yourcustomers desireforquality.rememberthatyourproductismorethanits physicalaspects,itincludesnontangiblessuchasserviceandreputationaswellas servicessuchasdelivery,credit,andcustomersupport(seeboxonnextpage). 46

55 TotalProductConcept Thetotalproductincludesnotonlythephysicalproductitselfbutalsothevarietyof imageandservicefeaturesthatcanimpactcustomersatisfaction.thisiscollectively knownasthetotalproductconcept.componentsofthetotalproductconceptthatare importanttosmallandmediumsizedfirmsarequality,reputation,andservice.by concentratingonthesethreecomponents,smallandmediumsizedfirmscan differentiatetheirproductfromthoseofcompetitors. Promotion& Theobjectivesofpromotionaretoinform,persuade,remind,andassociate. Promotingyourbusinessandproductsservestodothefollowing. Buildawarenessamongpotentialusers. Differentiateyourservicefromthatofyourcompetitors. Communicatethebenefitsofusingyourfirm. Buildafavorableimage. Persuadecustomerstouseyourfirm. Eliminatepreconceivedmisconceptions. Adviseexistingandpotentialclientsofnewservices. Acommonlyusedpromotionalmethodforsmallandmediumsizedoperationsis paidadvertisementsinlocalnewspapersandtradepublications.paid advertisementsshouldstatetheservicesyouofferandyourcompetitive advantage.animportantaspectofpaidadvertisementsisthatthemessageshould suityourtargetaudience.ifyouareabletoprovideonlysmalltomediumvolumes oflumber,thatshouldbestatedintheadvertisement. 47

56 Developingabrochureaboutyourcompanycanalsobeaneffectivepromotiontool foryourbusiness.becausethecostofpaidadvertisementsinnewspapersandtrade publicationsistypicallybaseduponthenumberofwordsandsize,itcanbe expensivetocompletelydescribeyourcompany.apersonalcomputerandprinter canbeusedtomakeaninformativebrochurethatprovidesanoverviewofthe capabilitiesofyourorganizationinordertohelpaprospectiveclientmakea positivepurchasedecision.ifyouareable,hiringaprofessionalwriter,graphic designer,orbothislikelyaworthwhileinvestment.abrochureshouldincludethe followingelements: Aclear,positiveimageofthecompany Benefitsavailabletoclients Whatmakesyourfirmunique Theservicesyouoffer Professionalinformationontheowners Qualificationsandbackgroundofthefirm Name,address,telephonenumbers,andwebsiteofthefirm Missionoftheorganization Whendevelopingabrochureavoidincludinginformationthatcouldbecome outdatedinayear,suchaspricinginformation.acommonapproachistostatethat inquiriesregardingcurrentpricingcanbemadebycallingyourcompany. Networkingcanhelpexpandthenumberofpeoplewhoareawareofyourbusiness. Byjoiningaprofessionalassociation,suchasalocallumberdryingsociety, networkingeffortscanbefocusedonthosewhowillbedirectlyinterestedinyour business.gettinginvolvedinlocalcommunityefforts,suchasbydonatingproducts tothelocalboyscouttrooporthelocalhighschoolwoodshopclass,can dramaticallyincreasethenumberofyournetworkcontactsandgenerategood publicity,whichservesasfreeadvertising.goodpublicitycancreateawarenessof yourcompanyorproduct,buildconfidenceinyourbuyingpublic,andkeep influentialindustrymembersapprisedofyourprogress. Price& Priceistheamountofmoneythatacustomergivesuptoacquireagivenquantity ofgoodsorservices.themajorfactorsaffectingpricingdecisionsare: Customerreactiontopricing(priceelasticity) Impactofwholesalersandretailers Thecompetitiveenvironment Costsofthedevelopment,manufacturing,anddistributionofproducts 48

57 Priceelasticityisthesensitivityofcustomerstoapricechangeintermsofincreases ordecreasesinthequantitiesthattheywillpurchase.ifdemandiselastic,asmall changeinpricewillresultinalargechangeindemand.ifdemandisinelastic, changesinpricehavelittleimpactondemand.customerreactiondependsinpart ontheavailabilityofacceptablesubstitutesandtheurgencyoftheirneed.the distributionchannelentities(wholesalersandretailers)affectpricingdecisionsby thedifferentrolestheyplayinthewarehousing,distribution,andsellingprocess. Thedegreeofinfluenceacompanymayhaveoverpricingisaffectedbythe competitiveenvironment.inamarketdcontrolledpriceenvironmentsuchas hardwoodlumberorengineeredwoodproducts,competitionishigh,products fromcompetingsuppliersseemsimilar,andthereislittlecontroloverpricing. Pricinghasanimpactonsalesvolume,profits,cashflow,inventorylevels,image, potentialforgovernmentregulation,andmarketcompetitiveness.consequently,it isimportanttoestablishpricingobjectivesinordertoclarifytheroleofpricingin overallcorporatestrategy.forsmalltomediumsizedmanufacturingcompanies, pricingobjectivesaretypicallyprofitoriented.thegoalistomaximizeprofitsand achieveatargetreturnoninvestmentorsales.largercompaniestendtobemore salesorientedwhenpricingtheirproducts.thegoalsofasalesdorientedpricing objectivearetoincreasemarketshare,maximizesalesrevenue,andgenerate traffictothecompany[88]. Oncetheobjectivesofthepricingmethodhavebeenestablished,astrategyis implementedtoachievethem.forcommodityitems(e.g.,dimensionlumber), competitorpricingisthemaindeterminantofprice.insomeinstancescompanies candifferentiatetheirproducts,eitherthroughserviceorquality,andcreatea greaterperceivedvaluefortheirproducts.withcompetitiondbasedpricing,aprice leaderistypicallyafirmwithadominantmarketsharethattendstoleadthe industryintermsofpricing.competitorswillusuallywatchthepriceleaderand changetheirpricesaccordingly.somepriceleaderscanbesodominantthatthey havetheabilityto force competitorsoutthroughtheirpricingpractices. Assmallandmediumsizedlumbercompaniesstartdevelopingspecialtyand differentiatedproducts,itbecomesimportantforthemtomovefroma competitivedbasedpricingstrategytoacostdbasedpricingstrategy.thefirststepis todetermineabreakdevenpoint.abreakdevenanalysisdeterminesthenumberof unitsthatneedtobesoldofanitemtobalancethesalesrevenuewiththetotal costofproducingandsellingthatitem.thebreakdevenpointinunitssoldis expressedasfollows(aformulatocalculatethebreakdevenpointusingdatafrom financialstatementscanbefoundinchapter7). Break evenpoint = Fixedcosts Unitsellingprice Unitvariablecost 49

58 AlthoughperformingabreakDevenanalysisinthisfashionisoversimplified,and frequentlyevenfurthersimplificationismadeinpractice,itisausefultoolthatcan indicatewhetherornotacompetitivepricecanbereachedonaproposednew product.breakdevenanalysiscanalsobeusedtodeterminehowquicklyanew productwillbecomeprofitableandwhethercostreductionmovesareneededon anexistingproduct. Fixedcostsareincurredwhetherornotyouroperationisrunningandofteninclude propertytaxes,salariedemployees,insurance,andpaymentsonbankloans. Variablecostsaccumulatewhenyourbusinessisrunningandoftenincludeitems suchasfuelexpenses,rawmaterialpurchases(e.g.,logs,lumber,panelproducts), andsuppliessuchassawblades.onceyouestablishyourbreakdevenpointyoucan thenbegintomarkuppricesinordertomakeaprofit.ifyouarenotmakinga profitandaresimplypayingyourbills,thenitbecomesdifficulttogrowyour company.considerthescenarioinwhichitcosts$150toproduceyourproduct.if youwanta25percentprofitonthatproduct,thenthesellingpriceshouldbe$200, calculatedas$150/(1.00d0.25). Ultimately,youshouldstrivetosetpriceatapointthatcustomersarewillingtopay forthevaluetheyperceiveintheproduct;however,thatvaluecanbedifficultto quantify.ifyourlocalmarketissaturatedwithcompaniesofferingthesame productorservice,customerswillusuallychoosethelowestpricedoneunlessthey perceiveyourproducttobesuperior.somecommonpricingstrategiesusedby woodproductscompaniesaredescribedintheboxbelow. 50 CommonPricingStrategiesUsedbyWoodProductsCompanies InestablishingpricesusesomeformofmarkDupmethodthatislogical,applicable,and relativelysimpletoimplement.theproblemcomesinwhatthemarkdupactuallyisand whetherornotthatamountadequatelycoversoperatingexpenses. Themostsuccessfulwholesalersappeartoachievesomedifferentiationfrom competitionthroughnonpriceissues.manywholesalersattemptandachievelittleor nodifferentialadvantageand,consequently,competesolelyonthebasisofprice. Manyofthesefirmshavenotsurvivedandothersstruggle. Amongmanufacturingfirms,thereisconsiderablevariationinpricingmethodology. Evensuccessfulmanufacturersdonotalwaysusethe proper pricingtechniques. Inthecaseofsmallmanufacturersandwholesalers,pricingisfrequentlymoreanart thanascience.manufacturingorpurchasingcosts;overhead,general,administrative, andsellingcosts;andareasonableallowanceforprofitarecertainlyconsidered,but ofteninmoreofanintuitivefashionthanaspartofaformalizedpricingmethodology. Apracticalpricingapproachistoestablishpricesusingawellthoughtout,frequently updatedmethodologyandthentousealotofintuitioninformalizingthepricesthat arequantitativelydetermined.obviously,ifyoudon tmanageprices,theywillmanage youthroughlowmarginsorlostsales. ManycommodityproducersusethepricesintheWeeklyHardwoodReview[28]or RandomLengths[29]publicationsasstartingpointsandtrynottolowertheirprices.

59 Placement& ThefourthPofmarketingisplacement.Placementdealswiththedistribution channel(seeboxbelow),whichisthemethodbywhichyourproductreachesthe finalconsumer.collectivelythedistributionchannelisaninterdorganizational systemmadeupofalloftheentitiesinvolvedinmovingthingsofvalue(products, services)frompointsofconceptionorproductiontopointsofconsumption. TheDistributionChannel Suppliers Manufacturers Wholesalers Retailers Consumers Examiningthedistributionchannelrevealshowtomostefficientlygetaproducttothe intendedcustomers.becausesmallandmediumsizedsawmillsoftendealinlessvolume thantheirlargercompetitors,theyoftenhavetheoptionofdistributingtheirproduct directlytooneormoreoftheintermediariesalongthedistributionchannel. Inordertochoosethebestdistributionsystem,youmusthaveagoodideaofwho yourcustomersare.onceyouidentifyyourcustomers,therearethreeaspectsof distributiontoevaluateinchoosingamethodforeachcustomer. Feasibility.Whatarethemarketneedsandwants,capitalrequirements, reliabilityofthedistributionchannel,speedofproductdelivery,andsuitability fortargetmarketsandmarketsizes? Desirability.Isthesystempractical?Doesitmeetyourbusinessneeds? Profitability.Canmarginsbemaintainedateachlevelofthedistributionsystem tomakeareasonableprofit?whowillpromotetheproduct?whatcostsare involvedatdifferentlevelsofthedistributionsystem? Figure16.Loadinglumberontoaship(left)andtruck(right).Photocredits:RobertSmith. 51

60 Whenchoosingadistributionchannelitisalsoimportanttounderstandtheroleof intermediaries.themainfunctionsofintermediariesareasfollows. Maintaincontactwithbuyers. Negotiateonpriceanddelivery. Establishcontactsandagreements. Transfertitle. Providecredit/collection. Servicetheproduct. Provideinventoryandstorage. Providebulkbreakingservice. Arrangetransportation. Intermediariesfallintotwoclassifications:thosewhotaketitletotheproductand thosewhodonot.merchants,whotaketitle,includeretailers,lumberyards, cooperativebuyingcenters,jobbers,industrialdistributors,distributionyards, wholesalers,reloadcenters,andhomecenters.agents,whodonottaketitle, includebrokersandmanufacturer srepresentatives.thetypeofproductand customerwilldeterminethetypeandnumberofintermediariestouse.asthe numberofintermediariesincreasessodoesthelengthofthedistributionchannel. Ingeneral,thelongerthedistributionchanneltheloweryourprofitmarginandthe widerthedistributionnetwork. 52 StandardandLongDistributionChannels Factor Shortchannel Longchannel Numberofcustomers Small Large Geographicconcentration High Low Ordersize Largedollarvalue Smalldollarvalue Complexity High Low Productmaintenance High Low Anumberoffactors(e.g.,numberofcustomers,geographicconcentration)and ordersizeshouldbeconsideredwhendecidingonashortorlongdistribution channel.typically,alongerdistributionchannelequatestolowerprofits,butit maymakeiteasiertosellyourproduct.ashortchanneltypicallyrequiresmore networkingandworkontheseller spart,whichcantranslatetohigherprofits. MarketResearch Ifyouarejustenteringthewoodproductsmarketorarelookingtoexpandyour operations,youneedtodosomeresearchoncurrentandfutureaspectsofthe marketthatyouareinterestedin.marketresearchisthesystematicgathering, recording,andanalyzingofdatarelatedtothemarketingofgoodsandservices. Initially,doingmarketresearchcanbeadauntingtaskasmuchoftheeasily

61 accessedmarketinformationcomesfromwallstreetandfocusesprimarilyon marketscontrolledbylargercorporatecompanies.somemethodsforeasymarket researchthatwillyieldinformationpertinentforsmallandmediumsizedlumber companiesareintroducedinthischapter. Therearenumeroussourcesforgatheringtheinformationneededtoperform marketresearchrelativetoyourcompany.marketresearchisimportantin identifyingtrendsthatcanopennewopportunitiesforyourbusiness.itistrue acrossallbusinessesthatthecompaniesthatcanidentifyandreacttomarket trendstendtobeleadersintheirfield.focusingonyourcustomersand competitorsisagoodstarttoperformingmarketresearch.otheroptionsfor marketresearchthatcanmorepreciselyquantifymarkettrendsinclude subscriptiondbasedmarketreports,trademagazines,andtradeassociations. Developingarelationshipwithanacademicinstitutionthathasawoodscience programthatprovidessomemarketinformationcanalsohelpyouidentifymarket trends.numerousstateextensionspecialistsarealsoavailableforinformation regardingmarketingandwoodutilizationquestions. Theimportanceofdoingmarketresearchcannotbeunderstated.Bydoingmarket researchyouwillenableyourcompanytoreacttomarketchangesfaster,findnew productideas,serviceyourcustomersbetter,anddeveloplongdtermselling opportunities.theunderlyingpurposeofdoingmarketresearchistoidentify trendsinthedifferentmarketsthatyourcompanyserves. Talk&to&Customers& Aneasywaytostartconductingmarketresearchistotalktoyourcurrent customers.theycanprovideinformationonchangesintheirproductlines,which maybeatrendintheentiremarket.yourcustomerscanalsocommunicateifthey plantoincreaseordecreaseoutput.probablymoreimportantly,yourcustomers canprovideinputintothefutureofthemarketsthattheyareengagedin.often yourcustomers attitudestowardthefuturewillhaveadirecteffectonyour business.thisinformationcanprovideyouwithsomeintuitionintowhetheritis timetoexpandorchangethecurrentmarketsthatyouservice. AssessingMarketStability Theactionsofyourcustomerscanbeagoodbenchmarktohowstableaspecificmarket is.increasedpurchasingofrawmaterialsandequipmentcanimplythatthemarkethas potentialforgrowth.employeelayoffsandsuddenchangesinmanagementcansuggest thattheymayfearthefutureofthemarketandaretryingtoreduceoverheadcosts. 53

62 Watch&Competitors& Tosomedegree,watchingtheactionsofyourcompetitorscanprovideinsightinto howhealthyamarketis.taketimetoexaminewhetheryourcompetitorsare introducingnewproductsoreliminatingexistingproducts.ifadvertisementsfrom yourcompetitorsareappearingmorefrequentlyinnewspapersandtrade publications,yourcompetitorsmayknowthatthemarketishealthyandthereare plentyofpotentialnewcustomers. Read&Trade&Publications& Theproblemwithmerelywatchingeitheryourcustomersoryourcompetitorsis thattheremaybeunseenfactorsdrivingtheiractions.fortunatelytherearea growingnumberofinformationsourcesthatprovidequantitativeinformationon woodproductmarkets.somesubscriptiondbasedmarketingpublicationsthat providepricinginformationforthesolidwoodmarketsincludehardwoodreview [28],HardwoodMarketReport[27],RandomLengths[29],Crow'sMarket&Price Service( Forest2Market[90].Inaddition,thesepublicationsalsoroutinelyprovidemarket forecastsfordifferentsegmentsrelatedtothewoodindustry.tradepublications suchasnorthernloggerandtimberprocessor,independentsawmillandwoodlot Management,SouthernLumberman,Wood&WoodProducts,andWindow&Door alsoroutinelygivemarketforecasts.editorialsandlettersfromreadersintrade publicationsalsooffersomeinsightintowhatothersthinkofvariousmarkets. Manytradeassociationspublishnewslettersandmembershipdirectoriesthatcan provideinformationaboutwhatothercompaniesaredoingandwheretheyare located.newsletterspublishedbytradeassociationsoftenhaveamarketoutlook sectionalongwithimportanttopicssuchaslegislativeissuesthatpertainto associationmembers.whilemembershipcanbecostly,itdoesprovidevaluable networkingoptions.nationalandregionaltradeassociationsandtradeandmarket publicationsarelistedinappendixa. Access&Information&From&Academic&Institutions& Anothersourceofinformationformarketresearchiscollegesanduniversitiesthat havewoodscienceprogramsorcooperativeextensionprogramsintheareasof forestryandforestproducts.manyacademicinstitutionswithwoodscience programshavefacultywhosemainfocusareaismarketing.therearecurrently32 academicinstitutionsidentifiedbythesocietyofwoodscienceandtechnologyas havingprogramsinwoodscienceorforestproducts(seelistatwww.swst.org). Someacademicinstitutionshaveresearchcentersthatfocusprimarilyonproviding marketresearchtowooddusingcompanies.dependingonthepoliciesofthe researchcenter,accesstomarketresearchmaybefreeorsubscriptiondbased. 54

63 Developingcontactsattheacademicinstitutionscanoftenfacilitatefinding qualifiedcandidatestoworkforyouroperation.appendixacontainsalistof centersandinstitutesthatsupporttheforestproductsindustry. Contact&Government&Agencies& Thefederalgovernmentandmanystategovernmentshavespecialistsonstaffto assistwiththemarketingandutilizationofwoodproducts.contactinformationfor theu.s.forestserviceaswellaswoodproductsextensionspecialistsbystateis listedinappendixa. MarketCustomizationandNicheMarketing Developmentsincommunications(e.g.,theInternet),strongdomesticand internationalcompetition,andmoresophisticatedcustomershaveendedtheeraof massproductionandmassmarketing.thereisno onesizefitsall anymore,and marketsaremovingtomasscustomization(producinggoodsthatmeetcustomers uniqueneedsatanindustrialscaleandatareasonablecost).consumersdemand productscustomizedtotheirspecificneeds.thesuccessofabusinesswill increasinglydependonitsabilityto(1)identifymarketnichesthatfititscore competencies,(2)successfullytargetthesemarketswithpromotionandtheright distributionchannels,and(3)positionthecompany sbrandinthemindsof potentialcustomersinawaythatdrivespurchasebehavior.thisprocessisknown asmarketcustomization(figure17). Figure17.Marketcustomizationprocess. Oneparticularmarketcustomizationstrategythatcanyieldgoodresultsforsmall orstartdupbusinessesisnichemarketing,whichisamethodforreducing competitionandgainingmorecontroloverproductprices.thatis,ineconomic terms,withlesscompetition,demandforanichemarketproductislesselastic.as such,theproducerhasmoreflexibilityinsettingprice.iftheproducerraisesprices therewillbealessdthandproportionalfallinthequantitydemanded,theresult beinganincreaseintotalrevenues[91].weseethisstrategysuccessfullyappliedin thenichebeermarket;thousandsofmicrobrewerieshavesprungupacrossthe countrywithspecialtybeersaimedatveryspecifictastes. Massmarketingisthe shotgunapproach, operatingontheassumptionthatall customershavesimilarproductneeds.nichemarketing,however,recognizesthat 55

64 themarketissegmentedintowellddefinedcustomergroups,eachwithitsownset ofneedsthatisbestservedbyamorefocused rifleapproach. Producersofcommodityproducts,like2x4framinglumberand5/4hardwood lumber,facestrongcompetitionfromnumerousotherproducersinamassmarket. Noproducerhasmuchcontroloverthemarketpriceforitsproducts,andnonehas enoughproductiontobeabletoexertpriceleadership.theyoperateinamarket structureapproachingtheeconomist smodelofpurecompetition.assuch,they arepricetakers,notpricemakers.inpurecompetition,demandfortheproductsof theindividualproducerispriceelastic;ifacompanytriestoraisepricesabovethe generalindustrylevel,theywilllosebusinesstocompetitors.acompanycan increaserevenuesifitdropsitspricebelowthegeneralindustrylevel.buta companymaythengetmoreordersthanitscapacitytofillandwillsoonraise pricesbackuptothoseofitscompetitors.insuchacompetitiveenvironment,cost controlisthesinglemostimportantfactorforprofitableoperationsandsurvival. Theidealnichemarketdisplaysfivecharacteristics. Profitability.Thenichehasadequatesizeandpurchasepowertobeprofitable. Growth.Thereisreasonablepotentialmarketgrowth. Limited&competition.Thereisnocompetitionfrommajorplayers. Competitive&advantage.Theproducerhastherequiredresources,skills,and locationtoservethemarketeffectivelyandtodosobetterthanitscompetitors. Goodwill.Theproducercanbuildenoughloyaltyamongcustomerstodefendand survivecompetition. Althoughprofitablenichemarketsmaybediscoveredbyaccident,itisalsopossible forproducerstobesystematicinfindinganddevelopingnicheopportunities.the followingstepsformtheframeworkfordecidingwhattosell,wheretosellit,to whomtosell,andatwhatprice,soastotakeadvantageofaprofitablemarket niche. 1. Analyze&the&existing&market.Findoutwhothecustomersare,whothecurrent playersorcompetitorsinthemarketare,whatproductorproductlinesand servicesarebeingoffered,whatpricesarebeingcharged,andwhatdistribution channelsareusedinbringingproductstocustomers.informationofthisnatureis oftenavailablefromstudiesconductedbyorganizationssuchasthecenterfor ForestProductsBusinessatVirginiaTech. 2. Identify&neglected&or&underserved&market&segments.Determineifanysegmentsin theexistingmarketarecurrentlyneglectedorunderserved.informationmaybe obtainedthroughpersonalobservations,interviewswithcurrentmarket participantsorconsultants,tradepublications,governmentpublications,market information,ornewspapers. 56

65 3. Evaluate&your&strengths&in&serving&identified&segments.Determinetheresources andskillsneededtobeeffectiveinsatisfyingtheneedsofperceivedunderserved orneglectedmarketsegments.considertherawmaterial,equipment,skill, financial,andmanagerialresourcesrequiredtobecompetitive.alsoconsider marketingrequirementssuchassalesforcesizeanddistributionchannel intermediaries.additionally,determinethecompetitionorrivalry,ifany,tobe expectedinthemarketsegments. 4. Select&the&niche&in&which&you&have&a&competitive&advantage.Chooseoneormore marketsegmentsbasedonyourstrength,skills,location,andresources.niche marketingcanberiskyasitmaybetemporaryormaybeattackedby competitors.specializinginmorethanonenichemaylowerriskandincreasethe chancesofsuccess.howwillyourpositioninthemarketnichebeprotected? 5. Develop&a&marketing&program&to&meet&the&needs&of&this&market.Foreachniche chosen,determinetheappropriateorbestproduct,price,promotion,and distributionsystemtoservecustomersefficientlyandprofitably.superiorservice canhelpbuildandretaincustomerloyalty. Successinnichemarketswillnotgounnoticed.Competitorswillbeattracted,each tryingtomakeabetterproduct,supplyitatlowerprices,orprovidebetterservice thanthepresentnicheoccupant.thenichemarketershoulddevelopaclose relationshipwithitscustomers,understandtheirrequirements,findwaystohelp themdoabetterjoborreducetheircosts,andberesponsivetotheirneeds. Continuingattentiontothesefactorswillhelpguaranteelastingsuccessinaniche marketandhelptheproduceravoidbeingtiedtocommoditymarkets. SuccessfulNicheMarketStrategyExample AfamilyDownedbusinessinMinneapolis,Minnesota,usesreclaimedwoodfrom discardedtreesinthe urbanforest tomakeitemssuchascuttingboards,tablet computerholders,bottleopeners,furniture,anddecorativepanels.thecompanymarks eachlogwiththezipcodeoftheareafromwhichthetreecameandmaintainsthis informationthroughoutthemanufacturingprocesstothefinishedproduct. Woodfrom thehood hasfoundanicheofcustomerswhowanttobuy local, fromasustainable source,andwithclearidentificationwithitsorigin.& Otherexamplesofnicheforestproductsinclude:& Reclaimedwoodfromoldbuildings Athleticflooringsystems Woodengolfclubs Proprietarygradesforhardwoodlumber Windowgrilles Barrelstaves 57

66 OnlineMarketing Onlinemarketinghasgrownatablazingpace;itnowinfluenceshalfofretailsales. MorethanthreeDquartersofU.S.residentshaveaccesstotheInternet,anda growingnumbersurfthewebontheirsmartphones.rareisthecompanythatdoes nothaveatleastsomeonlinepresence.fromadvertisingtoretailsalestoproduct reviewwebsites,theinternethasrevolutionizedthewaycompaniesconduct business.itisanespeciallypowerfultoolforsmallandstartdupbusinessesasit helpstoleveltheplayingfieldwithotherbigplayersinthemarket.thedayswhen onlymillionsofdollarsinadvertisingcouldcontrolthemessagearegone.thereare differentcomponentsofanonlinemarketingpresence;eachbusinessmust evaluatewhichonesarerelevantandappropriatetoitsuniquecharacteristics. Websites& Thefirststepinestablishinganonlinepresenceiscreatingawebsite.Thepurpose ofawebsitecanrangefrompromotingthecompany sbrand,gettingcustomer feedback,andprovidingproductinformationtousingitasanother(ortheonly) channelofdistributionbyenablingcustomerstomakepurchasesandconduct othertransactions.however,whilecreatingawebsiteisrelativelyeasy,maintaining andgrowingtraffictoitismorechallenging.awebsitemustprovidevalueto customersintheformofdetailedproductinformation,linkstootherresources, feedbackmechanisms,andmore.somekitchencabinetcompanies,forexample, providevisitorswithonlinetoolsthatallowthemto design theirkitchen,with greatvisualizationtools. &Marketing& isanothergrowingmarketingtool.Using enablescompaniestosend personalizedmessagestopotentialandcurrentcustomers.tailoredmessagesor newslettersallowbusinessestoreachnarrowlydefinedniches.themosteffective waytoreachcustomersusing isbyallowingthemtooptdintoperiodic messageswithpromotions,coupons,orusefulinformation.potentialcustomersfill outaformtoprovideconsentandotherusefulinformationthatfacilitatesthe companytobettertailorits marketingefforts. Online&Promotions&and&Ads& AsmorepeopleusetheInternet,companiesarespendingmoreonplacingads online.totalspendingononlineadvertisingintheu.s.isprojectedtoreach$37.6 billionin2019,almostdoubleitslevelin2014[92].themostcommontypeof onlineadisthatwhichappearswhensomeonemakesaqueryusingasearch engine(e.g.,google).asecondtypeofonlineadissponsorships,inwhich 58

67 companiessponsorcontentinspecificwebsites.onesubclassofonlineadsis mobilemarketing,inwhichmessagesandpromotionsaredeliveredtocustomers cellphones.accordingtoemarketer,mobileadvertisingisexpectedtoreach14 percentofallspendinginmediaadvertisingin2015[93].akitchencabinet manufacturer,forexample,providesafreesmartphoneapplicationviaitswebsite foruserstofindrecipeingredientsubstitutes(e.g.,howtosubstituteplainyogurt forbuttermilk).theapp sappearancereflectsthecompany sbrandandcontains linkstothecompanywebsite. Social&Media& Moreandmorecompaniesaretryingtoharnessthepowerofsocialmedia networkstogeneratewordofmouthandincreasebrandawareness(seebox below).companiesinterestedinusingsocialmediatosupporttheirmarketing effortscanjoinanexistingonlinecommunityorcreatetheirown.participatingin existingsocialmediahasitschallenges mostimportant,thecompanycannot controltheenvironment,andpresencemustbeearnedbyprovidingsomevalueto theaudience. UsingSocialNetworkstoMarketYourProduct Thenumberofpeopleparticipatinginonlinesocialnetworksisgrowingatanexponential rate.asof2014,facebookhadcloseto1.4billionactiveusers[94],whiletwitterhad284 millionactiveusers[95].professionalnetworkssuchaslinkedinorresearchgateare alsothriving.somecompaniesconsideranactiveparticipationinsocialmediaasan alternativetotraditionaladvertising,butsocialmediacanservetoamplifytraditional advertisingratherthanreplaceit.acleverlyplannedandexecutedsocialmediastrategy cangreatlyimproveawarenessandthereputationofabusinessanditsproducts,and generatefavorablewordofmouth.itisimportanttonotethat,contrarytopopular belief,socialmediamarketingisnotfreeastherearecostsandtimeassociatedwith creatingcontentandpotentiallypayingconsultantstohelpbuildandimplementthe socialmediastrategy.regardlessofthesocialplatformyouuse,thefollowing recommendationscanhelpinachievingasuccessfulsocialmediastrategy.& Closelymonitortheconversationsrelatedtotheproduct/company(orthe competitors );lookforopinions,viewpoints. Identifyinfluentialindividualsandtheirtraits,andofferincentivestothemtohelpyou spreadpositivewordofmouth. Usesocialmediatospreadthewordaboutoffers,sales,orevents. Usesocialmediatoinvitepotentialcustomerstohelp shape anofferordesign. 59

68 Woodproductsindustrieshavebeenveryslowinadoptingsocialmediaasa marketingtool.asurveyof600woodproductsfirmsconductedbythemarket intelligencefirmrandomlengthsconcludedthatmorethanhalfdonotusesocial mediaanddonothaveplansofdoingsointhenearfuture[96].predictably,those companiesdealingdirectlywithcustomersshowedhigheradoptionrates,whereas millsshowedverylowadoptionrates.somereasonsmentionedforthislackof acceptanceareskepticismaboutreturnoninvestment,fearofexposingcritical information,or,simply,lackoftime. CommunicatingtheEnvironmentalAttributesofWood Products AwarenessofenvironmentalissuesisgrowingamongAmericanconsumers.Proofis theexplosionin ecodlabels duringthelastdecade.accordingtoagreenbrands Survey,73percentofU.S.consumerssayitisveryimportantorsomewhat importanttobuyfromgreencompanies[97].asurveyofmanufacturersfoundthat 81percentofparticipantsconsideritveryimportantorsomewhatimportantto produceenvironmentallysustainableproducts[98].companieswanttoshowtheir environmentalcredentialsbypromotingtheirproductsandprocessesas environmentallyfriendly;andvirtuallyallmajorcorporationshavesomesortof environmentalsustainabilitysection intheircorporateresponsibilitywebsite. Somerecommendationstocommunicatetheenvironmentalattributesofwood (basedinparton[99,100])includethefollowing. Connectyourenvironmentalmessagewithamoraloremotionalpoint,suchas preservingtheplanetforourchildren. Usepersonalhealthandplanetpreservation(endangeredspeciespreservation) issuesasleveragepoints. Usegreencolors,animals,andnaturallandscapesinyouradvertisements. Useagreenlabel.Certifyyouroperationbyoneoftherecognizedcertification systems,suchastheforeststewardshipcouncil(fsc)orsustainableforestry Initiative(SFI),andusethelogoinyourads.Alternatively,someindustry associationshavetheirowngreenlabelingprogram,suchasthekitchencabinet ManufacturersAssociation senvironmentalstewardshipprogram(esp)[101]. Avoidmakingmisleadingenvironmentalclaims(seeboxonnextpage). 60

69 GreenAdvertisingorGreenwashing? Greenwashingis thebusinesspracticeofmisleadingconsumersthrough green marketingabouttheenvironmentalbenefitsofusingaproductorservicewhennosuch benefitsreallyexist [102].AstudybyTerraChoicefoundthat99percentofmorethana thousandconsumerproductssurveyedwereguiltyofgreenwashing.accordingtothe samecompany,the sixsinsofgreenwashing [103]are(1)hiddentradeDoff(themost common),whichmeansbasingaclaimsolelyononeattribute,disregardingother potentiallymoreimportantattributes;(2)providingnoproof,makingaclaimthatcannot besupportedbyareliablethirdpartyorbyinformationthatiseasilyaccessible;(3) vagueness,claimsdefinedinabroadmanner,inawaythatthatconsumersusually misunderstand;(4)irrelevance,makingaclaimthatistruthfulbutunimportant;(5)the lesseroftwoevils,claimsthatmaybetruewithinacategoryofproductsbutnotofthe categoryasawhole;and(6)fibbing(theleastcommon),whichissimplymakingafalse claim.& TheFederalTradeCommission(FTC)prohibitsdeceptivemessaginginadvertising, includingdeceptiveenvironmentalclaims.formoreinformationandtherulesand regulationsregardinggreenadvertising,andtomakesureyouareincompliancewiththe FTC s GreenGuides, visitbusiness.ftc.gov/advertisingdanddmarketing/environmentald marketing.trytoidentifytheproblemswiththefollowingstatements(fromtheftc website).& Whenyoubuildwith[BRAND]recycledplasticlumber,youdemonstrateyour commitmenttotheenvironmentandsustainableliving.[brand]recycledplastic lumberproductsare100percentplasticandgenerallycontainover90percent recycledhighdensitypolyethylene(rehdpe)material. [BRAND]paperplatesaremadefrom100percentpaper,arenewablenatural resource.ourproductissficertified,whichmeansitisrenewable,recyclable,and compostable. Fromaprintedadvertisementforawindowbrand: 50percentsavingsguaranteed. Customertestimony:Ourenergyusedroppedsomuchafterinstallingyourwindows that[electricutility]thoughtourmeterwasbroken Researchhasrepeatedlyshownthatproductsmadeofwoodarebyfarsuperiorto alternativematerials(seeboxonnextpage);however,theforestproductsindustry hasnotdoneaverygoodjobofcommunicatingtheseattributestothepublic. 61

70 WhatScienceSaysAbouttheEnvironmentalPerformanceofWoodProducts Whichofthesealternativesproduceslessenvironmentalimpacts:engineeredbamboo flooringvs.solidoakflooring,steelstudsvs.softwoodstuds,ahousemadeofconcrete vs.awooddframehouse?answeringthesequestionsisnoteasy.first,weneedto considertheimpactsofaproductthroughoutitsentirelifecycle,fromrawmaterial extractiontodisposal/recycling.second,therearethousandsofvariablesinvolved,andit isanintimidatingtasktokeeptrackofallofthem.fortunately,thereisatoolto determinetheenvironmentalimpactsofanyproduct,process,oractivityinascientific manner.lifecycleanalysis(lca)isastandardizedapproachofsystematicallyaccounting fortheflowsofmaterialsandenergyofaproductassociatedwithitslifecycle.the environmentalimpactsaregroupedintocategoriessuchasglobalwarmingpotential, eutrophicationpotential,acidificationpotential,andozonedepletionpotential.& Thefollowingtableisanexampleoftheresultsfromastudythatcomparedflooringof differentmaterials,includingsolidpine.resultsshowthatsolidwoodhasthebest environmentalperformanceinsevenofthenineimpactcategories.& Impactcategory Solid (allunitsperm 2 Linoleum Vinyl offlooring) wood Servicelife(years) * Energyconsumption(MJequiv.) D64* Globalwarmingpotential(gCO 2 equiv.) 1,600 4, * Acidificationpotential(gSO 2 equiv.) 13* Eutrophicationpotential& (gphosphateequiv.)& * 4.2 Ozonecreatingpotential(gethene) * Ashwaste(g) * Sectorspecificwastes(g) * Hazardouswaste(g) * Dustgenerated(g) * Source:[104]ascitedby[105] *Denotesbestperformance. Somesourcesforstudiesabouttheenvironmentalperformanceofwoodproductsusing LCAarelistedbelow.& ConsortiumforResearchonRenewableIndustrialMaterials(CORRIM) TheAmericanHardwoodExportCouncil(AHEC) WoodWorkswww.woodworks.org/whyDwood DovetailPartnersInc. 62

71 ChapterQuestions 1. Whoisyourtargetcustomer? 2. Listfivereasonswhyyourcustomershouldpurchaseyourproductoverothersin themarket. 3. Identifythreemethodstocommunicatewithyourtargetcustomer. 4. Draftanadvertisementforyourcompany. 5. Whereisinformationavailableonyourmarketandcustomer? 6. Whatwillbeyourpromotionalmessage? 7. Howwillyouphysicallygetyourproducttoyourcustomer? 8. Howwillyoucalculatethepriceofyourproduct? 9. Developa TotalProductDiagram foryourcompany/product. Acknowledgment ThischapterisbasedinpartonworkpublishedbyRobertL.Smith,EdwardCesa, andpatrickm.rappoldin AMarketingGuideforSmallandMediumSizedPrimary ForestProductsProcessors [106]. 63

72 64

73 Chapter&6: Operations&Management& OperationsmanagementisthesetofvalueDcreatingactivitiesinacompany,in whichvalueisdefinedbythecustomer.itincludesthetransformationofinputsto producegoodsandservices[107].meetingmarketdemandrequiresafull understandingoftheprocessesandconceptsassociatedwithoperations management.operationsmanagementcomprisestheactivitieslistedintable7. Table7.Operationsmanagementactivities. Operations management Operationsdesign Productdevelopment Manufacturingstrategy Managingoperations Productionplanning Inventorymanagement Qualityandprocesscontrol Maintenance ProductDevelopment Productdevelopmentisoneofthemostimportantsourcesofgrowthforany company.italsohaslongbeenrecognizedasasourceofcompetitiveadvantage.in theu.s.,newproducts(thoseinthemarketforthreeyearsorless)accountfor about28percentofamericancompanies salesprofits[108].thewoodproducts industry(naicscode321)spendsonly0.6percentoftotalsalesonresearchand development;incomparison,thecomputerelectronicsindustryspends7.6percent [109].Giventhelossesinmanufacturingcapacitytoimportsandsubstitute materials,andasaconsequenceofthegreatrecession,innovationandproduct developmentaremoreimportantthaneverforthesustainabilityoftheu.s.forest productsindustry. Theproductdevelopmentprocessconsistsofthestepstakentoconceive,design, andcommercializeaproduct[110].productdevelopmentincludesimprovementto existingproducts,productdlineextensions,newproductlines,andnewdtodthed worldinnovations.successfulcompaniesaremorelikelytohavesometypeof formalandwelldstructuredproductdevelopmentprocess.peoplethinkofproduct developmentasapurelycreativeprocess,but,infact,itinvolvesspecificsteps, documentation,andimprovement.structureddevelopmentprocessesmakethe decisionprocessexplicit,ensurethatallimportantissuesareincludedinthe discussions,andareusuallywelldocumented,whichhelpsasafuturereference andtotrainnewteammembers. Approximately25to45percentofnewproductprojectsfailanddonotmakeitto market,andabout46percentoftheresourcesspentonthedevelopmentand launchofnewproductsgotoventuresthatdonotsucceed[108].themajorcauses 65

74 fornewproductfailureareinadequatemarketanalysis,productdefects,lackof effectivemarketingeffort,highercoststhananticipated,andcompetitivereaction [108].Inaddition,productlaunchesfailbecauseoftheinabilitytosupportfastsales growth,productsfallingshortofclaims,andnoclearmarketforneedforthe product[111]. Everyorganizationhasadifferentproductdevelopmentprocess,somemore structuredthanothers.furthermore,variationsinproductdevelopmentprocesses canexistinthesameorganizationfordifferenttypesofdevelopmentprojects. Therearealsoseveralframeworksforproductdevelopmentavailable,suchasthe StageDGateprocessbyRobertG.Cooper[108],theNewProductDevelopment processbytheproductdevelopment&managementassociation[112],and processesbasedonthetoyotaproductdevelopmentsystem[113,114]. Regardlessofwhichprocessisadopted,somestepsareneededforaneffective productdevelopmentproject.basedonulrichandeppinger[110],thesestepsare (1)planning,whichincludesopportunityidentification,theproject smission statement,andallocatingresources;(2)conceptdevelopment,includinggenerating alternativeproductconceptstosatisfyaneedinthemarketandselectingafew conceptsforfurtherdevelopment;(3)systemdleveldesign,whichinvolvesdefining theproductarchitecture,includingitsmajorsubsystemsandcomponents;(4) detaileddesignwithcompletespecificationsofgeometryandmaterials,andtooling design;(5)testingandrefinement,inwhichtheproductistestedinitsintended environmentandrefinementsaremadebasedontheresults;and(6)production rampup,includingmanufacturingtheproductwiththeintendedproduction system,trainingtheworkforce,andcorrectinganyissuesbeforefullproduction (Figure18). Planning Concept development SystemDlevel design Detailed design Tesongand refinement Producoon rampdup ManufacturingStrategy 66 Figure18.Basicproductdevelopmentprocess[110]. Manufacturingstrategyisafirm sapproachtotransforminginputs(rawmaterials) intooutputs(finishedproducts).theobjectiveofamanufacturingstrategyisto meetcustomerneedswhileallowingthefirmtomeetitsbusinessobjectives. ManufacturingstrategydecisionshaveaprofoundandlongDtermimpacton manufacturingefficiencyandflexibility,aswellascostsandoutputquality[107].

75 Inamanufacturingstrategy,thecompanymakesdecisionsregardingthe componentsofthemanufacturingsystem:machines,workstations,queues, materialhandling,andprocessplans.decisionsaboutthemanufacturingstrategy havedirectimplicationsforplantlayout,whichisthephysicaldistributionof machines,material,materialdhandlingequipment,people,andinformation.there arefourbasicmanufacturingstrategies(table8). Table8.Basicmanufacturingstrategies. Productvariety Productionvolume Low Moderate High High ProcessDoriented MassDcustomization Moderate Cellularproduction Low ProductDoriented Alsocalledcontinuousprocess,productDorientedmanufacturingisusedwhenthe varietyofproductsmanufacturedislowandthevolumeproducedishigh.paper, lumbermanufacturing,andsolidwoodflooringaretypicallymanufacturedusinga continuousprocess.figure20showsthelayoutofatypicalmediumdvolume sawmill.productdorientedfactoriesarearrangedaroundaproductandusehighly specializedandoftenautomatedequipment;operationsarehighlystandardized andthroughputtimesareveryuniform.someadvantagesofthissystemarevery reliabletimingoforderssincecycletimeisfairlyconstant,andqualityisrelatively easytocontrolandmaintainsincetheproductandtheprocessarevery standardized.also,alessdskilledworkforceisneededcomparedwithother manufacturingsystems. Figure19.Twomodernsoftwoodsawmills,eachusingatypicalproduct]orientedprocess. Photocredits:OmarEspinoza(left)andMaríaFernandaLaguardaMallo(right). 67

76 PerhapsthebiggestadvantageofproductDorientedmanufacturingisthatthe productioncostperunitislow.thisisexplainedbyseveralreasons:highly specializedequipmenthasahighthroughputsofixedcostsaredistributedovera largenumberofproducts;alessdskilledworkforceisneeded,loweringlaborcosts; andlowerlevelsofindprocessinventoryareneeded. SinceproductDorientedoperationsconsumerawmaterialsandsuppliesingreat amounts,quantitydiscountsarepossiblefromsuppliers.routing,scheduling,and controlofproductdorientedplantsarealsosimpler.ontheotherhand,productd orientedfactoriesarenotveryflexible,andchangestoproductorproductionrate areverydifficultandcostly.forthesamereason,stoppageofproductionlinesisan expensiveproposition.veryspecializedequipmentrequiresalargeinvestmentand iscostlytomaintain,andmachinerymodificationisdifficult.fromahuman perspective,repetitiveandsimpletasksincreaseboredomintheworkforce, contributingtoemployeedissatisfactionandabsenteeism. Figure20.Processandlayoutofatypicalmedium]volumehardwoodsawmill[115]. 68

77 AprocessDorientedstrategy,alsocalledjobDshopstrategy,isappropriatewhenthe varietyofproductsmanufacturedishigh(manydifferentstockdkeepingunitsor SKUs)andthevolumeproducedofeachproductislow.Aplantthatadoptsa processdorientedmanufacturingstrategyisorganizedindepartments,witheach onespecializinginaspecificfunctionsuchasfinishingormaterialpreparation. Figure21illustratesajobDshopplantconfiguration.Customcabinetshopsand customarchitecturalmillworkplantsaretypicalexamplesofprocessdoriented settings.inaprocessdorientedfactory,thereisalotoftransportationofmaterials andpeople,andlargevariationsincycletimes.someadvantagesofthis manufacturingstrategyarethatitallowsthefirmtorespondtochangesindemand (flexibility);generalequipmentisused,whichrequireslessinvestmentandiseasier tomodifyandmaintain;andthereisnoneedtohalttheentireplantwhenone functionaldepartmentstops. Ripsaw department Chopsaw department Moulder department Raw Materials Glue department Finished Product Shaping Sanding Inspection Figure21.Layoutforaprocess]orientedstairpartmanufacturingstrategy. Fromapersonnelstandpoint,aprocessDorientedstrategyrequiresamoreskilled workforce,responsibilityandprideincrease,andboredomfromrepetitivetasksis reduced[116].themajordisadvantagesofaprocessdorientedstrategyarethatit carrieshighvariablecostsowingtotheslowrateofproduction,thehighlevelof skillrequiredfromworkers,andusuallyhighlevelsofrawmaterialandindprocess inventories.aprocessdorientedplantisverycomplextomanage,owingtothe varietyofinputs,outputs,andprocesses tracingaparticularworkorderbecomes adifficulttask,andqualityisvariableanddifficulttocontrol. 69

78 Figure22.Instairpartsmanufacturing,transformationtakesplaceindifferentmachining centers,suchas gluing and turning. Photocredit:OmarEspinoza. Cellular&Production&Strategy& AcellularproductionstrategycombinestheproductDandtheprocessDfocused strategies,allowingsomeofthebenefitsofeachsystem,namelytoproducealarge varietyofproductsinshortcycletimesandatrelativelylowcost.thistypeof manufacturingstrategyisappropriatewhenmoderatelevelsofproductvarietyand throughputarerequired.cellularmanufacturingismadepossiblebygroup technology asetoftechniquesthatclustertogetherpartsandcomponentswith similarprocessneedsinto families. Machinesarearrangedin cells capableof producingafamilyofparts,similartoaproductionline. Therearemanyapproachestoclassifytheproductsandcomponentsintofamilies, forexample,byprocesssequenceorgeometry.workersinacellareorganizedin teamsthathaveallthenecessaryskillstocompleteproductionofthefamilyof partsassignedtothatcell.manyoftheadvantagesofcellularproductionderive fromthefactthatsetduptimesarelowerthaninajobdshopsetting.byreducing setduptime,assetscanbeutilizedtoproduceinsteadofbeingidle.smallerbatches arealsomoreeconomicaltoproduce,allowingthefirmtomakemorecustomized productsandbemoreflexibleinrespondingtocustomerneeds,andlower inventorylevelsarepossiblewhenbatchsizesaresmall.amajoradvantageof cellularmanufacturingisthatworkinginautonomousteamsinacellenhances accountabilityandresponsibility,reducingtheneedforcontrolandimproving quality,whichisusuallyhigh.cellularmanufacturingissuitableforstairparts manufacturing,whereafewproductfamilies(treads,rails,balusters,andnewels) canbeproducedincellsor minidplants. Table9illustratesapossiblegroupingof stairpartsbyprocessneeds,andfigure23comparesatraditionalprocessdoriented layoutwithacellularlayout. 70

79 Table9.Productfamiliesinstairpartsmanufacturing. Processes Stairparts Newels Balusters Rails Treads Roughmill " " " DoubleDendtrimming " FingerDjointing " ClampDcarriergluing " " RadioDfrequencygluing " Turning " " Moulding " " Sanding " " " " Packing " " " " Figure23.Traditionalprocess]orientedlayout(left) andcellularmanufacturinglayout(right)[117]. Increasingnumbersofsophisticatedcustomersaredemandingcustomizedgoods, andcompaniesareofferingagrowingnumberofchoices.thispresents manufacturerswiththechallengeofachievingseeminglycontradictorygoals: producehighlyindividualizedproductsatarelativelylowcostandinashorttime frame.themanufacturingstrategythatsolvesthistradedoffbetweencustomization andefficiencyisknownasmasscustomization.stanleydavisdefinedmass customizationasproductionanddistributionofcustomizedproductsformass markets[118].companiessuchasdellandtoyotahavedemonstratedthatmass customizationisastrategywithconsiderablereturns.dellcanassemblea 71

80 72 customizedcomputerinlessthanaday,andtoyotacandelivercustomdordered automobilesinfivedays[107]. Masscustomizationhasbeenproposedasanapproachtoimprovethecompetitive positionofu.s.woodmanufacturers,particularlyfurnituremakers,whohaveseen hugemarketerosionbyimportsduringthelasttwodecades[119,120].the reasoningisthatcustomizedfurniturecanprovidedomesticproducers,whoare closetothemarket,withasustainablecompetitiveadvantage[120].intheu.s.,the kitchencabinetandofficefurnitureindustrieshaveleveragedsomeofthebenefits ofmasscustomization,and,coincidentally,theimpactoflowdcostimportsonthe marketshareofthesetwosectorshasbeenlower.marketshareofimportsof nonupholsteredfurnituregrew21percentfrom2004to2008,whereasthatof officefurnitureandkitchencabinetsgrewby5percentand2percent,respectively. SomeofthelevelsofmasscustomizationareexplainedinTable10. Table10.Levelsofmasscustomizationinthefurnitureindustry[120]. Levelofmass customization Description Popularizing Limitednumberoffurniturecollections.Itemssoldofftheshelfand positionedatlowendofpricestructure. Varietising Broaderrangeoffurniture.Retailerssellselectitemsofftheshelfand relyonquickdeliveryforfastreplenishment.simplechangestoa standardline,suchasdifferentcolors,areoffered.& Accessorizing Standardcoremodulespersonalizedbyaddingaccessoriesandfinishing options.finalassemblybythecustomer,retailer,ormanufacturer. Configuring Thecustomercandesignfurniturebyselectingfromasetofstandard componentsormodules.softwaretoolsareoftenusedforthispurpose. Tailoring Customeriscloselyinvolvedinproductdesign,withnopredefined modulesorcomponents,withsomelimitationstoensureefficiency. Servicing Customercandevelopacompletefurnishingconcept.Aprofessional designerhelpsthecustomeraddaccessories,colors,orwallpaper matchingthecustomer staste. Adjusting Productisadjustedtocustomerrequirementsafteruse,forexample,an adjustablechairthat evolves asthechildgrows. Monitoring Theevolvingneedsofthecustomeraremonitoredtoknowwhento offernewproductsorservices.newfurniturematchingthecustomer s evolvinglifestylecanbesuggestedatcertainmoments. Masscustomizationisnotwithoutitschallenges.Itrequirestechnologicallyadvanced manufacturingcapabilitiesandawelldtrainedandmotivatedworkforce.massd customizationadoptersneedtoimplementsophisticatedinventorymanagement systemssinceinventoriesneedtobekeptataminimumtoavoidobsolescenceand highcosts.companiesneedtoestablishclosecollaborationswiththeirsupplychain partnerstoensuretimelydeliveriesandavoidinventorystockdouts.

81 ProductionPlanning Productionresources,suchasmaterials,labor,energy,andtime,arealways limited,thusafirmneedstousethemefficientlytomeetcustomers ordersata reasonablecostforthecompanyandwithadesiredserviceleveltocustomers. Productionplanningmatchestheavailableresourceswithdemand.WellthoughtD outproductionplansallowthefirmtominimizecosts,keepchangestoproduction ratesataminimum,andmaximizecustomersatisfaction.productionplanninghas severallevelsdependingontheplanninghorizon.figure24illustratesthedifferent stagesofproductionplanningandthetimehorizonforeachphase. Aggregate&Plan& Figure24.Thedifferentlevelsofproductionplanning. AnaggregateplanisamidDtermplanforoperations.Inaggregateplanning, productionmanagementplanstherateofoutputneededtomeetdemandoverthe followingthreeto18months.anattemptismadetofindthecombinationof monthlyinventoryandworkforcethatminimizesproductioncostsduringthe planninghorizon.thetimeunitusedistypicallyonemonth.criticalinputsfor aggregateplanningarethesalesforecast,inventorypolicies,staffingpolicies,and overtimepolicy.theunitsofaggregationusedcanbeproductlinesorproduct equivalents. Theoutputsofaggregateplanningareproductionrate,workforce needed,andinventorylevels.theaggregateplaninformsdecisionssuchashiringor layingoffworkers,addingorsubtractingshifts,adjustingworkingdaysorworking hours,outsourcingproduction,andbuildingupordepletinginventories. Master&Schedule& Themasterscheduleusestheinformationintheaggregateplanandspecifieswhat needstobemanufacturedandwhen.theplanninghorizonforamasterscheduleis typicallythreemonthsandthetimeunitusedisoneweek.whiletheaggregate planconsidersfamiliesofproducts,themasterscheduledealswithspecific products.typically,amasterschedule(orpartofit)is fixed intheshortterm (e.g.,sixtoeightweeks),meaningthatnochangescanbemadeduringthattime,to facilitateplanning.existingordersareincorporatedintothemasterscheduleand comparisonsaremadebetweentheoutputproposedandtheexistingcapacity(in termsoflabor,machineavailability,andleadtime).anexampleofaggregateand masterplanningisprovidedintheboxonthefollowingpages. 73

82 AggregateandMasterPlanninginDoorManufacturing Asolidwooddoormanufacturerproducesagainstfirmorders.Itsproductionprocessis illustratedinitssimplifiedforminthefollowingfigure.theaveragetimeittakesa productunittobeprocessedateachstepislistedineachbox. RoughMill 0.50hours Machining 3.61hours Finishing 0.94hours Twostrategiescanbeadoptedwhendevelopinganaggregateplan:(1)achasestrategy, inwhichtheproductionoutputmatchesthedemandforeachperiod;and(2)alevel strategy,inwhichtheproductionoutputorthelaborforceisuniformforallperiods. Assumingachasestrategy,theproductionequalsthedemand,asshowninthefollowing table.thelaborhoursforeachmanufacturingareaaresimplythenumberofunitstobe producedmultipliedbythetimeittakesforaunittogothroughthatsection(e.g.,for Januarythelaborhoursneededintheroughmillarecalculatedas305unitsx0.5hours). Laborneedsarecalculateddividingthelaborhoursbythetotalavailablehoursinthe period(e.g.,infebruarythemachiningsectionwouldneedtobestaffedwithsix operators,resultingfromdividingthelaborhourscalculatedforthatsectionandperiod, 1,102,bythetotalavailablehoursintheperiod,195).& 74 Item Jan. Feb. March April May June Demand(units) Availablehours Availabledays Production(chasestrategy) Laborhours Roughmill Machining 1,102 1,102 1,102 1,044 1,044 1,044 Finishing Totalhours 1,540 1,540 1,540 1,460 1,460 1,460 Laborneeds(operators) Roughmill Machining Finishing Laborcostperhour(average) $14 $14 $14 $14 $14 $14 Laborcosts $20,796 $20,796 $20,796 $19,705 $19,705 $19,705 Thissimplifiedexampleassumesthatthereisnoinventoryatthebeginningofeach period.inmorerealisticscenarios,availableinventoriesneedtobetakeninto considerationanddiscountedfromtheproductionneeds.laborneedscanbecompared withsetpoliciestomakedecisionsabouthiringorlayoffs,orresortingtoovertimeifthe needexists.obviously,whenthecostsassociatedwiththeseactionsarefactoredinto laborcosts,estimateswouldchange.differentstrategiescanbeformulatedand comparedwhenusingamicrosoftexcelspreadsheetorspecializedsoftware. &

83 AggregateandMasterPlanninginDoorManufacturing(cont.) Basedontheaggregateplan,amasterscheduleforthemonthofJanuarycouldlooklike this:& January Aggregateplan 305units Week Total Doorstyle Doorstyle Doorstyle Total Amasterschedulecontainsspecificproductsormajorsubassemblies.Severalchallenges needtobeaddressedwhenputtingtogetherthemasterschedule mainlyachieving sometimesconflictingobjectives,suchasmeetingcustomerdeadlines,minimizing inventory,maximizingproductivity,minimizingchangeovers,andmaximizinguniformity. Aswiththeaggregateplan,thisisaniterativeprocess,whereseveralversionsofthe masterscheduleareevaluatedbasedoncosts,impactoncustomersatisfaction,and resourceavailability.& Short@Term&Scheduling& InshortDtermscheduling,thereleaseofordersintotheproductionsystemis planned.theshortdtermscheduletranslatesthemasterscheduleintospecificjob sequencesandmakesassignmentsformachinery,materials,andpersonnel.in shortdtermscheduling,demand(eitherfirmcustomerordersorforecast)is prioritizedandassignedtoavailableresources.fromthisimmediatelyfollowsthat somesortofprioritizationcriteriashouldbeused,suchastomaximizeutilization, minimizecompletiontime,minimizeindprocessinventory,orminimizecustomer waitingtime[107]. InventoryManagement Inventoryisoneofthemostexpensiveassetsofforestproductscompanies.Atthe endof2011,forestproductscompanies(includingthewoodproducts,paper manufacturing,andfurnitureandrelatedproductssectors)hadcloseto$140billion intotalinventories[121].someofthepurposesofmaintaininginventoriesat variouspointsintheproductioncyclearetoshieldthemanufacturingprocessfrom fluctuationsinsupplyanddemand,tobufferindividualoperationsagainst equipmentbreakdowns,andtoobtainfinancialbenefitsfromquantitydiscounts andhedgeagainstinflation.therearethreebasictypesofinventories:raw materialsinventory(e.g.,lumber,partsandcomponents),workdindprocess inventory(e.g.,subassemblies,unfinishedcasefurniture),andfinishedgoods inventory(e.g.,prefinishedsolidwoodflooringreadytoship,kilnddrylumber).the costsassociatedwithmaintaininginventoriesarelistedintable11. 75

84 Table11.Costsassociatedwithmaintaininginventories. Cost Orderingcosts Holdingcosts StockDoutcosts Costofgoods Description Costsassociatedwithplacingthepurchaseorder.Thesehavebeen greatlyreducedwiththeuseofonlinedbasedordering. Itsmajorcomponentsarefinancialcosts,storagecosts,andriskcosts. Costsincurredbynothavingtherequireditemonhandwhenneeded, eitherforsaletothecustomerorforstartingaproductionrun. Actualcostsofacquiringtheitems. Figure25.Lumberisthecostliestinventoryiteminmanyforestproductscompanies. Photocredit:OmarEspinoza. Carryinginventoryisexpensive,andthelevelofcontrolrequiredisnotthesamefor allinventoryitems.companiesnaturallywillhaveatightcontrolofthemost valuableitems(e.g.,importedhardwoodspecies,finishedcabinetdoorsand drawers)andwillbelessrigorouswiththoseitemsthatarenotascritical(e.g., hingescrewsforcabinetdoors,packagingpaperforfinishedproducts).theabc classificationsystemhelpscompaniessegregateinventoryinacostdeffectivewayto manageitaccordingtoitsimportance.abcanalysisusesthreeinventory classificationsaccordingtotheparetoprinciple,whichmaintainsthat relatively fewfactorsaccountforadisproportionallyhighshareoftheoccurrencesofan event [122].Thus,companiesshouldfocusonthosefewitemsthatarecritical. Toclassifyinventoryitems,theannualcostperitemiscalculatedandsortedfrom highesttolowest.thoseitemsmakinguptoabout70to80percentofthetotal inventoryvalueareclassifiedas A items(thesewilltypicallyrepresentonlyabout 15to20percentoftheitems);itemsthatare15to25percentofthetotalvalueare B items(representingabout30to40percentoftheitems);anditemsthatare about5to15percentofthetotalvalueare C items(representingabout45to55 76

85 percentoftheitems). A itemsaremoretightlyphysicallycontrolledthan B or C items,andtheaccuracyoftherecordsisverifiedatahigherfrequency.for example, A itemsarecountedeverymonth, B itemsonaquarterlybasis,and C itemseverysixmonthsoronceayear. QualityandProcessControl Variationisafactofnature.Notwomanufactureditemsareidentical.However, qualityisinverselyproportionaltovariability,andcustomersperceiveexcessive variability.thus,improvementofqualitywillrequirethereductionofprocess variability[123].whenvariabilityisreduced,overallproductperformance improves,thereislessneedforinspection,andproductswithlowervariabilitycan potentiallybesoldatapremium[124].themostimportanttoolforthereduction ofprocessvariationisstatisticalprocesscontrol(spc).spcisthe useofstatistical toolstoachieveprocessstabilityandimprovecapabilitythroughthereductionof variability [123].TheprimarytechniqueofSPCisthecontrolchart,whichisa graphicalrepresentationofaprocessqualitycharacteristicmeasuredovertime. Thisperformanceiscomparedwithasetoflimitstodeterminewhetheraprocess isinstatisticalcontrol(figure26). Figure26.Abasiccontrolchart. Anyprocesshassomeinherentvariabilityowingto commoncauses ofvariation, alsocalledrandomvariation,noise,ornondcontrollablevariation.commoncauses formapatternandoftenfollowanormaldistribution.normalvariabilityissmall anditsreductionrequiresprocessredesign.ontheotherhand,nondnormal variabilityisdueto specialcauses ofvariation,alsocalled assignable causes. Specialcausesresultinsignificantdeparturesfromthepatternformedbycommon causes. Acontrolchartworksbydetectingspecialcausesofvariation.Ifthesample averagesfallbetweentheupperandlowercontrollimits,itisconcludedthatonly 77

86 commoncausesofvariationexistandtheprocessisconsideredinstatistical control.ifoneormorepointsfalloutsidethecontrollimits,itissaidthatspecial causesofvariationexistandtheprocessisconsideredoutofstatisticalcontroland correctiveactionisneeded. Dependingonthetypeofdata,differentoptionsforcontrolchartsareavailable. Themostcommonistheaverageandrangechart(xandRchart),whichuses measurabledatasuchasthedimensionofafurniturecomponentorlumber thicknesscomingfromaheadsaw.chartsalsoexistforcounteddata,suchas percentdefectiveorproportions(pchart)andnumberofnonconformities(cchart). ThestepstoimplementanxandRcontrolchartarelistedbelow. 1. Select&attribute&to&control.Itshouldbeacriticalqualitycharacteristicoronethat needsattentionduetohighdefectrates. 2. Conduct&a&trial&study.Asampleistakenof50ormoremeasurements(for example10samplesoffiveunits)inordertocalculatethecontrollimits. 3. Calculate&limits&and&centerline.Thecenterlineistheaverageoftheprocess.The controllimitsareusuallycalculatedatthreestandarddeviationsaboveand belowthecenterline. 4. Implement&chart.Smallsamples(e.g.,fiveunits)aremeasured;theaverageand rangearecalculatedandthenplotted.ifpointsarewithinthecontrollimits,no actionistaken;ifpointsareoutsidethecontrollimits,causesareinvestigated andcorrectiveactionistaken. Maintenance Themissionofmaintenanceistosustainthecapabilityofthemanufacturing system.itincludesalloftheactionstokeepequipmentingoodworkingordersoit deliverstheexpectedlevelofperformanceandreliability.companiescanadopt twobasictypesofmaintenancestrategies:reactivemaintenance,whichoccursin responsetoequipmentbreakdown;andpreventivemaintenance,involving scheduledinspectionsandservicing.twoothercategoriesthatareadaptationsor enhancementsofthesetwobasictypesofmaintenancestrategiesinclude predictivemaintenance,inwhichsophisticatedtechniquesandinstrumentsare usedtomonitormachineryoperationinordertodetectearlysignsoffailure,and autonomousmaintenance,alsoknownastotalproductmaintenance(tpm),which isexplainedlaterinthissection.table12summarizesthefourmaintenance strategies. 78

87 Table12.Thefourtypesofequipmentmaintenance. Maintenance strategy Reactive Preventive Predictive Autonomous Description Fixequipmentwhenitfails.Includesstandby(machineisnotuseduntil fixed)andredundancy(machinecapableofsimilarfunctionisusedwhile mainmachineisbeingrepaired. Performmaintenanceatscheduledintervals.Includesoverhauls, replacements,androutinechecks.toolsusedincludechecklists, lubricationschedules,workorders,andequipmenthistories. Noninvasiveactiontomonitormachinecondition.Includesdiagnostic monitoringusinginstrumentssuchasvibrationmeters,heatsensors,and contaminantmonitors. Overallequipmentimprovement.Includesredesignandmodificationto improveequipmentlifespanandsafety. Thestrategicimportanceofmaintenanceisdifficulttooverstate.Figure27 comparespreventivemaintenanceandbreakdowncosts.aspreventive maintenanceeffortsincrease,sodotheircosts,butmorebreakdowncostscanbe prevented.breakdowncostsincludenotonlythecostofrepairbutalsocostssuch asinventorytobufferagainstproductiondisruptionsfrommachinebreakdowns, decreasesinproductivityowingtoreducedemployeemorale,orcostsassociated withlatedeliveries.theoptimalcostisachievedwhennobreakdownsoccurand totalcostsequalpreventivemaintenancecosts(dashedverticalline). Total costs Cost Breakdown costs Preventive maintenance costs Maintenance commitment Figure27.Maintenancecosts[107]. RecentTrendsinOperationsManagement InpartasaresponsetodevelopmentssuchasincreasingcompetitionfromlowD costimports,thegrowinguseofalternativematerials,andtheeconomicdownturn 79

88 thatstartedin2007,u.s.forestproductscompaniesareimprovingtheirinternal processeswithinitiativessuchasisocertification,qualityawards,lean manufacturing,totalqualitymanagement,sixsigma,andsupplychain management.itisincreasinglycommontofind continuousimprovement managersinmanufacturingfirms.betterquality,timelydelivery,andimproved controlofmanufacturingprocesseshavebeenidentifiedasimportantfactorsto improvethecompetitivenessofdomesticfirms[125].closeto60percentofu.s. manufacturershaveidentifiedleanmanufacturingandsixsigmaasthemost commonimprovementmethods[126]. Lean&Manufacturing& Leanmanufacturing(LM)isanimprovementmethodologydevelopedbyToyota MotorCorporationofJapan.ThemainpurposeofLMistoreducevarioussources of waste. Inthiscontext,wasteisanyactivitythatdoesnotaddvalueintheeyes ofthecustomer(e.g.,lumberdryingisavaluedaddingactivity,butlumbersittingin awarehouseonlyaddscosts).lmmaximizesvaluedaddingbysystematically eliminatingwaste.lmrecognizesseventypesof deadly wastes. 1. Overproductionismakingmorethanisrequiredbycustomerdemand. CompaniesoverDproduceforseveralreasons,forexample,tobuildbuffers againstdemandandsupplyfluctuationsortoprotectagainstmachinedowntime. Overproductionisprobablythemostimportanttypeofwaste,sinceitleadsto othertypesofwaste. 2. Inventoryisthemostvisibletypeofwaste.Rawmaterials,workDinDprocess,or finishedgoodsinventorygeneratescostswhenitsitsinawarehouseanddoes notaddvaluefromthecustomer sperspective.veryimportantly,inventoryhides otherproblems,suchasscrap,excessivesetduptimes,latedeliveries,andquality problems. 3. Waitinghappenswhenpeople,goods,orinformationareinactiveforexcessive periods.waitingcanbecausedbystockouts,processingdelays,machinesetdup, andcapacitybottlenecks. 4. Transportationwasteistheunnecessarymomentofgoods,people,or information.potentialcausesareexcessivedistancesandpoorprocess sequencing. 5. OverCprocessingisusingmoreprocessstepsthanisnecessary.Poorlydesigned toolsandproductsarecommoncausesofthistypeofwaste. 6. Waste&of&motionorunnecessarymotionbyemployees,resultsfromapoorly designedprocessorpoorworkplaceorganization. 7. Product&defectsleadtoreprocessing,scrap,wastedtimeandresources,and, mostimportantly,unsatisfiedcustomers. 80

89 Leanmanufacturingiscreditedwithimprovingthecompetitivepositionof Americancarmanufacturers.Intheirbook LeanThinking, WomackandJones [127]identifyfivestepstoimplementleanmanufacturing. 1. Specify&value&from&the&customer s&perspective. 2. Identify&the&value&stream.Thismeansidentifyingallthestepsneededtobringa productfromdevelopmenttomarketlaunch.onetoolcommonlyusedisthe value&stream&map,avisualrepresentationofthevaluestream,showingflowsof materialsandinformation.specialsymbolsareusedtorepresentprocesses, transportationsteps,informationflow,inventory,etc.themapenables managerstomoreeasilyidentifysourcesofwaste. 3. Create&continuous&flow.Thisincludeseliminatingallsourcesofwasteand establishingaonedpieceflowinsteadofbatchproduction.5s(astructured approachtocleaningandorganizingtheworkplace),udshapedcells,setduptime reduction,andautonomousdefectcontrolaresomeofthetoolsusedtoachieve thisgoal. 4. Implement&pull&production.Thismeansproducingonlywhatisneeded,whenitis needed,andinthequantityandqualityrequiredbycustomers.productionatall levelsistriggeredbycustomerdemand,notbyforecasts.pullproduction minimizesoverproductionandincreasesflexibility. 5. Strive&for&perfection.Acultureofcontinuousimprovementiscreatedinwhichthe currentstateisalwaysassumedtobetheworst.thisstepalsoensuresthat improvementsaresustainable.oneofthetoolsusedforcontinuous improvementare kaizen events focusedandstructuredimprovement projectsinwhichacrossdfunctionalteamworkstosolveaspecificproblemina shorttimeframe;typicallyfivedays(figure28). Figure28.Cross]functionalteamatanimprovementevent,alsoknownasa"kaizen event. Photocredit:UrsBuehlmann. 81

90 LeanManufacturingataWoodComponentsManufacturer Facedwiththechallengeofcontrollingcostsandimprovingquality,acompanythat manufacturescomponentsforthewoodwindowindustryhasstreamlinedits manufacturingoperationsbyimplementingleanmanufacturingprinciplesandtools.the companyhasimplementedjustdindtimedeliveriesofbothrawmaterialsfromitssuppliers andoffinishedproductstoitscustomers.rawmaterialsarriveonadailybasisusinga kanban system(kanbansareinventorycontrolcardsusedina pull systemtosignal theprecedingprocesstostartproducingpartsforthenextprocess).woodcomponents areshippeddailyormorefrequentlytoitscustomers.finishedcomponentsareplacedin containersarrangedinthesequencethecustomerisgoingtoneedthemduring assembly.thefacilityhasaleadtimeof41hoursandcanreplacecomponentsonan emergencybasisinthreehours.batchsizesareverysmall,withabatchsizeofoneitem notuncommon.accordingtocompanymanagers,implementingleanmanufacturinghas allowedthecompanytoexpanditsproductdiversity,reduceemployeeturnover,and remaincompetitiveinatoughmarket.& Six&Sigma& SixSigmaisadataDdrivenapproachtoimprovebusinessandorganizational performance.itappliesthescientificmethodtoidentifythesourcesofprocess variationandformulateactionsforimprovement[128].sixsigmawasdevelopedby Motorolaintheearly1980sandbecamewidelypopularafteritwasadoptedby GeneralElectric.Itiscreditedwithgreatimprovementsinqualityandcostsavings. ItisestimatedthattwoDthirdsoffirmsintheFortune500listuseSixSigmatosome degree[129].thenamesixsigmaisastatisticalreferencetothegoalofachievinga processthatyieldsonly3.4errorsordefectspermillionopportunitiesfordefects. AtthecoreofSixSigmaimplementationistheDMAICproblemDsolvingcycle(Figure 29),whichprovidesa gated processforprocessimprovement.specificconditions aredefinedtoendeachstageandcontinuewiththenext[128].certaintoolsare typicallyusedineachstageofthedmaicprocess,examplesarelistedintable13. Define Control Measure Improve Analyze Definegoalsoftheimprovementproject, estimateimpact.writeproblemand objectivestatementandassembleteam. Measurecurrentstate.Establishmetrics usingstatisticaltools. Analyzecurrentstateandidentifycauses andopportunitiesforimprovement. Improve:implementsolution. Controlprocessperformanceandmonitor tosustainresults. Figure29.DMAICcycle[130]. 82

91 Table13.DMAICtools[128]. DMAICstage Define Measure Analyze Improve Control Toolsused Qualityfunctiondeployment(QFD) Paretoanalysis Suppliers,inputs,process,outputs,andcustomeranalysis(SIPOC) Descriptivestatistics Runchart Processanalysis CauseDandDeffectdiagrams(fishbonediagrams) Hypothesistesting Regressionanalysis Forcefielddiagrams Failuremodeanalysis Statisticalprocesscontrol(SPC)charts Checklists ISO900x Inpractice,SixSigmaandleanmanufacturingareintegratedinwhatisknownas LeanSigma, inwhichthedatadorientedtechniquesandlaserfocusonreducing processvariationofsixsigmaarecombinedwiththecustomerdandpeopled orientedapproachofleanmanufacturing[131]. Supply&Chain&Management& Animportantdevelopmentinbusinessmanagementistheemergenceofsupply chainmanagement(scm).itcanbedefinedasthe strategiccoordinationof businessprocesseswithinanorganizationandacrossbusinesseswithinthesupply chain,withtheobjectiveofimprovingperformanceofindividualorganizationsand oftheentiresupplychain [132].CompaniesadoptingSCMintegratecloselywith theirsupplychainpartners(suppliers,customers)inaspectssuchaslogistics, informationtechnology,qualitymanagement,andprocessflow.companiessuchas WalmartandAppleowetheirtremendoussuccessinparttotheirultraDefficient supplychains.somefactorsthathavecontributedtothegrowthofscmincludethe eliminationoftradebarriers,innovationsintransportationsuchascontainerization andintermodalshipping,andimprovementsinlogisticsmanagementbrought aboutinpartbydevelopmentsininformationtechnology.companiesthat successfullyimplementscmexperienceimprovementsinquality,delivery reliability,flexibility,costleadership,anddesignquality[133].intheforestproducts sector,thekitchencabinetindustryhasbeennotablysuccessfulinimplementing SCMpractices,withshorterleadtimes,increasedproductchoices,andimproved processesasaresult. 83

92 ChapterQuestions 1. Whichofthemanufacturingstrategiesdoesyouroperationmostresemble?Isit appropriategivenyourproductvarietyandproductionvolume? 2. Doyouhaveanaggregateproductionplan?Ifnot,developone. 3. Doyouknowhowmuchitcoststomaintainyourcurrentlevelsofinventory? 4. Doyoumeasureprocessvariability?Doyouthinkyoucouldbenefitfrom reducingit? 5. Doyouthinkyouroperationcouldbenefitfromapplyingleanmanufacturing concepts?how? 84

93 Chapter&7: Financial&Management& Intheforestproductsindustry,abusinessmanagesfourbasicresources:its physicalresources(plant,property,equipment),itshumanresources(people),the naturalresourcesthatituses(forests,land,timber),anditsfinancialresources (howitallocatesvariousformsofcashandcredit).thischapterexamineshowa businessmeasurestheuseofitsfinancialresources. Thefinancialstatementsofacompanycanbecomparedtothescoreinanathletic event.theyareanindicationofthecompany sperformanceoveraperiodoftime andreflectthedecisionsafirmmakesonhowitallocatesitsresources.itis importanttorememberthatfirmsareinbusinesstomakemoney,notproducts. Profitisthescoreinthegameofbusiness.Businessownersneedtorecognizethat theycannotdoanythingunlesstheyremainprofitable.understandingand managingthecompany sfinancialresourcesisoneofthemostimportantactivities ofthebusinessowner,anditoftendoesnotreceiveadequateattention. Table14.Financialmanagementsummary. Financial management Financialplanning Financialstatements Incomestatement Balancesheet Cashflowstatement Financialratios Assetmanagementratios Leverageratios Liquidityratios Profitabilityratios BreakDevenpointanalysis Capitalbudgetingevaluation Paybackperiod Netpresentvalue Internalrateofreturn Sourcesoffinancing FinancialPlanning Anybusinessororganizationneedstounderstandfinancialplanning.Infinancial planning,givenastrategyforoperationsandmarketing,andassumptionsofgrowth andexternalfactors,salesprojectionsaremadeforincomeandassets.the resourcesneededtoachievetheseprojectionsarealsoestimated,andthesources oftheseresourcesarespecified[63].newventuresneedtoprojectfinancial statementsforanumberofaccountingperiods,typicallythreetofiveyearsintothe future.thefinancialplanningprocessisdepictedinfigure30,andsomeofits componentsareexplainedinthefollowingsections. 85

94 Sales&forecast Production& plans Current&period& balance&sheet Income& statement Cash&flow& statement Fixed&asset& outlay&plan Balance&sheet Figure30.Financialplanningprocess[134]. Thefinancialplanningprocessstartswithasalesforecastforagivenperiod.Asales forecastmaybebasedon(1)analysisofexternaldata,suchasnewhousingstarts, grossdomesticproductgrowth,orconsumerconfidenceindex;(2)internaldata, whichsummarizesthesalesexpectationsoftheownersorsalespeople;or(3)a combinationofthetwo,whichisthemostcommonapproach.basedonthesales forecast,thecashflowsneededtosupportthesalesprojectionscanbeestimated, suchasoutlaysforinventory,manufacturing,andsales.thefixedassetsand amountoffinancingneededtomeetthesalesforecastcanalsobedetermined. FinancialStatements Financialstatementsreflectthefinancialsituationofacompanyatagiventime showingthesourceofabusiness smonetaryresources,wherethoseresources went,andwheretheyarenow.thefourkeyfinancialstatementsaretheincome statement,balancesheet,cashflowstatement,andstatementofshareholders equity.theincomestatementshowsthecompany srevenuesandexpensesover anaccountingperiod.thebalancesheetisasnapshotintimeofwhatacompany ownsandowes.thecashflowstatementreflectsthemovementsofcashbetween thecompanyandtheoutsideworld.thestatementofshareholders equityreflects changesintheinterestsofthecompany sshareholdersovertime.theincome statement,balancesheet,andcashflowstatementareexplainedindetailinthe followingsections;thestatementofshareholders equityisoutsidethescopeof thispublication. 86

95 Income&Statement& Theincomestatement(Table15)reflectstheprofitperformanceofabusiness [135].Firmsuseassetstogenerateotherassets,andtheincomestatement measuresthedifferencebetweenassetincreases(revenues)anddecreases (expenses).theserevenuesandexpensesshouldbedirectlyassociatedwith operatingthebusiness.anincomestatementtypicallycontainsthefollowingparts. Sales&revenueisthatgeneratedfromsalesofproductsorservices. Cost&of&goods&soldarethosecostsassociateddirectlywithproducinggoods. Operating&expensesarethoseincurredtosupportthefirm soperationsduring oneaccountingperiod.includedareadministrativepersonnel,product development,marketingexpenses,anddepreciation.thedifferencebetween operatingexpensesandcostofgoodssoldisthattheformercannotbelinked directlytotheproductionofgoodsorservices.dividendspaidtoshareholders arenotlistedasexpensessincetheyarenotincurredtogeneraterevenue. Interest&expense&istheinterestthecompanypaysforlongDorshortDtermloans; interest&incomeiswhatthebusinessearnsoninterestdbearingaccounts. Income&before&income&taxesiswhatresultsfromsubtractingthecostofgoods sold,operatingexpenses,andinterestexpensefromsalesrevenue. Table15.Incomestatement. Incomestatement Salesrevenue (D)Costofgoodssold =Grossprofits (D)Operatingexpenses =Operatingincome(earningsbeforeinterestandtaxes) (D)Interestexpense(andincome) =Incomebeforeincometaxes (D)Incometaxexpense =Netincome(orloss) Balance&Sheet& Thebalancesheetisasnapshotofabusiness sfinancialstrengthsandweaknesses forareportingperiod[135].itpresentswhatthebusinessowns(assets),whatit owes(liabilities),andhowmuchtheshareholdershaveinvestedinthecompany (equity).thedifferentcomponentsofabalancesheetarepresentedintable16. Totalassetsmustequaltotalliabilitiesplustheshareholders equity. Assets = Liabilities + Equity 87

96 Table16.Balancesheet. Assets Balancesheet Assets Liabilities Current Current Cash Accountspayable Marketablesecurities Wagespayable Accountsreceivable Taxespayable Inventory Interestpayable Supplies LongDterm Fixed Equity Land Commonstock Plant Preferredstock Equipment PaidDincapitalinexcessofpar Intangibles Retainedearnings Assets=Liabilities+Equity Assetsareallthethingsthatthecompanyowns,includingproperty,equipment, materials,andcash.assetsareusedbythecompanytogenerateotherassets. Assetsincludethefollowing,listedfromthemostliquid(cash)totheleastliquid. Current&assetsarethosethatcanbeconvertedintocashwithinoneaccounting periodoroneyear.examplesarecash,finishedgoodsinventory,investmentsby thecompanyintheformofbondsorshareinotherbusinesses,andmoneyowed tothecompanybycustomers(accountsreceivable). Fixed&assetstakelongerthanoneyeartobeconvertedintocash,suchasland, buildings,equipment,atruckfleet,etc. Intangible&assetsarenotphysicalinnaturebuthavevalue,suchasintellectual property(e.g.,patents,trademarks),brandrecognition,and goodwill. Liabilities Liabilitiesarealltheobligationsthatthecompanyowestoothers,includingmoney owedtosuppliers,landlords,andbanks;benefitstoemployees;ortaxesowed. Liabilitiesincludethefollowing. Current&liabilitiesincludeallthoseliabilitiesthatareduewithinoneyear,suchas creditcarddebtormoneyowedtosuppliers(accountspayable). LongCterm&liabilitiesincludedebtthatthecompanyowesthatisdueinmorethan oneyear. 88

97 Equity Equity,alsoknownascapitalornetworth,representsthemoneythatwould remainfortheownersaftersellingallassetsandpayingallliabilities.equityalso includestheearningsorlossessincethecompanystarted. Cash&Flow&Statement& Thecashflowstatement,orcashbudget,isprobablythemostimportantfinancial statementfornewbusinesses[135]sinceitshowstheabilityofthecompanyto meetitsobligationsandpurchaseassets,andthusreflectsthebusiness sviability. Insomeways,thecashflowstatementissimilartotheincomestatement,but insteadofreflectingrevenuesandexpenses,itshowsactualcashinflowsand outflows[135].whilethelastlineintheincomestatementreflectsthebusiness s profit,thelastlineinthecashflowstatementreflectsthecashpositionofthe businessattheendoftheaccountingperiod.examplesofcashinflowsaremoney receivedfromsellingproductsorservices,cashfromafinancinginstitutioninthe formofloanproceedsorinterest,orcashreceivedforsellingcompanystock. Examplesofcashoutflowsarecashpurchases,paymentstosuppliers,wagesand salaries,rent,taxpayments,purchasesoffixedassets,dividendspaid,paymentof loanprincipal,orinterestpayments. Thecashflowstatement(Table17)isgenerallypresentedinthreeparts. Cash&flows&from&operating&activities.Thissectionreconcilesthecashflow statementwiththeincomestatementbyadjustingthenetincomeforany noncashitems(e.g.,depreciation,baddebtwritedoffs,prepaidexpenses)andfor cashusedorreceivedbyotheroperatingassets(orliabilities). Cash&flows&from&investing&activities.Allofthecashoutflowsorinflowsrelatedto investmentactivitiesarelistedhere,suchasthepurchaseofpropertyor equipment,orinvestmentinbuyingsharesofotherbusinesses.inflowsoccur whenthefirmsellssomeoftheseinvestments. Cash&flows&from&financing&activities.Ifacompanyreceivescashfromselling sharesorfromabankloan,theseinflowsarereportedinthissection.outflowsof cashincludepayingbackabankloanorpayingdividends. Thelastlineofthecashflowstatementisthenetchangeincashflowforthe accountingperiod.itisimportanttonotethatacompanycanhaveapositivecash flowchangeandanetlossintheincomestatement,andviceversa.foracompany intheearlystagesofoperation,itismoreimportanttohaveapositivecashflow. 89

98 Table17.Cashflowstatement. Cashflowstatement Cashflowsfromoperatingactivities Revenue(cashsalesandinterestreceived) (D)Expenses(cashpaymentsandinterestpaid) =Netcashfromoperatingactivities Cashflowsfrominvestingactivities CashfromsaleoflongDtermassets (D)CashpaymentsforpurchaseoflongDtermassets =Netcashfrominvestingactivities Cashflowsfromfinancingactivities Cashfromloansreceived Cashreceivedfromissuingstocks (D)Cashpaymentsforrepayingloanprincipal (D)Dividendspaidincash =Netcashfromfinancingactivities FinancialRatios Netchangeincashandcashequivalents Financialratiosmeasuretheefficiencyandprofitabilityofafirmusingitsfinancial statements.itisimportanttonotethatfinancialratiosalonedonothaveany meaning;theyareusefulonlywhencomparedwithsomething.afirm sfinancial ratioscanbecomparedwiththoseofotherfirmsinthesameindustryatthesame pointintimeoragainstindustryaverages.ratioscanalsobecomparedovertime forthesamefirmtoevaluatethebusiness sprogress.therearefourbasictypesof financialratios:assetmanagementratios,leverageratios,liquidityratios,and profitabilityratios. InformationSourcesforFinancialRatiosinDifferentIndustries AlmanacofBusinessandIndustrialFinancialRatios[136] D&BIndustryNormsandKeyBusinessRatios RiskManagementAssociation sannualstatementstudies: FinancialRatioBenchmarks[137] Asset&Management&Ratios& Assetmanagementratiosmeasurehoweffectivelyabusinessismanagingitsassets or,inotherwords,howfastitcanconvertassetsintocash.twocommonlyused assetmanagementratiosareinventoryturnoverandcollectionperiod. 90

99 Inventory&turnovermeasureshowmanytimestheinventoryissoldandreplaced inagivenperiod.ingeneral,ahighervalueisdesirable,asitwouldindicatethe companyismanagingitsinventorymoreefficiently.lowinventoryturnover valuesmayindicateexcessiveinventory(withitsassociatedcosts),butveryhigh valuesmayindicatefrequentstockouts.theinformationtocalculatethisratiois foundintheincomestatement(costofgoodssold)andthebalancesheet (averageinventoryofthecurrentandthepreviousperiods).comparisonsofthis ratiobetweenfirmsmakesenseonlywhentheycomefromthesameindustry. Theaverage&ageoftheinventorycanbeobtainedbydividing365bythe inventoryturnoverratio. Inventoryturnover = Costofgoodssold Averageinventory Collection&periodindicatesthenumberofdaysafirmtakestocollectanaccount receivable.accountsreceivablecomefromthebalancesheet.thisratioshould beevaluatedinrelationtothefirm screditpolicy.forexample,avalueof28.1 foracompanythatextends30ddaycredittoitscustomersshowsagood collectionperformance. Leverage&Ratios& Collectionperiod = Accountsreceivable Averagesalesperday Leverageratiosreflectthedegreetowhichotherpeople smoneyfinancesthe firm soperations.acompanyishighlyleveragedifitusesmoredebtthanequity.in general,debtcarriesalowercost,buttoomuchdebtincreasestheriskofthe companynotbeingabletomeetitsinterestandprincipalobligations,potentially leadingtobankruptcy. DebtCtoCequity&ratioisthemostcommonmeasureofleverage.Itcomparesthe debtandequityinacompany scapitalstructure. Debt to equityratio = Totalliabilities Shareholders equity Debt&ratiomeasuresthepercentageoftotalassetsthatisfinancedbycreditors. Thehigherthisnumber,thehigherthefinancialleverageofthefirm. Debtratio = Totalliabilities Totalassets 91

100 Liquidity&Ratios& LiquidityratiosmeasurehowcapablethebusinessistomeetitsshortDterm obligations[135].thisisparticularlyimportantforacompanyinitsearlystages sincethefirmshouldbeabletopayitsbillstooperatenormally.ontheotherhand, toomuchliquidityisnotdesirable,asliquidassetsdonotnormallyearnhigh returnsforthecompany.thetwomostimportantliquidityratiosarethecurrent ratioandthequickratio. Current&ratioreflectsthebusiness sabilitytomeetitsobligationsintheshort term.adesirablevalueishighlydependentontheindustry,butacurrentratioof 2.0isgenerallyconsideredacceptable.Forindustriesinwhichcashflowismore stableandpredictable,suchasutilities,alowercurrentratiocouldbeacceptable. 92 Currentratio = Currentassets Currentliabilities Quick&ratio,alsoknownastheacid&test&ratio,&issimilartothecurrentratiobut doesnottakeintoaccounttheinventory,whichinsomecasescannotbe convertedintocasheasily.avalueof1.0isconsideredacceptable,butitdepends ontheindustry. Profitability&Ratios& Currentratio = Currentassets Inventory Currentliabilities Profitabilityratiosmeasurehowefficientlythecompanyusesitsresources.Itisvery usefultocompareafirm sprofitabilitywiththatofitscompetitorsandtomonitor profitabilityovertime.themostcommonmeasuresofprofitabilityarethegross profitmarginandreturnontotalassets. Gross&profit&marginreflectstheshareofsalesthatisavailabletocover administrativeexpenses.ifthenumeratorisreplacedbynetincome,thisratio becomesthenetprofitmarginandmeasuresthepercentageofprofitonsales. Grossprofitmargin = Sales Costofgoodssold Sales = Grossprofits Sales Return&on&assets&(ROA),alsoknownasreturn&on&investment&(ROI),measureshow effectivelythefirmgeneratesprofitswithitsassets. Returnonassets ROA = Earningsavailableforcommonstockholders Totalassets

101 Break]EvenPointAnalysis Foranybusiness,averyimportantpieceofinformationishowmanyproductsit needstoselltocoveritscashobligations.thisiscalledthebreakdevenpointand reflectsthelevelofactivityabovewhichthecompanystartsmakingaprofit. Fixedcosts Break evenpoint = 1 Variablecosts Salesrevenue Fixedcostsarefoundintheincomestatementunder Generaland AdministrativeCosts. Variablecostscanbetakenfromthe CostofGoodsSold. SalesrevenueisselfDexplanatory. SearchingforFinancialStatementsofPubliclyOwnedCompanies Itmaybeusefultolookforexistingcompanies financialstatementstobetterunderstand howtheconceptsinthischapterapplytorealcompanies.allu.s.publiclyowned companiesarerequiredbylawtosubmitanannual10dkreporttothesecuritiesand ExchangeCommission.Thisreportcontains,amongotherusefulinformation,financial statements,includingthecompany sincomestatement,balancesheets,statementof cashflows,andstatementofstockholders equity.thefinancialstatementsareprepared accordingtoguidelinesknownasgenerallyacceptableaccountingprinciples(gaap)and areaccompaniedbynotesthatexplaintheinformationpresentedinthefinancial statements.thisinformationispubliclyavailableusingtheelectronicdatagathering, Analysis,andRetrieval(EDGAR)systemathttp:// webusers.htm.thereareanumberofsearchoptionsavailable,includingcompanyname lookup.mostcompaniesalsoposttheirannualreportsontheirwebsites. CapitalExpenditureEvaluation SmallorstartDupfirmshavelimitedresources;therefore,thoseresourcesshouldbe spentwisely.thepurchaseofacostlypieceofequipment,forexample,willcommit preciouscompanyresourcesforanextendedperiodoftime.thusthereneedsto beawaytoevaluatewhetheraninvestmentwillproducethereturnsthatjustify theexpense.thethreemajortechniquestoevaluatecapitalinvestmentsare paybackperiod,netpresentvalue,andinternalrateofreturn. Payback&Period& Paybackperiodisthemostcommonlyusedevaluationmethodinindustrial environmentsbecauseitisintuitiveandeasytocalculate.paybackperiodissimply thetimeittakesabusinesstorecoveraninvestmentfromthecashinflows 93

102 generatedbytheinvestment[93].tocalculatepaybackperiod,thecashflowsfrom aninvestmentareprojectedoveranumberofperiodsandthenaccumulateduntil theinitialinvestmentismet.abusinesswouldnormallyhaveapolicyofmaking investmentswithamaximumpaybackperiod.itcandecidewhetherornotto investusingpaybackperiodbycomparingtheproject spaybackperiodwitha maximumacceptablevalue,say,oneyear.ifthecalculatedpaybackperiodis greaterthantheacceptablevalue,theprojectisrejected. Let sconsideraninvestmentthathasthefollowingcashflows:initialinvestment (yearzero)of$800andthenpositivecashinflowsof$400attheendofyear1,2, and3.thecashflowscanbeillustratedasshowninfigure31. $400 $400 $400 Year0 Year1 Year2 Year3 $(800) Figure31.Cashflowsofahypotheticalinvestment. Theinitialinvestmentisrecovered(i.e.,cumulativecashinflowsequaltotalcash outflows)attheendofyear2,thusthisinvestmenthasapaybackperiodof2.ifthe initialinvestmentis$1,000andtheinflowsaredistributedevenlythroughoutthe year,thepaybackperiodwouldbe2.5years. Net&Present&Value& Netpresentvalue(NPV)isthemostrobusttechniqueusedtoevaluatecapital investmentsasittakesintoaccountthetimevalueofmoney,whichisanimportant considerationforlongdterminvestments.aproject snetpresentvalueis determinedbysubtractingthepresentvalueofcashoutflowsfromthepresent valueofcashinflowsovertheplanninghorizon. Netpresentvalue = Presentvalueofcashinflows Presentvalueofcashoutflows 94

103 Theselectioncriterionforaprojectistypicallythatitshouldbeundertakenifthe netpresentvalueispositive,meaningthatcashinflowsaregreaterthancash outflows.theideabehindnetpresentvalueisthataninvestmentprojectshouldbe undertakenonlyifthenetpresentvalueofthecashflowsthattheproject generatesaregreaterthanthenetpresentvalueofthecosts[93].theboxbelow showshowtocalculatepresentvalue. TimeValueofMoney ThetimevalueofmoneyisanimportantconsiderationwhenlongDterminvestmentsare beingevaluated.adollartodaydoesnothavethesamepurchasingpowerasadollar10 yearsago.thesameistrueforadollartodaycomparedtoadollarfiveyearsfromnow.in ordertocompareinvestmentoptionsonafairbasis,cashflowsneedtobeexpressedinthe sametimeframe. Presentvalue = Futurevalue 1 + discountrate Thediscountrateisnormallythecostofopportunityoftheentrepreneurortheminimum returnallinvestmentsmustachievetosatisfyinvestors.typicallythediscountrateishigher thantheinterestratepaidbythecentralbank,toreflectthehigherriskinvolvedinmost investments. Internal&Rate&of&Return& Internalrateofreturn(IRR)isthepreferredevaluationtechniqueoffinancial managers[134].itisthediscountratethatmakesthenetpresentvalueofaproject equaltozero.itscalculationisiterativebuteasytomakewithspreadsheet softwareorafinancialcalculator.aprojectisundertakeniftheirrisgreaterthan thecostofcapitalandisrejectedifitislower. Itisimportanttonotethatwhilethecapitalexpenditureevaluationmethods discussedinformtheinvestmentdecisionprocess,theyshouldnotbetheonly considerationinsuchdecisions.itmustberememberedthatthesequantitative methodsfocusonmeasurablequantities(cashflows),andthustheirvalidity dependsonthevalidityoftheassumptionsmadewhenestimatingthosecash flows.otherfactorsshouldbeconsideredintheinvestmentdecisionsuchas(1) whethertheinvestmentisastrategicfitwiththelongdtermgoalsoftheenterprise; (2)marketconsiderationsrelatedtocompetitors,customers,orsuppliers;and(3) externalfactors,suchaseconomicshifts,regulations,andsocialtrends.theboxon thefollowingpagesexplainscapitalexpenditureevaluationusingmicrosoftexcel. 95

104 UsingMicrosoftExceltoEvaluateInvestmentOptions Awindowmanufacturerisconsideringthepurchaseofanewpieceofequipmentandis evaluatingthetwofollowinginvestmentoptionsoveraperiodof10yearsandwithacost ofcapitalof6percent:& OptionA:Aninitialinvestmentof$22,000,annualcashinflowsfromaddedproductivity of$5,000,operationcostsof$1,700,andaresidualvalueof$7,500attheendofthe 10thyear. OptionB:Aninitialinvestmentof$35,000,annualcashinflowsfromaddedproductivity of$5,500,operationcostsof$1,450,andaresidualvalueof$17,000attheendofthe 10thyear. Thecashinflowsandoutflows,aswellasthenetflow,canbeenteredinaMicrosoftExcel spreadsheetasfollows.& Notethatthenetcashflowforeachinvestmentoptioniscalculatedbyaddingthe outflowsandinflowsalgebraically.alsonotethatthecashinflowinthelastyearincludes therevenueandtheresidualvalueobtainedfromsellingtheequipmentattheendofthe 10thyear.& Payback&Period.Thepaybackperiodcorrespondstotheyearinwhichthecumulativecash flowschangefromapositivetoanegativevalue.forinvestmentoptionaitis6.7years (6+[2,200/3,300])andforinvestmentBitis8.6years(8+[2,600/4,050]).& Net&Present&Value.ExcelhasbuiltDinfunctionstocalculateNPVgivenadiscountrateand anarrayofcashflows.veryimportantly,excelassumesthatthefirstvalueinthearray containsacashflowthatoccursattheendofthefirstperiod,whichmeansthat investmentsmadeinyearzero(rightnow)shouldbesubtractedoutsidetheformula.to calculatethenpvforeachinvestmentoption,thefollowingformulas(inbold)shouldbe entered: 96

105 UsingMicrosoftExceltoEvaluateInvestmentOptions(cont.) NPVforinvestmentoptionA:=NPV(C1,D6:D15)+D5=$6,476 NPVforinvestmentoptionB:=NPV(C1,H6:H15)+H5=$4,301 Internal&Rate&of&Return.Similarly,ExcelcancalculatetheIRRusingabuiltDinfunctionfor whichtheonlyargument(input)isthearrayofcashflows.itisimportanttonotethatif thecashflowsareannual,thentheirrhasalsothesamebasis.theformulaisenteredas follows:& IRRforinvestmentoptionA:=IRR(D5:D15)=11% IRRforinvestmentoptionB:=IRR(H5:H15)=8% Basedontheresults,investmentAisabetteroptionforthefirmbecausetheinvestment isrecoveredfasterandithasahighernetpresentvalueandahigherrateofreturn.& SourcesofFinancing Afinancialmanagementplanneedstoincludeanexplanationofthesourceofthe fundstorunorstartthebusiness.thereareanumberofoptionsfornew businessestoraisefundstofinanceoperationsorforexistingbusinessestofund expansion. Personal&Savings/Friends&and&Family& Itisveryunlikelythatalenderorinvestorwillcompletelyfinanceanewventure. MoststartDupfundingfornewventuresincludesthepersonalsavingsofthe founderorthefounder sfamily.whenamajorityofthebusinessisfinancedwith personalsavings,thefounderhasmorecontrolandownership;however,thistype offinancingalsoisveryriskysincenomatterhowmuchplanningiscarriedout, thereisalwaysriskinvolved.oneespeciallyriskyandexpensivewayoffinancing newventuresistogetcashadvancesonacreditcard,whichshouldbeavoidedat allcosts.acommonsourceofnewbusinessfinancingisborrowingfromfriendsor family,whichcanbeintheformofdebtorequitycapital.entrepreneursare stronglyencouragedtohavewrittenagreementswithclearinformationaboutthe amountowed,intereststobepaid,andmodeofrepayment. Bank&Loans& Bankloansarethetraditionalfundingmethodinwhichtheventurereturnsthe cashplusinterest;however,mostnewbusinessesdonotstartwithbankloans. Bankloansmayrequiresomeliensonassetsorintellectualproperties,and personalguaranteesofthebusinessfounders. 97

106 Venture&Capital& Venturecapitalisequityfinancingforbusinessesthatdonothaveaccessto traditionalsourcesoffunding.venturecapitalistsfocusonnewcompanieswith highpotentialforgrowth theyprovidefundswithalongdtermvision.sincethey takeequityinthebusiness,venturecapitalistsaretypicallymoreinvolvedinthe strategicmanagementofthecompany.theyarelaterstageinvestors,meaningthat theyinvestincompanieswithprovenrevenuedgeneratingcapacityandwitha proventechnology. Onesubclassofventurecapitalistsisknownas angels wealthyindividualsin searchofhighdreturninvestmentopportunities.angelstypicallyinvestinindustries withwhichtheyhaveexperienceorareveryfamiliar.theyoftenassociatewith otherinvestorsandsetupanangelassociation.onegoodresourceforstartdup capitalisgust.com,anonlineplatformwhereangelinvestorsorassociationsand entrepreneurscanmeet,withbrowsingtoolsforinvestmentandfunding opportunities. Federal&or&State&Government&Financial&Assistance& TheU.S.SmallBusinessAdministration(SBA)hasloanandgrantprogramsaimedat smallbusinessesforanumberofpurposes,suchasshortdtermloansandcyclical workingcapital(caplines),loansforexportactivities,loansforruralsmall businesses,andseveralothers[138].thesbahaslocalofficesineverystate.for moreinformation,visitwww.sba.gov. Otherfederalagenciesalsoprovidefinancialassistancetosmallbusinesses.For example,thedepartmentofagriculturehasanumberofloansandgrantsforrural andcommunitydevelopment.visitwww.rd.usda.gov. Stategovernmentsalsoprovidefinancialassistancefornewenterprises.For example,theminnesotadepartmentofemploymentandeconomicdevelopment providesfinancingprogramsandtaxcreditsforstartingbusinesses(mn.gov/deed/), andthevirginiasmallbusinessfinancingauthorityhasseveralprogramsfornew andexistingsmallbusinesses( Small&Business&Innovation&Research&and&Small&Business& Technology&Transfer&Program& SmallBusinessInnovationResearch(SBIR)andSmallBusinessTechnologyTransfer (STTR)isafederalprogramtoassistsmallbusinessestostimulatetechnological innovationanddevelopproductswithcommercialmerit.itfundshighdriskproduct developmentbasedontechnologicalinnovationwithacommercializationstrategy. 98

107 Severalfederalagenciesparticipateinfundingthisprogram:Departmentof Agriculture,DepartmentofCommerce,DepartmentofDefense,Departmentof Education,DepartmentofEnergy,DepartmentofHealthandHumanServices, DepartmentofTransportation,EnvironmentalProtectionAgency,NASA,and NationalScienceFoundation. Eligiblebusinessesmustmeetcertaincriteria,suchashavinglessthan500 employees,beinglocatedintheu.s.,conductingresearchanddevelopmentinthe U.S.,andhavingresearchfacilitiescontrolledbythecompany.Thedifference betweenthesbirandthesttristhatthesttrrequirestheparticipationofa nonprofitresearchinstitution,whereasthesbirdoesnot.however,theapplicantis alwaysthesmallbusiness.forfurtherinformationaboutbothprograms,visit ChapterQuestions 1. Whatisyourestimateofannualsalesandhowdidyouarriveatthisnumber? 2. Developanincomestatementforyourbusiness. 3. Whatarethekeyfactorsthatwillimpactyourcashflowforthebusiness? 4. Whatisyourtargetedgrossmarginonsales? 5. Identifykeysourcesoffinancingforyourbusiness. 99

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109 Chapter&8: Writing&a&Business&Plan& Youhaveidentifiedabusinessopportunity.Thereisanattractivemarketsegment youthinkyoucansatisfywithaproductorservicethatyoufeelconfidentyoucan provideinaproficientmanner.however,youneedtoraisecapitaltostartthenew venture.unlessyouareborrowingfromrelativesorclosefriends(andoftenevenin thiscase),thisalmostinvariablymeansthatyouneedtowriteabusinessplan. Abusinessplanis adocumentthatexplainsabusinessopportunity,identifiesthe markettobeserved,andprovidesdetailsabouthowtheentrepreneurial organizationplanstopursueit [139].Inabusinessplan,youwillputinwriting yourstrategyforalltheaspectsofbusinessmanagementcoveredinthisguide, fromidentifyinganeedinthemarkettoforecastingthefinancialperformanceof yourventure.inthischapter,weexplainhowthedifferentcomponentsofthe businessplanfittogetherandhowtowriteacredibleandattractivebusinessplan. Wealsoprovidealistofresourcesthatmayhelpyouinthisimportanttask.In AppendixB,weprovideanexampleofacompletebusinessplanforawood productscompany. Table18.Businessplancomponents. Businessplancomponents Executivesummary Generalcompanydescription Productsandservices Marketingplan Operationalplan Managementandorganization Financialplan Contrarytocommonbelief,businessplansarenotonlyforraisingmoneytostarta newventure.businessplanscanhaveanumberofapplications,someofwhichare listedbelow[135]. As&a&benchmark.Abusinessplanprovidesmeasurableindicatorsofsuccess; therefore,anorganizationcanuseittocompareresultswithactualperformance andestablishcorrectiveaction.abusinessplanthusactsasacontroltool. As&a&planning&tool.AwellDwrittenbusinessplansetsthedirectionofthecompany forthenextfewyearsandliststheactionstoachievethebusiness sgoals. As&a&budget.Afinancialplanthathasbeenwellthoughtoutcanbeusedasa budgetthatcanbereviewedperiodicallytocheckactualandplannedresultsand toformulateactionstoclosethegapbetweenthetwo. As&a&communication&tool.Afirmcanuseabusinessplantoeducateexisting employees,newcomers,andexternalstakeholdersonthegoalsandobjectivesof theorganizationandthemajorstrategiestoachievethosegoals. 101

110 WhatIsMostImportantinaBusinessPlan? Researchhasbeenconductedonwhatimportanceinvestorsplaceonthedifferent componentsofabusinessplanduringtheinitialscreeningphase[140].duringthisstage investorsdecidewhichproposalsareworthyoffurtherconsideration.theresearchers interviewedinvestorsandreportedthenumberoftimesevaluationcriteriawerementioned. Werankedtheresearchresultsfromthosethataregivengreatestemphasis(rank1)tothe leastimportant(rank8).thefinancialconsiderations,marketpotential,andthebackground ofthemanagementteamsareratedamongthethreetopevaluationcriteriabyallinvestors.& Businessplancomponent Banker Venturecapitalist Angel Financialconsiderations Market Entrepreneur/managementteam Strategy Operations Product/service Businessplan Investorfit Existingcompaniesalsowritebusinessplans,forexample,whentheyareaboutto makeabigstrategicmove,suchasamergeroranacquisition.companiesthatare planningtoputthemselvesupforsalemayhireexternalhelptowriteabusiness planandmakeitavailabletopotentialbuyers.corporationswithseveralbusiness unitssometimesaskmanagersateachunittowriteaseparatebusinessplanand thenincorporatetheseplansintoasinglestrategyfortheentirecorporation[141]. Nonprofitorganizationsalsowritebusinessplans.Acharityneedstoraisefunds, andagoodwaytodemonstratethattheorganizationcanmakegooduseofthose resourcesisadocumentstatinggoals,servicestobeprovided,intended beneficiaries,measuresofsuccess,andresourcesneeded.governmentagencies mayrequireabusinessplanfromcompaniesthatwanttosignaprocurement contract,oracityorcountyadministrationmaywriteabusinessplanasastrategic managementtool. Therearemanywaysinwhichabusinessplancanbestructured.Regardlessofthe format,abusinessplanshouldprovideanoverviewofthebusinessopportunity,a marketingplan,afinancialplan,andanoperationsmanagementplan.eachofthe businessplancomponentsisexplainedindetailinthefollowingsections.theboxat theendofthischaptercontainsseveralresourcesforbusinessplanwriting. ExecutiveSummary Asthenamesuggests,theexecutivesummaryisacompressedversionofthe businessplan.ataminimum,theexecutivesummaryshouldconveythenew 102

111 venture sbusinessgoals,themarket,thefinancialpredictions,andtheintended fundingsources.remember,potentialinvestorsarebusypeopleandmayhave littletimetocompletelyrevieweachbusinessplan,thustheypaycloseattentionto theexecutivesummary.ifitdoesnotgrabthereviewer sattention,thebusiness planwillunlikelybethesubjectoffurtherreading.veryimportantly,writethe executivesummaryaftercompletingtheotherbusinessplansections;otherwise youriskendingupwithavaguesummaryortryingtoaccommodatetheplantothe summary[135].suggestedcontentsfortheexecutivesummaryare: Thefirm smissionandvision(seechapter3:strategicplanning) Ashortdescriptionoftheindustryandbusinessenvironment Thebusinessopportunitythatthenewventureisgoingtoaddress Themostimportantstrategiesforsuccess(howisthenewventuredifferentfrom thecompetition?) Adescriptionofthemanagementteam ThefinancialneedsofthestartDup,theanticipatedsourcesoffunding,andthe projectedreturns GeneralCompanyDescription Thegeneralcompanydescriptionshouldcontainanoverviewofthecompany, including: Briefhistoryofthecompanyanditsaccomplishments Customersegmentsthenewventureisgoingtoserve Productsandservicestobeofferedandtheirstageofdevelopment(in development,workingprototype,inthemarket) Locationofthecompany sfacilitiesanditsmarkets Thenewventure sbusinessobjectives Industryoverview Thebusinessobjectivesmayincludethedesiredmarketparticipation,the geographicscopeofsales,andtheanticipatedlevelofsalesandgrowth.topicsto coverfortheindustryoverviewmayincludeindustrysize,growthtrends,natureof thecompetition(istheindustryfragmentedorconcentrated?),majorplayers, sourcesofdifferentiation,andthecompetitiveadvantageofthenewventure. ProductsandServices Theproductsandservicesthatthenewventureisplanningtoofferaredescribedin thissection.emphasisshouldbeplacedonhowtheseproductsandservicesare 103

112 uniqueandsatisfytheneedsidentifiedpreviously.specifically,thefollowingshould beincluded[63,142]: Physicaldescriptionofproduct Benefitsanduniqueness Anobjectivecomparisonwithcompetitors productsandservices ProductDlinestrategieswithintheplanninghorizon Regulatoryissues(environmental,safety,etc.) Intellectualpropertyissues Qualityandwarrantyissues Marketingandtechnicalsupport,includingfieldsupport Productionprocessesandrequiredequipment Someentrepreneursprovideaprototypeorsample,conductademonstration,or offertestimonialsfromusersorexperts[135].acommonmistakewhenwritingthis sectionisassumingthereaderwillbefamiliarwiththeproductorserviceandits technicalaspects.itisgoodpracticetoavoidjargonandusesimpleandconcise language. MarketingPlan Themarketingplanisoneofthemostimportantsectionsofthebusinessplan,asit describeshowthecompanyisgoingtomanagetherevenuedgeneratingsideofthe business.themarketingplanisusuallydividedinsubsections,describedinthe followingsections[135]. Market&Definition&and&Opportunity& Thepurposeofthemarketdefinitionandopportunitysectionistoestablishthat demandexistsfortheproductsandservicesdescribedintheprevioussection.also, themarketsandmarketsegmentstobeservedshouldbeclearlyidentifiedand describedherealongwithadescriptionoftheattractivenessofeachsegment. Marketopportunitiesareusuallyanalyzedusingbothsecondarysourcesof informationsuchasmarketresearchreports,industrystatistics,andmagazinesand newspapers,andinformationdirectlycollectedbythefirm,eitherthroughitssales forceorsomeothermethod,suchasthefollowing[110]: Compiling buglists (defectsorimprovementopportunitiesinproductsfromthe competition) Studyingcustomers(e.g.,videotapingthebehaviorofpotentialhousebuyers inspectingthekitchen) 104

113 Makinganexistingproductavailableinanewmarketormarketsegment Identifyingmarketorsocietaltrends(e.g.,healthconcernsareanincreasing interestinstanddupdesks,orincreasingenergypricesleadinghomeownersto wooddfueledheating) Competition&and&External&Forces& Thecompetitionandexternalforcessectionisadescriptionoftheexternal environmentanditslikelyeffectsonthecompany.italsoincludesanexplanationof howthecompanyintendstousetheseexternalforcestoitsadvantageandactions neededtoavoidnegativeinfluences.particularemphasisisplacedonthe competitionanditseffectsonthecompany ssuccess,includingnamesofpotential competitorsandtheircharacteristics.externalfactors,suchasregulation,subsidies, suppliers,andthecommunity,shouldbeaddressedhere. Toconducttheexternalforcesanalysis,Porter s fiveforcesanalysis framework maybeuseful[143]. 1. Threat&of&substitutes.Howlikelyarecustomerstoswitchtoproductsubstitutes? Thisisespeciallyrelevanttoforestproductscompanies,assubstitutematerials havebeentakingmarketshareofproductstraditionallymadefromwood(e.g., steelstuds,metalorplasticpallets,deckingfromwooddplasticcomposites,vinyl siding). 2. Threat&of&new&entrants.Howeasyitisfornewcompaniestojointheindustry? Arethebarrierstoentry(e.g.,capitalrequirements,accesstodistribution channels,switchingcosts)highorlow? 3. Bargaining&power&of&customers.Thepowerofbuyersincreaseswhentheyare fewandlarge,whenthefirmproducesanundifferentiatedproduct,andwhen thereisathreatthatbuyerswillintegratebackwards. 4. Bargaining&power&of&suppliers.Howpowerfularesupplierstosetpricesand influenceavailability?thebargainingpowerofsuppliersisinverselycorrelatedto theirnumberanddirectlycorrelatedtotheirrelativesize. 5. Rivalry&among&competitors.Rivalryincreaseswhentherearemany,small producers,fixedcostsarehigh,customerscanswitchbrandseasily,andthe barrierstoexitarehigh. Marketing&Strategy& Themarketingstrategysectionisthecoreofthemarketingplan.Theentrepreneurs shouldexplainhowtheyplantousemarketingtoolsinordertoachievethe businessobjectives.specifically,thefollowingshouldbeincluded. The&firm s&approach&to&the& marketing&mix : 105

114 Product.Describeproductsandproductlinesandhowtheydifferentiatefrom thecompetitors. Promotion.Anexplanationshouldbeprovidedastohowthevalueproposition isgoingtobecommunicatedtothetargetsegments. Price.PricingstrategychoicesincludevalueDbasedandcostDbasedpricing,or penetrationorpremiumpricing.otherissuestoaddressaretheprice sensitivityofcustomers,thediscountpoliciestobeadopted,andcompetitors pricing. Placement(distribution).Describehowtheproductorserviceisgoingtoreach itsintendedmarket,includingtheuseofthesalesforce,distributionchannels, Internetsales,andcompanyDownedstores. The&brand&strategy.Thebrandisapowerfulcommunicationtool,anditisa criticalcomponentofanymarketingplan.thebrandstrategyandimportancewill dependtoahighdegreeonwhethertheproductisaconsumerbrandora businessdtodbusinessbrand. The&segmentation&strategy,includingthesizeandgrowthprospectsofthetarget segmentsandthegeographicscopeofthemarketsegments. The&positioning&strategy,includingthedesiredpositionoftheproductor companyinthemarketplace(costleader,technologydfocus,orhighestquality), andhowthefirmintendstoachievethatposition.veryimportantly,itshouldbe conveyedthattheintendedpositioningstrategyisrealisticanddefendable. Market&Research& Inthemarketresearchsection,thewritersdescribethemethodsandresultsof formalorinformalmarketresearchconductedtounderstandthenatureandsizeof themarkettobeserved.thisinformationisimportanttoenhancethecredibilityof thesalesforecastandthereviewer sunderstandingofthemarket. Sales&Forecasts& Theprojectionsforsalesfortheplanninghorizonarepresentedhere,including trends,growth,andseasonalbehavior.salesforecastscanbeofdifferenttypes dependingonhowtheyarestructuredandpresented.somecommonkindsareby period,byproductorservice,bycustomerorcustomersegment,andbymarket share.commonmethodstoforecastsalesincludethefollowing[63]. Sales&force&estimates.Salespersonnelareclosetothemarketandtheyhave knowledgeofmarketconditionsandthuscanmakeagoodpredictionofsales. Expert&opinion.Thisisaverycommonmethodintheforestproductsindustry. Industry experts areconsultedastotheirthoughtsonthedirectionofaspecific market.associationmeetings,tradeshows,andacademiaarepotentialsources ofthisinformation. 106

115 Time&series&analysis.Thereareavarietyoftechniquestoforecastsalesbasedon historicalsales.amajorweaknessofthesemethodsisthattheunderlying assumptionisthatmarketconditionsintheforecastperiodaregoingtomirror thoseinthepast. Market&tests.Thismethodisappropriatefornewproductcategoriesinwhich producersmaywanttoreduceriskbyfirsttestinghowtheintendedmarket receivesthenewproduct. Businessplanwritersmaydecidetoincludesupportingmaterialstoaddcredibility tothemarketresearchandsalesforecast.supportmaterialsincludemarket researchreports,statistics,brochures,lettersofsupport,etc. OperationalPlan Theoperationalplansectiondescribeshowthenewventureisgoingtoconvert inputsintoproductsandservicesthatitintendstodelivertothemarket.specific topicstoaddressincludethefollowing. Product&development,includingactionstodevelopnewproductsandservicesto maintainacompetitiveadvantage. Manufacturing&strategy,includingplansforproductionstartDup,approachfor productionplanningandcontrol,outsourcingstrategy(manynewventuresresort tooutsourcingintheearlystages),andinventoryneedsandmanagement.itis commontoincludeadescriptionoftheproductionprocess. Supply&strategy,includingthesourcesforkeymaterials,theanticipatedcosts, logisticsissues,termsofpurchase,andexternalinfluencesthatmayaffectsupply (positivelyornegatively). Labor&requirements,includingworkforceavailability,salariesandbenefits, approachtomanagement,unionrelationships(ifrelevant),anticipatedadditions topersonnel,andskillsandtrainingneeds. Machinery&and&maintenance,includingmachineryandequipmentneeds, potentialvendors,capabilitiesandlimitations,andapproachtomaintenance. Facilities&location,includingjustificationforlocation,costs,andaccessto qualifiedlaborandservices. Itisimportantthatthissectionoftheplanbeconsistentwiththepredictionsof growthincludedintheforecast.ifasignificantincreaseinsalesisanticipatedat somepointontheplanninghorizon,therequiredadditionsinmanufacturing capabilityandallthattheyentailshouldbereflectedhere,especiallyifthisadded capacitywillrequireadditionalfinancing.theexternalforcesthatimpactthe manufacturingstrategyshouldalsobediscussedinthissection,forexample,how changesintechnologymayimpactthemanufacturingstrategy,theeffectof anticipatedregulationsonthebusinessoperations,ortheeffectofpriceand 107

116 availabilityofresourcesusedbythefirmonitsprofitability(e.g.,increasinguseof woodbiomassforenergymayimpactfiberavailabilityforcertainengineeredwood products). ManagementandOrganization Theimportanceofthemanagementandorganizationsectioncannotbeoverstated. Researchshowsthatinvestorsconsidertheexperience,background,andskillsof themanagementteamamongthemostreliablepredictorsofanewenterprise s success[140],andsomeindicatethattheyreviewtherésumésectionfirst[139]. Thusaneffortshouldbemadetodescribewhatspecificaspectsofthe entrepreneurs pastexperiencesuggestthattheyaregoingtobesuccessfulinthe future.thefollowingquestionsshouldbeansweredinthissection. Whoisneededtostartandrunthenewventure? Whataretheskillsandcompetenciesneededinthoserunningthebusiness? Whicharethecriticalfunctionsandroles? Howisauthoritygoingtobedividedamongtheprincipals? Howistheorganizationgoingtochangeasitgrows? Whatstepsareplannedtosearch,attract,retain,andcompensateemployees? Inthissection,thenamesandbackgroundsofthosewhowillplayakeypartinthe businesssuccessshouldbeincluded:foundingentrepreneurs,investors,key personnel,advisoryboard,anddirectors.alsoprovideadescriptionofhowthe organizationisgoingtobestructured(e.g.,byfunction,byproduct,ora combination).anorganizationalchartistypicallyincluded,althoughatthispointa highlevelofdetailisnotrequired.thereportingrelationshipsamongthekey membersaswellasthecompensationlevelsshouldbeclear. Thissectionshouldalsocontainadescriptionofthepoliciesandstrategies regardingpersonnel.specifically,somedetailsshouldbeprovidedastotheplansto findandattractkeypersonnel,thetimingofthesehires,andthecompensation philosophy. FinancialPlan Inthefinancialplan,thebusinessplanauthorsshould formulateacredibleand comprehensivesetofprojectionsofthebusinessfinancialperformance [135]over athreedtofivedyearperiod.projectionsaretypicallymadeonamonthlyor quarterlybasisforthefirsttwoorthreeyearsandthenannuallyforthelasttwoor threeyears.owingtotheimportanceanddifficultyofthissection,itissometimes advisabletoseekprofessionalhelpfromsomeonewithanaccountingbackground. 108

117 Veryimportantly,theassumptionsonwhichthefinancialprojectionsaremade, suchastaxrate,collectionperiod,increasesinsellingprices,andinterestrates, shouldbecarefullylistedasfootnotesorasaseparatesubsection. Afinancialplanshouldcontainthefollowingelements[135,142]. Capital&requirements,includingcurrentandprojectedrequirementsandtheir uses.capitalrequirementsincludemachinery,tooling,supplies,officeequipment andfurnishings,andothercapitalacquisitions.workingcapital,suchaswages, salaries,inventory,receivables,andreservesfortaxes,shouldalsobeincluded. Mostitemsshouldcomefromprevioussectionsofthebusinessplan. Funding&strategy,includinganticipatedsourcesoffundingforthenewenterprise. Itshouldbespecifiedwhatpercentageofthefundingwillcomefromthe entrepreneurs,theinvestors,financialinstitutions,andgovernmentloansand subsidies. Current&and&projected&financial&statements.Adetailedexplanationofthese statementscanbefoundinchapter7. Balancesheet.Current(ifalreadyoperating)orproforma(ifstartinga business). Cashflowstatement.Thisisthemostcriticalstatementforastartingbusiness sinceitdemonstratestheabilityofthefirmtopayitsbillsand,hence,its viability. Incomestatement.Profitpotentialandabilitytorepaydebtshouldbe emphasizedinthisstatement.sincerevenuesarecalculatedbasedonasales projection,specialcareshouldbeplacedondemonstratingthefeasibilityof suchprojections. Other&elements: BreakDevenanalysis.SomebusinessplansincludeabreakDevenanalysisto showwhenoratwhatlevelofsalesthenewventureisexpectedtobecome profitable.adetailedexplanationofhowtomakesuchanalysiscanbefoundin Chapter7. Businessratios.Sincetheinformationinthefinancialstatementscarrieslittle meaningwhenconsideredinisolation,thedatafromdifferentfinancial statementsaresometimescombinedintobusinessratios.someinvestorsmay evenrequirespecificratiosaspartofthebusinessplan.adetailedexplanation ofhowtocalculatetheseratiosispresentedinchapter7. Sensitivityanalysis.Thisanalysisdescribeshowchangesincertaincritical parameters,suchasinterestrates,foreignexchangerates,oragovernment subsidy,impactthefinancialprojections. ItisofutmostimportancethatpreparersusewellDdocumentedandreliabledatato makefinancialprojections[135].asindicatedearlierinthischapter,investors considerthefinancialplanthemostimportantevaluationcriteriainabusinessplan, 109

118 andtheymayconsideritworthwhiletocheckthevalidityoftheinformation presented.also,sinceanyforecastcarriesalevelofuncertainty,itisagood practicetopresentfinancialprojectionsusingdifferentscenarios,forexample, makingprojectionsfora conservative anda fullpotential scenario.finally,as mentionedpreviously,specialcareshouldbetakentoensurethattheprojections inthefinancialplanareconsistentwithotherpartsofthebusinessplan.ifthe managementandorganizationsectionanticipatesanumberofhiresduringthe planninghorizon,thefinancialplanshouldreflectthoseincreasesinexpenses. Similarly,iftheoperationalplananticipatesthepurchaseofanimportantpieceof equipmentatsomepointduringtheproject(andperhapsthesaleofold equipment),thecorrespondinginflowsandoutflowsofcashshouldbe incorporatedintheprojectedfinancialstatements. FinalRemarks Keepthefollowingrecommendationsinmindwhenwritingabusinessplan. Itisimportanttoconveyasenseofexcitementandenthusiasmforthenew ventureandtocapturethereader sinterestearlyinthedocument[135]. Remember,thebusinessplanmust sell abusinessopportunityasagood investmentandaworthwhilerisk. Itcannotbeoveremphasizedthattheplanshouldavoidtoomuchjargonand shouldnotassumethereviewersarefamiliarwiththetechnicalaspectsofthe businessidea.ifyouwanttoincludetechnicaldetailstoshowthatyouknow whatyouaredoing,useanappendix. Makesureallofthecomponentsofthebusinessplanareconsistent.Avoid contradictionsatallcosts.also,makesurealltheinformationusedinthe projectionsandindustryanalysiscomesfromreliablesourcesandisverifiable. Avoidwildorunfoundedassumptionsofmarketsizeandcompetition.Nothing willdiminishthecredibilityofyourbusinessplanmorethanclaimingno competitionorriskforthenewventure,orprojectingmarketsizetoo optimistically[144]. Trytogetfeedbackontheplanfromexperiencedpeoplethatyoutrust. Apoorlywrittenbusinessplanandsloppypresentationwilldiscouragepotential investorstocontinuereading.itishighlyadvisabletoasksomeonetoproofreadthe documentbeforesendingittoapotentialinvestor.somegeneralstylesuggestions forwritingbusinessplansincludethefollowing. Usedirect,conciselanguage.Avoidlongnarrative;useshortparagraphsand bullets,whereappropriate. Avoidusingthesamephraseoridearepeatedlyinthedocument. 110

119 Makethebusinessplaneasytoreadandavoidtheuseofjargon.Averycommon mistakeistoassumethereaderknowsaboutthetechnicalaspects. Dependingonthepurposeofthebusinessplan,usethefewestnumberofpages possible.mostplansrangefrom10to40pages. Donotuseaplanninghorizonofmorethanfiveyears;longerperiodsarenot credible.also,usemoredetailforyourpredictionsforthenearfuture(twoor threeyears)andmoreaggregatedtermsforlateryears. ResourcesforWritingaBusinessPlan Thereareawealthofonlineandprintresourcesforbusinessplanwriting.Hereareafew:& Hundredsoffreesamplebusinessplansandatemplateforbusinessplanwriting. TheSmallBusinessAdministration scompleteguidetostartingabusiness,including businessplanwriting. business/startingdbusiness/ APlanningGuideforSmallandMediumSizeWoodProductsCompanies,byJeffreyL. HoweandStephenBratkovich.na.fs.fed.us/spfo/pubs/misc/keys/ wp_planning_guide.pdf ForestProductsBusinessPlanningGuide,byDawnGardnerandRandyJohnson. cusp.ws/wpdcontent/uploads/2014/05/forestproductsplanningguide.pdf HowtoWriteBusinessPlansforForestProductsCompanies,byEdPepke. ir.library.oregonstate.edu/xmlui/handle/1957/12299 AMarketingGuideforSmallandMediumSizedPrimaryForestProductsProcessors,by RobertSmith,EdwardCesa,andPatrickRappold. forest_products/marketing_guide_nadtpd02d07cd.pdf TheErnst&YoungBusinessPlanGuide,byBrianR.Ford,JayM.Bornstein,andPatrick T.Pruitt. ChapterQuestions 1. UsingthischapterandtheexampleinAppendixB,developacompletebusiness planforyourcompany. 2. Haveyourbusinessplanreviewedbyprofessionalsfortheirthoughtsand feedback. 111

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131 123 Appendix&A:&Useful&Links& NationalTradeAssociations AmericanForestandPaperAssociation 11011KSt.,NW,Suite700 Washington,DC20005 Tel.:202D463D AmericanHardwoodExportCouncil 1825MichaelFaradayDr. Reston,VA20190 Tel.:703D435D ArchitecturalWoodworkInstitute 46179WestlakeDr.,Suite120 PotomacFalls,VA20165D5874 Tel.:571D323D ForestProductsSociety 15TechnologyParkwaySouth,Suite115 PeachtreeCorners,GA30092 Tel.:855D475D HardwoodDistributor sassociation P.O.Box1921 FortWorth,TX HardwoodFederation thSt.,NW,Suite800 Washington,DC20036 Tel.:202D463D2705Fax:202D463D4702 hardwoodfederation.wildapricot.org HardwoodManufacturersAssociation 665RodiRd.,Suite305 Pittsburgh,PA15235 Tel.:412D244D0440Fax:412D244D InternationalWoodProductsAssociation 4214KingSt. Alexandria,VA22302 Tel.:703D820D6696Fax:703D820D MapleFlooringManufacturersAssociation 111DeerLakeRd.,Suite100 Deerfield,IL60015 Tel.:888D480D9138Fax:847D480D MouldingandMillworkProducers Association 507FirstSt. Woodland,CA95695 Tel.:530D661D9591Fax:530D661D NationalHardwoodLumberAssociation P.O.Box34518 Memphis,TN38184D0518 Tel.:901D377D NationalLumberandBuildingMaterial DealersAssociation 2025MSt.,NW,Suite800 Washington,DC20036D3309 Tel.:202D367D NationalWoodFlooringAssociation 111ChesterfieldIndustrialBlvd. Chesterfield,MO63005 Tel.:636D519D NationalWoodenPalletandContainer Association 1421PrinceSt.,Suite340 Alexandria,VA22314D2805 Tel.:703D519D6104Fax:703D519D NorthAmericanWholesaleLumber Association 330NorthWabash,Suite2000 Chicago,IL60611 Tel.:312D321D5133Fax:312D673D6838

132 124 SocietyofWoodScienceandTechnology P.O.Box6155 Monona,WI53716D6155 Tel.:608D254D WoodComponentManufacturers Association P.O.Box662 Linstrom,MN55045 Tel.:651D332D6332Fax:651D400D RegionalTradeAssociations AlleghenyHardwoodUtilizationGroup P.O.Box133 Kane,PA16735D0133 Tel.:814D837D AppalachianHardwoodManufacturers P.O.Box427, HighPoint,NC27261 Tel.:336D885D8315Fax:336D886D GreatLakesTimberProfessionalsAssociation P.O.Box1278 Rhinelander,WI54501 Tel.:715D282D IntermountainForestAssociation 2218JacksonBlvd.,#10 RapidCity,SD57702 Tel.:605D341D0875Fax:605D341D LakeStatesLumberAssociation P.O.Box8724 GreenBay,WI54308D8724 Tel.:920D884D0409 lsla.com Mid]AmericaLumbermen sassociation P.O.Box KansasCity,MO64141D6264 Tel.816D561D5323Fax:816D561D MountainStatesLumberandMaterials DealersAssociation 9034EastEasterPl.,Suite103 Centennial,CO80112 Tel.:303D793D0859Fax:303D290D NortheasternLoggersAssociation P.O.Box69 OldForge,NY13420 Tel.:315D369D3078Fax:315D369D NortheasternLumberManufacturers Association 272TuttleRd. Cumberland,ME04021 Tel.:207D829D6901Fax:207D829D NortheasternRetailLumberAssociation 585NorthGreenbushRd. Rensselaer,NY12144 Tel.:518D286D1010Fax:518D286D NorthwesternLumberAssociation 5905GoldenValleyRd.,#110 Minneapolis,MN55422 Tel.:763D544D Penn]YorkLumbermen sclub 130SouthUnionSt.,Suite200 St.Olean,NY14760 Tel.:716D373D1000Fax:716D373D SoutheasternLumberManufacturer s Association 200GreencastleRd. Tyrone,GA30290 Tel.:770D631D6701Fax:770D631D SouthernForestProductsAssociation 6660RiversideDr.,Suite212 Metairie,LA70003 Tel.:504D443D4464

133 125 SouthernPineInspectionBureau P.O.Box10915 Pensacola,FL32524D0915 Tel.:850D434D2611Fax:850D434D VirginiaForestProductsAssociation 220EastWilliamsburgRd. Sandston,VA23150D0160 Tel.:804D737D WestCoastLumberandBuildingMaterial Association 177ParkshoreDr. Folsom,CA95630 Tel.:916D235D7490Fax:916D235D7496 lumberassociation.org WestCoastLumberInspectionBureau P.O.Box23145 Tigard,OR97281 Tel.:503D639D0651Fax:503D684D WesternHardwoodAssociation P.O.Box1095 Camas,WA98607 Tel.:360D835D1600Fax:360D835D WesternRedCedarLumberAssociation 1501D700WestPenderSt. Vancouver,BCCanadaV6C1G8 Tel.:604D891D1262Fax:604D687D WesternWoodProductsAssociation 1500SWFirstAve.,Suite870 Portland,OR97201 Tel.:503D224D3930Fax:503D224D TradeandMarketPublications AmericanLumberandPallet P.O.Box1136 Fayetteville,TN37334 Tel.:931D433D1010Fax:931D433D Crossties 115CommerceDr.,SuiteC Fayetteville,GA30214 Tel.:770D460D Crow smarketreport 4AlfredCir. Bedford,MA01730 Tel.:781D734D8900Fax:781D271D HardwoodMarketReport P.O.Box2633 Memphis,TN38088D2633 Tel.:901D767D9126Fax:901D767D HardwoodReview P.O.Box Charlotte,NC28226 Tel.:800D638D7206Fax:704D543D Lumbermen sequipmentdigest P.O.Box1146 Columbia,TN38401 Tel.:800D477D7606Fax:931D388D NationalHardwoodMagazine 5175ElmoreRd.,Suite23 Memphis,TN38134 Tel.:800D844D1280Fax:901D373D TheNorthernLoggerandTimberProcessor P.O.Box69 OldForge,NY13420 Tel.:315D369D3078Fax:315D369D3736

134 126 PalletEnterprise 10244TimberRidgeDr. Ashland,VA23005 Tel.:804D550D0323Fax:804D550D PalletProfileWeekly 10244TimberRidgeDr. Ashland,VA23005 Tel.:804D550D0323Fax:804D550D RandomLengths P.O.Box867 Eugene,OR97440D0867 Tel.:541D686D SawmillandWoodlotManagement P.O.Box1149 Bangor,ME04402 Tel.:207D945D9469Fax:207D945D TimberProcessing P.O.Box2268 Montgomery,AL36102D2268 Tel.:334D834D WoodProducts P.O.Box1400 Lincolnshire,IL60069 Tel.:847D634D2600Fax:847D634D WoodMarketsMonthlyInternationalReport Suite603,55E.CordovaSt. Vancouver,BCCanadaV6A0A5 Tel.:604D801D5996Fax:604D801D FederalAssistance U.S.ForestServiceNorthernRegion P.O.Box7669 Missoula,MT59807D7699 Tel.:406D329D33511Fax:406D329D U.S.ForestServiceRockyMountainRegion 740SimmsSt. Golden,CO80401 Tel.:303D275D U.S.ForestServiceSouthwesternRegion 333BroadwaySE Albuquerque,NM87102 Tel.:505D842D U.S.ForestServiceIntermountainRegion 32425thSt. Ogden,UT84401 Tel.:801D625D U.S.ForestServicePacificSouthwestRegion 1323ClubDr. Vallejo,CA94592 Tel.:707D562D9240Fax:707D562D U.S.ForestServicePacificNorthwestRegion 1220SW3rdAve. Portland,OR97204 Tel.:503D808D U.S.ForestServiceSouthernRegion 1720PeachtreeRd.NW Atlanta,GA30309 Tel.:404D347D4095Fax:404D347D U.S.ForestServiceAlaskaRegion 3301CSt.,Suite.202 Anchorage,AK99503 Tel.:907D743D9467Fax:907D443D9479

135 127 U.S.ForestServiceNortheasternAreaState andprivateforestry Mid]Atlantic 180CanfieldSt. Morgantown,WV26505 Tel.:304D285D1530Fax:304D285D U.S.ForestServiceNortheasternAreaState andprivateforestry Midwest 1992FolwellAve. St.Paul,MN55108 Tel.:651D649D5246Fax:651D649D U.S.ForestServiceNortheasternAreaState andprivateforestry NewEnglandandNew York 271MastRd. Durham,NH03824 Tel.:603D868D7716Fax:603D868D U.S.ForestServiceNortheasternAreaState andprivateforestry EasternHardwood Region 301HardwoodLane Princeton,WV24740 Tel.:304D487D U.S.ForestServiceForestProducts Laboratory ForestProductsMarketingUnit OneGiffordPinchotDr. Madison,WI53726D2398 Tel.:608D231D9200Fax:608D231D U.S.ForestServiceNorthernResearchStation 241MercerSpringsRd. Princeton,WV24740 Tel.:304D431D2700Fax:304D431D U.S.ForestServiceNorthernResearch Station 359MainRd. Delaware,OH43015 Tel.:740D368D0030Fax:740D368D U.S.ForestServiceNorthernResearch Station 1992FolwellAve. St.Paul,MN55108 Tel.:651D649D5000Fax:651D649D U.S.ForestServicePacificNorthwest ResearchStation 1220SW3rdAve. Portland,OR97204 Tel.:503D808D U.S.ForestServiceSitkaWoodUtilization R&DCenter 204SiginakaWay Sitka,AK99835 Tel.:907D747D4308Fax:907D747D U.S.ForestServiceSouthernResearch Station(BrooksForestProductsCenter) 1650RambleRd. Blacksburg,VA24061D0503 Tel.:540D231D4016Fax:540D231D ExportingAssistance ForeignAgriculturalService 1400IndependenceAve.AGStop1047 Washington,DC20250D1047 Tel.:202D720D0638Fax:202D720D U.S.DepartmentofCommerce 1401ConstitutionAve.,NW Washington,DC20230 Tel.:202D482D0375

136 128 EnvironmentalOrganizations U.S.EnvironmentalProtectionAgency 1200PennsylvaniaAve.,NW Washington,DC20460 Tel.:202D272D U.S.GreenBuildingCouncil 2101LSt.,NW,Suite500 Washington,DC20037 Tel.:800D795D UniversityResearchCenters BiomaterialsandWoodUtilizationResearch Center WestVirginiaUniversity P.O.Box6125 Morgantown,WV26506 Tel.:304D293D7601 wdscapps.caf.wvu.edu/biomatwurctr CenterforEnvironmentandNatural ResourcePolicy UniversityofMinnesota 1530ClevelandAve.N. St.Paul,MN55108 Tel.:612D624D7286 enrpolicy.forestry.umn.edu CenterforForestBusiness UniversityofGeorgia 180E.GreenSt. Athens,GA30602D2152 Tel.:706D542D CenterforForestProductsBusiness VirginiaTech 1650RambleRd. Blacksburg,VA24061 Tel.:540D231D CenterforInternationalTradeinForest Products UniversityofWashington P.O.Box Seattle,WA98195D2100 Tel.:206D543D CenterforSupplyChainResearch UniversityofMinnesota 111ChurchSt.SE Minneapolis,MN,55455 Tel.:612D626D ForestBioproductsResearchInstitute UniversityofMaine 5737JennessHall,Room213 Orono,ME04469 Tel.:207D581D1431 forestbioproducts.umaine.edu ForestProductsCenter UniversityofTennessee 2506JacobDr. Knoxville,TN37996D4570 Tel.:865D946D1129 wood.tennessee.edu ForestProductsManagementDevelopment Institute(FPMDI) UniversityofMinnesota 2004FolwellAve. St.Paul,MN55108 Tel.:612D624D0770 fpmdi.cfans.umn.edu ForestResourcesInstitute StephenF.AustinStateUniversity P.O.Box6109 Nacogdoches,TX75962 Tel.:936D468D3301

137 129 ForestandWildlifeResearchCenter MississippiStateUniversity 201LocksleyWay Starkville,MS39759 Tel.:662D325D2243 fwrc.msstate.edu LouisianaForestProductsDevelopment Center LouisianaStateUniversity Room227,SchoolofRenewableNatural Resources BatonRouge,LA70803 Tel.:225D578D NaturalResourcesResearchInstitute UniversityofMinnesota 5013MillerTrunkHwy. Duluth,MN55811 Tel.:218D720D NorthStarInitiativeforSustainable Enterprise UniversityofMinnesota 1954BufordAve St.Paul,MN55108 Tel.:612D624D2648 northstar.environment.umn.edu OlympicNaturalResourcesCenter UniversityofWashington 1455S.ForksAve. ForksWA98331 Tel.:360D374D OregonWoodInnovationCenter OregonStateUniversity 119RichardsonHall Corvallis,OR97331D5751 Tel.:541D737D4212 owic.oregonstate.edu Schilling slab UniversityofMinnesota 2004FolwellAve. StPaul,MN55108 Tel.:612D624D1761 schillinglab.cfans.umn.edu SustainableInnovationManagement VirginiaTech 1650RambleRd. Blacksburg,VA24061 Tel.:540D231D7107 sim.sbio.vt.edu TimberMart]SouthCenterforForest Business UniversityofGeorgia Athens,GA30602D2152 Tel.:706D542D UrbanForestEcosystemsInstitute CaliforniaPolytechnicStateUniversity SanLuisObispo,CA93407 Tel.:805D756D1111 ufei.calpoly.edu ValueAddedWoodProductsManufacturing NorthCarolinaStateUniversity CampusBox8003 Raleigh,NC27695 Tel.:919D515D5581 www4.ncsu.edu/~pmitchel

138 130

139 Appendix&B:&Business&Plan&for&The&House&of&Pine& Thissamplebusinessplanisincludedinthispublicationwithexpresspermission frompaloaltosoftwareinc.names,locations,andnumbersmayhavebeen changed,andsubstantialportionsoftheoriginalplantextmayhavebeenomitted topreserveconfidentialityandproprietaryinformation. Youarewelcometousethisplanasastartingpointtocreateyourown,butyoudo nothavepermissiontoresell,reproduce,publish,distribute,orevencopythisplan asitexistshere.additionalsampleplansandresourcesareavailableat Requestsforreprints,academicuse,andotherdisseminationofthissampleplan shouldbe edtothemarketingdepartmentofpaloaltosoftwareinc.at 1D800D229D7526. Copyright PaloAltoSoftware,Inc.,1995]2009Allrightsreserved. TableofContents 1ExecutiveSummary 132 Mission KeystoSuccess CompanySummary CompanyOwnership. 133 CompanyLocationsandFacilities StartDupSummary ProductsandServices MarketAnalysisSummary MarketSegmentation StrategyandImplementationSummary. 136 CompetitiveEdge. 136 SalesStrategy ManagementSummary PersonnelPlan FinancialPlan.138 BreakDevenAnalysis 138 ProjectedProfitandLoss 139 ProjectedCashFlow 140 ProjectedBalanceSheet.141 BusinessRatios

140 1.ExecutiveSummary Producingandsellingfurnitureisa$12billionindustry.Thefocusoftheindustryis ontheaffluentcustomerwhocanspendupwardsto$3,000onfurniturepurchases. InRichmond,therearefifteenfurniturestoresthatarecompetingforthese customerswithdeeppockets.thosecustomerswhocan'taffordthesehighprices areleftwithapoorselectionofinferiorproducts. IntheRichmondMetroarea,thereareapproximately50,000residentswithmodest incomesthatdonothaveafurniturestoretocatertotheirneedsforaffordable qualityfurniture.thisincomedemographichasgrowntremendouslyoverthepast fiveyearsbuthasnotbeenrespondedtobytheareafurniturestores.targeting customerswithmodestincomesisgoodbusiness.theyareexpectedtomakeup halfofmetropopulationby2020 makingthemthefastestdgrowingsegmentof thecity'shousingmarket. TherearethreemodestDincomehousingrenovationprojectsunderwayinRichmond withacombinedtotalof1,500unitsthatwillbesoldasaffordablehousing. AstheRichmondMetrosectionrevives,TheHouseofPinewilloffercustomized, readydtodfinishpinefurniturethat'shanddmadeandsurprisinglyaffordable.we offer: TrulyCustomFurniture:Anunfinishedfurniturepiecethatiscraftedforthe customer.we'llcustomizeanypieceorcreateawholenewpiecefroma customer'sroughsketch. HeirloomQualityFurniture:Thefurnitureismadetolastforgenerations.It's handcrafted,soeachpieceisunique. HandmadefromQualityPine:Everypieceismadebyaprofessionalcraftsman, fromthefinestpineavailable.everypieceofpineischeckedforgrainandtexture beforeit'sused. Mission& TheHouseofPine'sMissionissimple.Thecustomergetswhathe/shewants; furniture(onepieceorawholehousefull)thatfitsthecustomer'sspace,taste, budgetandstylepreference,fromtoptobottom Keys&to&Success& Offerourcustomersaffordablequalityfurniturethatwilllast. Customizeanypieceasrequestedbyacustomer. 132

141 Ifcustomizingapiecewon'tquitework,createawholenewpiecefromscratch, exactlytothecustomer'sspecifications. $1,100,000 $1,000,000 $900,000 $800,000 $700,000 $600,000 $500,000 $400,000 $300,000 $200,000 $100,000 $0 Year1 Year2 Year3 Chart:Highlights Sales Grossmargin Netprofit 2.CompanySummary TheHouseofPinewilloffercustomized,readyDtoDfinishpinefurniturethat's handmadeandsurprisinglyaffordable.ourtargetcustomersareyoungfamiliesand youngadultswithmodestincomeswhoarelookingforthesameselectionand qualitythatthehighdendcustomerreceives.eachpieceishandcraftedfromthe finestpineandbuilttolastforgenerations. Company&Ownership& TheHouseofPineisownedbyRichardPutnam.Richardhasover10yearsof experienceinfurnituremanufacturing. Company&Locations&and&Facilities& TheHouseofPinewillbecentrallylocatedintheindustrialsectionoftheRichmond Metroarea. TheHouseofPine'sstartDupcostsconsistmostlyoffurnituremanufacturing equipmentandtransportcontainers.richardputnamwillinvest$50,000.in addition,hewillsecurea$130,000loan. 133

142 START]UPREQUIREMENTS Start]upExpenses Legal $1,000 Stationeryetc. $200 Insurance $1,000 Rent $2,000 ExpensedEquipment $60,000 TotalStart]upExpenses $64,200 Start]upAssets CashRequired $5,800 StartDupInventory $50,000 OtherCurrentAssets $0 LongDtermAssets $60,000 TotalAssets $115,800 TOTALREQUIREMENTS $180,000 START]UPFUNDING StartDupExpensestoFund $64,200 StartDupAssetstoFund $115,800 TotalFundingRequired $180,000 Assets NonDcashAssetsfromStartDup $110,000 CashRequirementsfromStartDup $5,800 AdditionalCashRaised $0 CashBalanceonStartingDate $5,800 TotalAssets $115,800 LiabilitiesandCapital Liabilities CurrentBorrowing $0 LongDtermLiabilities $130,000 AccountsPayable(OutstandingBills) $0 OtherCurrentLiabilities(interestDfree) $0 TotalLiabilities $130,000 Capital PlannedInvestment RichardPutnam $50,000 Other $0 AdditionalInvestmentRequirement $0 TotalPlannedInvestment $50,000 LossatStartDup(StartDupExpenses) ($64,200) TotalCapital ($14,200) TotalCapitalandLiabilities $115,800 TotalFunding $180,

143 3.ProductsandServices TheHouseofPinewillofferwoodproductsforthebedroom,livinganddining room,andthestorageroom: Beds Dressers Chest Armoires Entertainmentcenters Bookcases Tables Chairs Benches 4.MarketAnalysisSummary IntheRichmondMetroarea,thereareapproximately50,000residentswithmodest incomes.theyareexpectedtomakeuphalfofthemetropopulationby2020 makingthemthefastestdgrowingsegmentofthecity'shousingmarket. ItisestimatedthattheRichmondMetroareawillneed10,000unitsofaffordable housinginthenextsevenyears.currently,therearethreerenovationprojectsthat represent1,500newhousingunits.nextyear,twonewconstructionprojectswill becompletedofferinganother1,000unitsofaffordablehousing.another1,000d unitproject,tobelocatedinthegardenmeadowssectiondowntown,iscurrently intheplanningstages. TherearechangesoccurringaroundtheStateUniversity,locateddowntownthat willalsoimpacttherevivaloftherichmondmetroarea.twooffdcampushousing projectswillbecompletedmiddyearthatwilladdanadditional2,000familyhousing unitstotheuniversityarea. Market&Segmentation& ThegrowthofaffordablehousingintheRichmondMetroareaiscriticaltothe successofthehouseofpine. WewillaggressivelymarketourtargetcustomerswholiveintheMetroarea: Youngworkingfamilies:17%oftotalmarket. Students:27%oftotalmarket. 135

144 Youngadults:56%oftotalmarket. MARKETANALYSIS Potential Customers Growth Year1 Year2 Year3 Year4 Year5 CAGR* YoungWorking 12% 3,000 3,360 3,763 4,215 4, % Families Students 10% 5,000 5,500 6,050 6,655 7, % YoungAdults 10% 10,000 11,000 12,100 13,310 14, % Total 10.34% 18,000 19,860 21,913 24,180 26, % *CAGR=CompoundAnnualGrowthRate 5.StrategyandImplementationSummary TheHouseofPinewillfocusonthemodestincomefurniturecustomerwholivesin therichmondmetroarea. Competitive&Edge& MostofRichmond'sfifteenfurniturestoresaredispersedthroughoutthecity adjacenttoaffluentorsuburbancommunities.thestoresdowntownarehighend andoffernoaffordableproductstothemetroresidents. Theprimaryreasonforthepriceofthefurnitureisthetypeofwoodthatisused.A bedroomsetmadeofpinecancostacustomer$400.thesamesetmadeinoakor maplewillcost$800.theprofitsarehigherbyfocusingonthemoreexpensive wood.whenusingpine,manymanufacturersimprovetheirprofitsbyusing cheaperconstructiontechniques.theresultingpoorqualityoftheseproductshas addedtoapopularmisconceptionthatpineisaninferiorwood. TheRichmondfurniturestoresofferaverylimitedselectionofstylesinpine.Most productsareselectedtomaximizethestore'sprofit,notthecustomer's satisfaction,sinceitisbelievedthecustomerhasfewoptions. TheHouseofPinewillbuilditsfurnituretolastgenerationsandwillofferthe customerallthepopularstyles. Sales&Strategy& WewilladvertiseintheuniversitydailystudentnewspaperaswellastheMetro areaadvertisingflyer.intheadvertisementsforthestoreopening,wewillhavea 20%offcoupon.Wewillcontinuethisdiscountforthefirstmonthofoperation. 136

145 Themetroareaalsohassixcommunityorganizationsthatsendoutweeklyflyersto allcommunityresidents.wewilladvertiseintheseflyers. SALESFORECAST Year1 Year2 Year3 Sales Furniture $964,000 $1,000,000 $1,050,000 Other $0 $0 $0 TotalSales $964,000 $1,000,000 $1,050,000 DirectCostofSales Year1 Year2 Year3 Furniture $432,000 $430,000 $450,000 Other $0 $0 $0 SubtotalDirectCostofSales $432,000 $430,000 $450,000 $100,000 $90,000 $80,000 $70,000 $60,000 $50,000 $40,000 $30,000 $20,000 $10,000 $0 6.ManagementSummary Chart:Monthlysales Thestore'sowner,RichardPutnam,hasworkedinthefurnituremanufacturing industryforovertenyears.thisexperiencebeganatingram'sfinefurniture,where heworkedforfiveyears.withinthreeyears,hereachedthepositionofshift manager.mostrecently,richardwastheoperationsmanageratwasserman FurnitureManufacturing. RichardisanexcellentstaffsupervisorandwilldowellmanagingthestaffofThe HouseofPine. 137

146 Personnel&Plan& TheHouseofPinewillhavethefollowingstaffmembers: Manager Assistantmanager Officemanager/accountant Checkers(1.5) Productionstaff(5) Stockers(1.5) PERSONNELPLAN Year1 Year2 Year3 Manager $36,000 $40,000 $45,000 AssistantManager $36,000 $39,000 $43,000 OfficeManager/Bookkeeper $36,000 $39,000 $42,000 Checkers $32,400 $35,500 $40,000 ProductionStaff $120,000 $130,000 $140,000 Stockers $39,600 $43,000 $46,000 TotalPeople TotalPayroll $300,000 $326,500 $356,000 7.FinancialPlan Break@even&Analysis& BREAK]EVENANALYSIS MonthlyRevenueBreakDeven $69,767 Assumptions: AveragePercentVariableCost 45% EstimatedMonthlyFixedCost $38,

147 Projected&Profit&and&Loss& PROFORMAPROFITANDLOSS Year1 Year2 Year3 Sales $964,000 $1,000,000 $1,050,000 DirectCostofSales $432,000 $430,000 $450,000 OtherProductionExpenses $0 $0 $0 TotalCostofSales $432,000 $430,000 $450,000 GrossMargin $532,000 $570,000 $600,000 GrossMargin% 55.19% 57.00% 57.14% Expenses Payroll $300,000 $326,500 $356,000 SalesandMarketingandOther $60,000 $60,000 $60,000 Expenses Depreciation $11,424 $11,424 $11,424 LeasedEquipment $0 $0 $0 Utilities $9,600 $9,600 $9,600 Insurance $12,000 $12,000 $12,000 Rent $24,000 $24,000 $24,000 PayrollTaxes $45,000 $48,975 $53,400 Other $0 $0 $0 TotalOperatingExpenses $462,024 $492,499 $526,424 ProfitBeforeInterestand $69,976 $77,501 $73,576 Taxes EBITDA $81,400 $88,925 $85,000 InterestExpense $11,917 $10,001 $8,002 TaxesIncurred $17,418 $20,250 $19,672 NetProfit $40,641 $47,250 $45,902 NetProfit/Sales 4.22% 4.72% 4.37% 139

148 Projected&Cash&Flow& PROFORMACASHFLOW Year1 Year2 Year3 CashReceived CashfromOperations CashSales $723,000 $750,000 $787,500 CashfromReceivables $198,158 $248,400 $260,278 SubtotalCashfromOperations $921,158 $998,400 $1,047,778 AdditionalCashReceived SalesTax,VAT,HST/GSTReceived $0 $0 $0 NewCurrentBorrowing $0 $0 $0 NewOtherLiabilities(interestD $0 $0 $0 free) NewLongDtermLiabilities $0 $0 $0 SalesofOtherCurrentAssets $0 $0 $0 SalesofLongDtermAssets $0 $0 $0 NewInvestmentReceived $0 $0 $0 SubtotalCashReceived $921,158 $998,400 $1,047,778 Year1 Year2 Year3 Expenditures ExpendituresfromOperations CashSpending $300,000 $326,500 $356,000 BillPayments $539,935 $627,157 $637,580 SubtotalSpentonOperations $839,935 $953,657 $993,580 AdditionalCashSpent SalesTax,VAT,HST/GSTPaidOut $0 $0 $0 PrincipalRepaymentofCurrent $0 $0 $0 Borrowing OtherLiabilitiesPrincipal $0 $0 $0 Repayment LongDtermLiabilitiesPrincipal $19,992 $19,992 $19,992 Repayment PurchaseOtherCurrentAssets $0 $0 $0 PurchaseLongDtermAssets $0 $0 $0 Dividends $0 $0 $0 SubtotalCashSpent $859,927 $973,649 $1,013,572 NetCashFlow $61,231 $24,751 $34,206 CashBalance $67,031 $91,782 $125,

149 Projected&Balance&Sheet& PROFORMABALANCESHEET Year1 Year2 Year3 Assets CurrentAssets Cash $67,031 $91,782 $125,988 AccountsReceivable $42,842 $44,442 $46,664 Inventory $51,700 $39,895 $43,895 OtherCurrentAssets $0 $0 $0 TotalCurrentAssets $161,573 $176,118 $216,547 Long]termAssets LongDtermAssets $60,000 $60,000 $60,000 AccumulatedDepreciation $11,424 $22,848 $34,272 TotalLongDtermAssets $48,576 $37,152 $25,728 TotalAssets $210,149 $213,270 $242,275 Year1 Year2 Year3 LiabilitiesandCapital CurrentLiabilities AccountsPayable $73,700 $49,563 $52,658 CurrentBorrowing $0 $0 $0 OtherCurrentLiabilities $0 $0 $0 SubtotalCurrentLiabilities $73,700 $49,563 $52,658 LongDtermLiabilities $110,008 $90,016 $70,024 TotalLiabilities $183,708 $139,579 $122,682 PaidDinCapital $50,000 $50,000 $50,000 RetainedEarnings ($64,200) ($23,559) $23,691 Earnings $40,641 $47,250 $45,902 TotalCapital $26,441 $73,691 $119,593 TotalLiabilitiesandCapital $210,149 $213,270 $242,275 NetWorth $26,441 $73,691 $119,593 Business&Ratios& Businessratiosfortheyearsofthisplanareshownbelow.Industryprofileratios basedonthestandardindustrialclassification(sic)code5712,furniturestores,are shownforcomparison.thefollowingisanexplanationoftheplansdivergencewith industryratioprofile. SalesGrowth willstartbelowtheindustryaveragebutwillbeclosertothe averageafterthethirdyearofoperation. AccountsReceivable isslightlybelowaverageduetothelowuseofcreditfor purchases(25%). Inventory isbelowtheindustryaveragebecause20%ofthefurniturewillbe builttoorder. LongTermAssets,LongTermLiabilities,andExpenseofSales arehigher becausethehouseofpinebuildsfurnitureonsite. 141

150 RATIOANALYSIS Year1 Year2 Year3 Industry SalesGrowth n.a. 3.7% 5.0% 6.2% PercentofTotalAssets(TotalAssets=100%) AccountsReceivable 20.4% 20.8% 19.3% 21.0% Inventory 24.6% 18.7% 18.1% 38.8% OtherCurrentAssets 0.0% 0.0% 0.0% 21.7% TotalCurrentAssets 76.9% 82.6% 89.4% 81.5% LongDtermAssets 23.1% 17.4% 10.6% 18.5% CurrentLiabilities 35.1% 23.4% 21.7% 44.9% LongDtermLiabilities 52.4% 42.2% 28.9% 13.7% TotalLiabilities 87.4% 65.4% 50.6% 58.6% NetWorth 12.6% 34.6% 49.4% 41.4% PercentofSales(Sales=100%) GrossMargin 55.2% 57.0% 57.1% 37.6% Selling,General&Admin.Exp. 52.% 52.3% 52.8% 20.8% AdvertisingExpenses 6.2% 6.0% 5.7% 4.4% ProfitBeforeInterestandTaxes 7.3% 7.8% 7.0% 1.6% MainRatios Current Quick TotalDebttoTotalAssets 87.4% 65.4% 50.6% 58.6% PreDtaxReturnonNetWorth 219.6% 91.6% 54.8% 3.8% PreDtaxReturnonAssets 27.6% 31.6% 27.1% 9.2% AdditionalRatios NetProfitMargin 4.2% 4.7% 4.4% n.a. ReturnonEquity 153.7% 64.1% 38.4% n.a. ActivityRatios AccountsReceivableTurnover n.a. CollectionDays n.a. InventoryTurnover n.a. AccountsPayableTurnover n.a. PaymentDays n.a. TotalAssetTurnover n.a. DebtRatios DebttoNetWorth n.a. CurrentLiab.toLiab n.a. LiquidityRatios NetWorkingCapital $87,873 $126,555 $163,889 n.a. InterestCoverage n.a. AdditionalRatios AssetstoSales n.a. CurrentDebt/TotalAssets 35% 23% 22% n.a. AcidTest n.a. Sales/NetWorth n.a. 142

151 Good business prac ces are key for the long-term success of any business. Within this book you will find all the informa on needed to start a small forest products company, from business planning to financial management. Included is a sample business plan that readers can use as a guide for the prepara on of their own business plan.