CVELP: Course Material: Operations

• OVERVIEW
• Course Material
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This section will help you understand how to set up your business so that you can effectively and efficiently provide products and/or services to your customers. The definition of efficient and effective will change as you grow and you will need to plan for this change. For example, when you start your business you may want to keep overhead costs low as you test many of the assumptions that you used in developing this plan. Accordingly you may not want to commit to any long-term financial obligations such as a long-term lease. As you gain business knowledge, the long-term lease may become a necessity to insure that a competitor cannot take your established territory from you or you may want to insure the landlord cannot arbitrarily increase your rent as he sees your success. We will discuss factors and terms such as overhead, fixed and variable cost, the advantages and risk inherent in making decisions related to these issues, location significance, ability and readiness to serve and many more issues.

PRODUCT DEVELOPMENT
Explain how your products and/or services are created, built, or developed. If you are a manufacturer or are in construction, this section may require more detail. If you are a service business or a retailer, this section could be quite simple. For manufacturers and/or construction firms you should state:

• What raw materials you use and how you get them.

• The process you undertake to turn the raw materials into your final product.

• Any vendors, suppliers, and/or subcontractors that help create the final product.

• Any agreements in place with vendors, suppliers and/or subcontractors.

Retailers should state:

• Your overall product line.

• Your primary vendors and suppliers.

• Back-up or secondary vendors and suppliers you can use in case of emergency or unanticipated demand.

• Any agreements in place with vendors and suppliers.

Service Businesses should state:

• A brief overview of raw materials used (if any).

• The process(es) you undertake to produce the service.

• Any vendors, suppliers, and/or subcontractors that help create the final product.

• Any agreements in place with vendors, suppliers and/or subcontractors.

EQUIPMENT, FACILITY AND STAFFING 
Equipment - You will need to discuss in your plan what equipment you will need/use to create the product or conduct the service. If you need very little equipment, state what you need and explain why. If your business requires the use of very specialized machinery or equipment state what it is and how it will be used. Equipment used by a business can range from commonly-know items such as computers and cash registers to complex manufacturing, inventory, and or construction machinery. Remember to keep this section simple and easy for the reader to follow. Simply list your equipment needs and, if the list is large, make it an attachment to your plan.

Facility – If your business operates outside of your home, state what it will take to establish your facility (e. g. leasehold improvements like counters, walls for offices, installation and purchase or lease of equipment) and also include the cost to get the business started. Do you need a sign? Do you have license qualifications and permit requirements? What will it take to get this going? Ask others in a similar or same business for some input. If the locals will not help you go outside your market where they will possibly be more cooperative. Entrepreneurs like to talk about their business, especially if you are not going to compete locally with them.

Next, you should discuss any of the following issues if they apply to your business:

• Do you need traffic?

• Do you need to be close to shipping?

• Is image an issue?

• Do you want to be close to competitors or far away (your product needs comparison-shopping so competitors are welcome e.g. auto dealers, versus you pull from a small customer radius and need to stay away from competitors to avoid sharing a market)? Are you a destination business (e. g. large department store or grocery store) or do you need to be close to someone who will pull customers in?

• Is visibility (seeing you business) critical?

If your business is going to be home-based, state why that location is appropriate.

• Do you offer a service?

• Is it a mail-order business?

• Do you have a workshop in your garage?

• Are customers only contacted at their location?

Staffing – Discuss any specialized skills, certifications, and/or training required for you, your employees, and your subcontractors. Often, these skills are one of the competitive advantages you will use to set your business apart from the competition. They can be quite simple, or even considered standards for your type of business:

• Bonded/insured workers

• Contractor’s license

• Union membership

Or, they can be quite specialized:

• Technical/trade certifications

• Accreditation from professional organizations

• College coursework or degrees

DISTRIBUTION
Distribution is simply how your customers purchase your products/services and how they are delivered to them. Often overlooked, distribution is a fundamental business plan element and must give the reader a clear understanding of the way (or ways) your product/service gets to the customer. Your distribution strategy can be just one simple process (“customers drop off their vehicles at my shop and return to pick them up when the repair work is done.”), or can be a combination of a number of different processes. As a starting point, consider the following and feel free to customize your strategy to best suit your business’ capability and your customers’ needs:

• On-site purchasing (in a store or showroom)

• Purchasing through direct sales (at the customer’s location)

• Purchasing via catalog/mail

• Purchasing via Internet

• Receipt via customer pick-up

• Receipt via personal delivery

• Receipt via third-party shipping

• Service conducted off-site

• Service conducted on-site

Finish your distribution strategy with brief mention of your service levels such as:

• Hours/days of service (ie: Monday through Friday from 8-5)

• Standard of service (guarantees/warranties)

• Quality (quality of products/materials used and/or services provided)

BREAKEVEN POINT
This tool will help with several decisions including buy versus rent, how much readiness to serve can you afford, what are your overhead costs that need to be covered every month and how to evaluate the alternatives (do "what ifs"). Being able to chart or formally calculate this is important but understanding the concept is essential. The concept of "readiness to serve" relates to the fact you will have cost for people and capacity in order to open for business everyday regardless if it comes in at all and in the quantity you plan for.

Step one: We need to start with identifying your fixed expenses and variable expenses

For example (metal fabrication business)

Fixed Costs:	Facility rent	$1000	/per month
	Equipment rent	500	/per month
	Utilities (assumes basic service)	500	/per month
	Truck rent	400	/per month
Total fixed cost		$2400	/per month
Variable cost:	Metal	$1000	/per project
	Welding supplies	100	/per project
Total variable cost		$1100	/per project

Step two: What price will you charge?

Sales price: (determined by the market) $1500/per project

Step three: Calculate the breakeven point

You know that your sales price is $1500 and that it will cost you $1100 for each one you make to sell. Therefore, you will clear $400 after paying for those costs that vary based on the amount of business you do. But you have not covered all of the business expenses. You have fixed expenses that occur every month regardless if you have no sales or twenty. We can calculate what it takes to cover the fixed cost after paying all of the variable costs by dividing the $400 (our margin between sales price and variable cost) into our fixed cost.

Breakeven: $2400/$400=6 projects

At six projects per month we breakeven but notice we did not include any salary for the entrepreneur. Also if you need to add personnel for growth they would have to be put into this equation. Generally they become fixed expense unless you can pay them by the job or piece.

This model can help you understand the concept of overheads. We can add to the dynamics of this model by suggesting entrepreneurs may want to have less fixed costs. For example, source out part of the fabrication and they would need less facility, equipment and then the related cost would be less than $2400, possibly as low as $1200. Therefore, in the months that business is slow and you are unable to cover your fixed cost, you will lose less. But in the good months since you will not make as much because as you sell more and more you will continue to pay for the part of the fabrication that you source out to avoid the fixed cost of so much equipment. This arrangement causes your variable cost to increase. Alternatively, if you fixed a lot of your costs and sell over you breakeven, this is known as economies of scale. The term economies of scale means that you will make more money when sales are high because as your revenue (sales) goes up, your cost will not. The equipment costs the same regardless of how much you use it. Complicating this decision is the need for initial capital many times to fix cost if it requires equipment purchases. In this example we would have avoided the additional variable expense of out-sourcing some of the fabrication, but we now have a new fixed cost called interest, which is paid to the bank that financed the equipment.

There is another way of understanding this concept. Regardless of the type of industry that you are in, manufacturing or service, you will have fixed costs. The concept of readiness to serve is critical. For example, a temporary employment agency has rent and equipment but they have additional expense in employees who must be available to take calls from potential clients (users of temporary employees) and employees who form the inventory of temporary workers that will be sent out on assignment. To better understand this concept, do some "what ifs". What if I source out versus buy the equipment to do it myself? What if I hire enough staff versus use an independent sales representative who is paid a commission? Don't forget the change in performance that you get with these decisions, both good and bad.

THE BOTTOM LINE
This section of your business plan should clearly state how your products/services are created, specialized equipment you use (if any), specific skills/training/certifications needed by staff, how you get your products/services to your customers, and your breakeven point.