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- 1. 1 Section 2 Team 9 Fall 2013 Business Plan Business Name: The Wiper Diaper Corporation Business Idea: On-The-Go Diapers Team Members: Email Address Michael Calo calomr@dukes.jmu.edu Zachary Conte contezl@dukes.jmu.edu Tyler Faley faleytj@dukes.jmu.edu Gregory Heckel heckelgm@dukes.jmu.edu Cal Rider ridercp@dukes.jmu.edu Joel Torreyson torreyje@dukes.jmu.edu
- 2. 2 TABLE OF CONTENTS 1. Elevator Pitch 4 2. Our Business 4 3. Our Product 5 4. Industry Analysis 5 5. Marketing a. Market Segmentation and the Target Market 6 b. Positioning Strategy 7 c. Pricing Strategy 8 d. Pricing Objective 8 e. Sales Forecast 8 f. Promotional Strategy 9 g. Packaging and Branding 10 6. Operations a. Operations Strategy 11 b. Inventory Management 11 c. Suppliers of Outsourced Goods 11 d. Triple Bottom Line 12 e. Process Flow Chart 13 f. Proactive and Reactive Quality Control 14 g. Distribution 14/15 7. Management a. Organization Staffing and Employee Acquisition Plan 15 b. Employee Motivation Plan 16 c. Labor Costs & Benefits 18 d. Outline of Employee Benefits 18 8. Financial Narrative 17 9. Financial Statements 19-23 10. Financial Assumptions 24
- 3. 3 Executive Summary The Wiper Diaper Corporation Michael Calo 1555 North Freedom Boulevard, Provo, Utah, 84604 Phone: (703) 405-0155 Email: calomr@dukes.jmu.edu Industry: Diaper Manufacturing Number of Employees: 33 Bank: Wells Fargo Amount of Financing Sought: $12,870,600 Current Investors: Co-founders: .98%: $127,000 Loans: 34.60%: $4,497,600 Venture Capitalists: 64.4%: $8,373,000 Use of Funds: Factory: $2.6 Million, Custom Machinery: $4 Million, Salaries: $1,526,000, Materials: $23,029,983 in 2012, Promotional Expenses: $6-6.13 Million per year Business Description: The Wiper Diaper Corporation is a business-to-business organization centrally located outside Provo, Utah, that manufacturers and sells a convenient, two-in-one diaper. Due to the increasing awareness of our product, we predict an annual growth in our market share of 23.7% giving us a market share of 1.5% by year 5. Products/Services: In the second year, we manufacture 5,907,687 boxes of diapers at a cost $3.90 per box creating an estimated total cost of $23,039,983. Estimated sales of 5,453,250 boxes in 2015, will result in revenue of $32,719,502. Due to increased need for convenience products, a diaper and wipe combination product will enable parents to easily complete the diaper changing process. Company Background: Brand-new business-to-business corporation established in 2013, with manufacturing beginning April, 2013. Management: General, Sales, HR, Operations Managers, Sales Reps, and Accountant: Minimum of BA and year of prior work experience Competitive Advantage: Through the addition and patenting of an adhesive wipe pouch to the standard diaper, we can effectively differentiate our product, creating a competitive advantage in the mind of consumers. Markets: Active and efficient parents that shop at Wal-Mart and Target’s throughout the nation. Focus on higher income families with discretionary income for higher quality products. Outdoor Recreation Economy: Growth of 5% from 2005-2011. Estimated 3,992,466 births per year as of 2013. There are a total of 103 companies within the industry. Distribution Channels: Our two primary distribution channel partners include Wal-Mart and Target Distribution Centers through the United States. Competition: Potential competitors include Procter and Gamble with 37.4% market share, Kimberley Clark with 32% and Johnson and Johnson with a 4% share of the market. There is overall industry revenue of $11.5 billion and annual growth of .1% throughout the last 5 years. With improving per capita income, there is an expected revenue boost within the next 5 years (IBIS World, 2013). Financial Projections (Unaudited): 2014 2015 2016 2017 2018 Revenue: $17,496,329 $32,719,502 $40,994,637 $51,121,986 $64,008,106 EBIT: $(664,037) $4,134,199 $4,947,104 $8,238,353 $12,830,343
- 4. 4 Elevator Pitch- The Wiper Diaper Corporation is a diaper manufacturing company that will bring change to the market by creating a differentiated, convenience product. Our patented Wiper Diaper has a cellophane pouch containing three wipes adhered directly to the front of the diaper. This added convenience of the Wiper Diaper’s wipe feature would appeal to caretakers of the 3,992,466 children born in the United States yearly. While this $6.6 billion industry has reached its maturity stage, with many key competitors having over 60 years of experience, recently some specialty brands have entered the market and become profitable by appealing to niche markets. Although each brand has found moderate success they haven’t created a product with an innovative feature like the Wiper Diaper. Our Business- The Wiper Diaper Corporation is a business-to-business organization that will be founded just outside Provo, Utah, the second best city for business in the country (Forbes, 2013). We chose to form as a corporation, taxed at 35%, due to the high startup costs associated with the manufacturing process. As an emerging company, The Wiper Diaper Corporation’s mission is to provide caretakers of children with the convenience product that eases the on-the-go diaper changing experience. The Wiper Diaper Corporation’s vision is to change the way every consumer views the changing experience by providing a convenience product that facilitates the lives of active families. Our factory’s efficiency in the workplace will be achieved through the cross training of all employees and through numerous personal and family benefits. From our factory, we will ship in raw materials, manufacture the diaper, and ship out our finished goods to the 68 Wal-Mart and Target distribution centers across the nation. We chose to selectively distribute our diaper to Wal-Marts and Targets nationally due to their reputation and ability to reach a high volume of diaper consumers on a consistent basis. For more information on our distribution strategy and channel coverage decisions refer to our Operations section on pages 14 and 15. In order to produce the Wiper Diaper, we will use 10 custom machines, purchased from Engineering Production Equipment Incorporated. (Reischl, 2013). Upon receiving raw materials from our outsourced manufacturers, this machinery will automate our production process, creating a higher standard of quality and output rate. For more detailed information on our selection of outsourced suppliers, refer to the operations strategy on page 11. Our Product- The Wiper Diaper Corporation produces a diaper that provides a convenient changing experience by capitalizing on an innovative design. We will patent this design at our inception and we will apply a product adaptation strategy, catering to consumer
- 5. 5 preferences. Adding a highly useful feature to the traditional diaper will establish a point of differentiation from competitors as well as provide an alternative to the substitute, cloth diaper product. Throughout the life cycle of our product we have many tools to ensure the Wiper Diaper’s profitability. In the introduction, awareness is our goal. Our product will be advertised through television commercials and magazine print ads. The Wiper Diaper Corporation will also establish point-of-purchase displays in Wal-Mart and Target to highlight our product among diaper alternatives. Once reaching the growth stage and recovering initial costs, the Wiper Diaper will increase its first-time consumers by providing our product to numerous national hospitals. After reaching maturity, we will keep our market share by pursuing new distribution channels such as rest stops, national, state and amusement parks and other public facilities. Industry Analysis- The diaper manufacturing industry is highly competitive and saturated. Procter and Gamble and Kimberly-Clark dominate the market share of the diaper industry maintaining 35.5% and 30% respectively (IBIS World, 2013). As of 2013, the industry profits in the United States totaled $811.1 Million (IBIS World, 2013). Revenue from production of baby and family care products is estimated to rise at an average annual rate of 1.2% in the five years to 2013 (IBIS World, 2013). With growth projected, Wiper Diaper sees a potential to initially acquire .67% of the market share by targeting the national need for convenience. Along with a growing diaper industry, there are many national trends that will lend to the increased need for the Wiper Diaper. The first is the widespread consumer interest in convenience products. With the creation of a diaper and wipe-pouch combination, we will effectively appeal to this national trend and facilitate the changing process for consumers. Another appealing trend is the public’s increased spending within the outdoor recreation sector. “Despite the uncertainty, more than 140 million Americans make outdoor recreation a priority in their daily lives, proving it with their wallets by putting $646 billion of their hard-earned dollars right back into the economy” (Outdoor Industry Association, 2013). We believe that families partaking in these outdoor activities will value the simplified changing experience and a smaller carrying load. Although the national birth rate has been declining throughout the last 5 years, our targeted niche will provide a sizeable consumer base and return on our operations (Izzo, 2013).
- 6. 6 MARKETING: Marketing Segmentation: Value Shoppers- The first targeted segment is consumers that shop at multi-purpose stores, Target and Wal-Mart. Their national reputation and large channels of distribution will provide a platform to present the Wiper Diaper product to our targeted markets as a trusted and cost effective convenience product. Once distributed to each Wal-Mart and Target and prepared for sale, the Wiper Diaper will differentiate itself through its two-in-one feature. Active Lifestyle- A recent trend in increased outdoor recreation among the public has provided the Wiper Diaper Corporation with a vast market of potential consumers. “The outdoor recreation economy grew approximately 5 percent annually between 2005 and 2011 – this during an economic recession when many sectors contracted” (Outdoor Industry Association, 2013). Due to the large number of active parents we hope to reach, the majority of our promotional advertisements and efforts will be targeted towards this segment of consumers. Environmentally-Friendly/Cloth Diapers- A prominent group of consumers share a belief in purchasing environmentally conscious products. Due to the undesirable components found on all disposable diapers and our added wipe pouch, we deem this market impenetrable. A specific segment of environmentally conscious diaper consumers are reusable cloth diapers users. Although presenting a large number of potential consumers, our inability to satisfy them will eliminate the Wiper Diaper’s ability to profit from their segment. Low-Income Consumers- An additional untargeted segment is the lower income consumers. Due to the comparatively higher cost of our product in relation to the average diaper, consumers in need of low-cost products will find private brands of inferior quality more attractive. By positioning the Wiper Diaper as a cost-efficient item, we could potentially sway a small percentage of this market to purchase our product. Target Market- Active and Efficient Parents Once analyzing an array of segments within the diaper market, The Wiper Diaper Corporation established Active and Efficient Parents as our target market. This target market captures three characteristics that apply to the need for our convenience product. The first is parents due to their demand for a quality diaper for their children. The convenience of a bundle product appeals to parents looking to get the diaper-changing task completed quickly and efficiently.
- 7. 7 We also appeal to efficient shoppers by providing two necessary items in one, at convenient stores like Wal-Mart and Target. Our most exclusive characteristic to our target market is the need for convenient changing product for active families. We believe that the nationwide need for a diaper with on-the-go features will enable the Wiper Diaper to add to the $120.7 Billion in annual outdoor recreation product sales (Outdoor Industry Association, 2013). Positioning Strategy- Because the diaper industry is highly saturated, the best way to create a sustainable disposable diaper would involve establishing a niche. To do this we positioned our product as an innovation to the changing experience. We believe active families will value the new convenience. Industry competitors have been attempting to differentiate themselves by adding features to the diaper such as a wetness indicator, lotion, and stretch sides (Consumer Reports, 2012). As seen on the perceptual map in figure 1-1, brands such as the eco-friendly, Pampers Swaddlers are offered at a comparable average of 33 cents a diaper. The Wiper Diaper’s additional value creates a competitive advantage for our product. In addition, we believe that our positioning on the shelves at Target and Wal-Mart amongst lower quality, cheaper, private brands will display the elite quality the Wiper Diaper provides while maintaining a reasonable price. Pricing Strategy- Our pricing strategy was to offer a high quality, combination- product at a competitive price. By offering our box of 30 diapers at $9.60, a similar price as brands such as Pampers Swaddlers, we encourage a direct comparison between the featured benefits each product presents for the customers. We buy our diapers from our suppliers at Figure 1-1
- 8. 8 10 cents per diaper, including delivery to the warehouse. In boxes of 30, this brings the cost to $3.00. Additional materials including wipes, packets, adhesive and packaging brings the cost per unit to $3.90. The unit is then sold at $6.00 for a $2.10 profit (gross margin of 35%). Transportation to the distributors incurs a $0.60 charge and $0.30 to the retail store. The total cost per unit for retail comes out to $6.90. After a 44% markup, the 30-count box of Wiper Diapers is available for the consumer to purchase at $9.90. Because the Wiper Diaper is attempting to differentiate itself on product features alone and not on price, the Wiper Diaper product will be offered at similar prices to that of our direct competitors. The most applicable pricing strategy for our product was psychological, bundle pricing. The Wiper Diaper Corporation has combined these two products at a considerably lower cost creating a “bundle” of goods that simplifies the changing process. Many parents and caretakers will enjoy finding a product that simplifies the changing process, sold at a reasonable price. In establishing initial pricing tactics for the sale of our product, we did not include discounts or rebates as an option while recovering initial investment costs. We believe that after five years, our initial investments will be recovered, and we can then offer discounts, rebates and coupons to our consumers. Pricing Objective- Due to the large size of the diaper industry, totaling over $6 Billion in revenue in 2012, a small deviation in market share would dramatically affect sales and production (IBISWorld, 2013). To properly determine our market share, we benchmarked our performance against Johnson & Johnson, a smaller producer of diapers. Currently, Johnson & Johnson maintains a 4% share of the market. Recognizing that J & J is a much larger and developed company, we acknowledge the reality of acquiring a significantly lower market share. At the end of year five, we expect to have a 1.5% market share because of our products attractiveness and substantial investments in promotion. Examining Hain Celestials, a new diaper manufacturer’s, financials from 2009 to 2013, we found an average growth of 23.7% in their company and applied that percentage growth to the Wiper Diaper. Using the Annual Sales Forecast Year Annual Births Market Size Market Potential Market Share % Diaper Sales Unit (box) Sales Dollar Sales Unit Sales 0 3,952,937 - 0.0% $0 0 1 4,032,391 7,985,328 20,402,513,126 0.67% 136,696,838 4,556,561 $16,038,302 2,673,050 2 4,072,715 8,105,106 20,708,545,773 0.79% 163,597,512 5,453,250 $32,719,502 5,453,250 3 4,113,442 8,186,157 20,915,631,231 0.98% 204,973,186 6,832,440 $40,994,637 6,832,440 4 4,154,577 8,268,019 21,124,787,543 1.21% 255,609,929 8,520,331 $51,121,986 8,520,331 5 4,196,122 8,350,699 21,336,035,419 1.50% 320,040,531 10,668,018 $64,008,106 10,668,018 Figure 1-2
- 9. 9 combination of Johnson & Johnson and Hain Celestial financial statements, we can confidently benchmark our estimated market share potential. Promotional Strategy- To effectively reach our consumers, we will be using numerous promotional elements effectively reaching our targeted .67% market share and 1.5% by the end of year 5. Those elements are: Television- Our most effective form of advertising will be done through the commercials aired on two stations primarily aimed at women and families, Lifetime and ABC Family. Upon inception of the company, we will only be airing our ad on Lifetime Network. Once reaching year three we will expand our coverage to ABC Family as well. Due to the minimal CPM when reaching a vast amount of potential consumers via television, the airing of our ad will relay the active lifestyle our product provides to the largest market possible. We will allow an equal budget of $2 million annually towards television advertisements on each respective channel. By repeatedly targeting the commercial-viewing market, we believe our television advertisements will constantly remind the consumers of the usefulness of our product. Magazine- Second will be the use of print ads through two magazine subscriptions. Two national parenting magazines for the care of newborns and babies are Pregnancy & newborn and Parenting Magazine. Having almost 8 million combined readers monthly, this channel of promotion will present our product to non-television watchers and both expecting and current parents. The cost of a full-page color ad within Parenting Magazine is $143,860 monthly. With monthly subscriptions totaling 7,019,000, our cost to reach 1000 viewers will be an estimated $20.50 (Parenting Media Kit, 2013). We have decided to publicize our print ad through Parenting Magazine from March through October, in an attempt to capitalize on the warmer and active months. Our other magazine of choice, Pregnancy & newborn, charges $8,340 per month for a full-page print ad. Given an estimated reach of 900,000 readers monthly, their cost to reach 1000 readers is $9.26 (Pregnancy & newborn Media Kit, 2013). Point of Purchase Displays- Through agreements made with Wal-Mart and Target, the Wiper Diaper product will be providing point of purchase displays of the active lifestyle our company promotes. By providing advertising displays at the onset of warmer seasons, we can successfully differentiate our product from the numerous competitors on the shelves
- 10. 10 beside us. At the beginning of each calendar year, our corporation will set aside $300,000 to fund the creation and placement of our point of purchase displays. Throughout all channels of advertising including television, magazine and point of purchase displays, our advertisements will portray an outdoor setting containing a mother hoisting her baby in front of her, displaying the wipe pouch on the front of the diaper. By using a natural color scheme and an outdoor setting, our advertisements will create value to the consumer by exemplifying the need and convenience the Wiper Diaper satisfies. We will also apply an element of sales promotion to arouse interest among brand new diaper consumers. We will do so by providing $450,000 worth of diapers to numerous hospitals across the nation in year one, and increasing costs by $30,000 annually. This will position our product among new mother and fathers, creating strong brand equity. Packaging and Branding- The Wiper Diaper product will be packaged in a rectangular cardboard box in counts of 30. On the face of our package will be a blue and green color scheme with white lettering to resemble an outdoor setting as well as the image of the mother and child discussed previously. By tying the outdoor theme to our advertisements we will develop psychological value to our brand. In developing the Wiper Diaper brand, we applied a single product branding strategy. Unlike many of our competitors who manufacture many products across numerous industries, the exclusivity of our manufacturing process Promotional Elements: Year 1 Year 2 Year 3 Year 4 Year 5 Television Lifetime $2,000,000 $2,000,000 $2,000,000 $2,000,000 $2,000,000 ABC Family $2,000,000 $2,000,000 $2,000,000 Total: $2,000,000 $2,000,000 $4,000,000 $4,000,000 $4,000,000 Magazine (12 issues/ year) Pregnancy & newborn $100,080 $100,080 $100,080 $100,080 $100,080 Parenting:( March-October) $1,150,880 $1,150,880 $1,150,880 $1,150,880 $1,150,880 Total: $1,250,960 $1,250,960 $1,250,960 $1,250,960 $1,250,960 P.O.P. Displays Wal-Mart $150,000 $150,000 $150,000 $150,000 $150,000 Target $150,000 $150,000 $150,000 $150,000 $150,000 Total: $300,000 $300,000 $300,000 $300,000 $300,000 Hospital Sales Promotion $450,000 $480,000 $510,000 $540,000 $570,000 ( $0.13/diaper +$0.02 distribution/diaper ) Total Promotional Cost: $4,000,960 $4,030,960 $6,060,960 $6,090,960 $6,120,960 Figure 1-3
- 11. 11 allows our corporation to ensure quality. With attention on a single product, we can reduce manufacturing errors, increasing customer satisfaction. Operations Operations Strategy/Outsourced Goods- Our operations strategy will ensure the quality of our production process and keep costs low enough for consumers to justify spending extra on our convenience product. To ensure the quality of our products, we outsource the production of every component except for the creation of the Wiper- Diaper. Through outsourcing we are able to lessen the production time, allowing us to be more responsive to demand. Due to certification programs like ISO 9000 and Alibaba.org, we can trust in the quality of suppliers and reduce risk. The use of outsourcing enables us to focus on the added value of our product at a lower cost. Engineered Production Equipment specializes in creating fully automated production machines by combining standard production equipment to consumer specifications. Each machine will be capable of producing 126,000 Wiper Diapers per 7-hour day. We estimated this by combining the production rates of three standard production machines (a cellophane package sealer to wrap the diapers in the package, a machine to glues the wipe package to the diaper, and a packaging machine to put thirty diapers into each box) into one fully automated process (Reischl, 2013). Inventory management and ABC analysis- The goal of our inventory storage system will be to provide enough safety stock of both raw materials and finished goods to meet demand. Safety stock will include one month’s worth of finished goods, and two weeks of raw materials on site. We chose this storage amount due to our suppliers’ longest lead-time, 14 days (Cazorla, 2013). To create our initial stock of finished goods, we will begin production one month before we ship out orders. If we need to use any of our safety stock, we plan on producing more the next week to replenish it. To ensure wipe freshness, we will ship out our finished goods in a first in, first out method.
- 12. 12 We utilized an ABC analysis, classifying Diapers and Wipes as A items, and packaging, glue, and cellophane as C items. From this we decided our annual demand, order quantity, lead-time, annual order placement for years two and five in order to show growth in production in response to demand. This information is fully is shown in the chart below. Triple Bottom Line: Planet: Through our research we found that there is no such thing as a biodegradable diaper, and companies who claim so have been successfully sued (Allen & Nichols, 1990). Being a part of the diaper industry is accepting the necessary environmental impact with the disposable diapers. Although there are some partially biodegradable diapers, these are not cost effective, raising costs by 500% (Allen & Nichols, 1990). While the diapers cause some environmental damage, the Wiper Diaper will limit the consumption of wipes. People: As a company, we decided to compensate our employee’s above the normal cost of living index to enable a comfortable life. Outside of our company, we hope to improve the lives of our consumers by relieving some of the stress that accompanies the care for a child. We also will not outsource from any companies exploiting child labor. Profit: Despite the high start-up costs, and competitive market, our forecasts project profitability starting in our second year, with profits growing each year. Raw Good Company being Sourced Annual Demand Year 2 Annual Demand year 5 Order Quantity Year 2 Order Quantity Year 5 Lead Time Annual Order Placement Diapers First Quality Enterprises Inc 163,597,512 320,040,551 3,146,106 6,154,626 14 Days Weekly Wipes Foshan Angel Shining Trading Co. 490,792,536 960,121,653 9,438,318 18,463,878 14 Days Weekly Packaging Aquatic Paper Products 5,453,250 10,668,018 104,870 205,154 10 Days Weekly Glue Zheijang Good Adhesive Co. 102 tons 200 tons 8.5 tons 16.67 tons 10 Days Monthly Cellophane Zhenzhen Asuwant Plastic Packaging Co. 164 tons 353 tons 13.67 tons 29.42 tons 10 Days Monthly Figure 2-1
- 13. 13 Process Flow Chart: Figure 3-2- First in the operating process is ordering the raw materials from our wholesale distributors. As stated above, diapers, wipes, and packaging will arrive weekly, while glue and cellophane will arrive monthly. When all necessary materials arrive via trucks, we will then unload them while setting the machines up for production. First in the production process, we will move diapers from the raw materials storage area to an open machine, depending on availability. The machine will then wrap three wipes in a cellophane pouch, glue the package to the front of a diaper, and place thirty diapers in a box. Once sealed, the boxes will be placed on pallets, which hold 456 boxes each (Martinez, 2013), and sent to the finished goods storage area of our warehouse. Finally, we will ship the completed goods to the distribution centers on shipping out days. There are several potential critical failure points that we can identify in this production process. The first is possibly receiving a late shipment of raw materials. Having two weeks of raw materials inventory stockpiled at our warehouse prevents this. Another possible critical failure point in our process could be machine failure. We will combat this problem by performing routine inspections of our machines for any possible problems. If a machine does happen to break down, we would use the stockpiled inventory to ship out what that machine would have been producing, and call the maintenance team provided by Engineered Production Equipment Inc.(Reischl, 2013). One final possible failure point that Start Order all raw materials Unload raw materials from trucks/ Set up machines for production Is there an open machine? No- Wait for one of the machines to open. Yes- Send diapers to the open machine to be processed. Take finished goods to storage area Ship finished goods to distribution center End Preform random sampling check of finished goods. Figure 2-2
- 14. 14 we are aware of is producing faulty products. We plan on preventing this by performing acceptance sampling on our product, ensuring minimal external failure costs. Proactive and Reactive Quality Assurance- To proactively assure the quality of our Diaper Wiper, we plan on implementing several control checks. First, we plan on only using suppliers that have quality assurance programs from Alibaba, and have completed an ISO 9000 certification process. This will be a cost effective way of getting quality raw materials for our production process. To ensure that our custom machinery is running as efficiently as possible, we will monitor the machines throughout the process, to check for any wear and tear. To ensure quality at the source we will cross train our employees to work on every aspect of our production process, unloading raw materials, operating the machinery, and shipping out the raw materials. This way, any employee on the production floor is capable of identifying a problem. This method has been proven to reduce employee fatigue, boost morale, and raise production quality levels. (Easton, 2011). We also have several reactive quality control plans in our production process. We plan on performing a random sample check on the diapers once they have gone through our production process in order to identify any problems before defective products are shipped to our customers. In addition to our random sample checks, we will ask distribution centers to check the quality of our packages upon arrival to guarantee products were not damaged in transit. If the product was damaged we will direct the distributor to ship defective products back to ensure that only quality items reach the market. Sales Representatives will be in charge of checking up on any distribution centers in their area, and responding to any and all customer feedback about the product. They will then meet with the operation manager in order to relay this information and find ways to improve our production process. Finally, we plan on implementing a Six Sigma quality assurance initiative in order to perpetually improve and control our production process. This would help reduce our process defects by setting a standard of 3.4 defective units per million outputs. We plan on monitoring our process toward our goal by looking at our random sample quality check data. Distribution - Because the Wiper Diaper will be a new product in the disposable diaper market, our company will utilize a push strategy to reach our customers through the indirect channels of Target and Wal-Mart. Our company will utilize a selective distribution
- 15. 15 process in order to maximize the reach of our product to the market. We chose selective distribution rather than intensive distribution in order to focus on the large reach, and distribution that Target and Wal-Mart already have in place, as opposed to other retail stores. In order to prevent any confrontations or issues within the channel, our company will serve as a channel captain in order to coordinate, direct, and support other channel members. Management: Organization, Staffing, and Employee Acquisition Plan- Our corporation will consist of 33 employees including; General Manager, Sales Manager, six Sales Representatives, Human Resources Manager, Operations Manager, Accountant, two General Maintenance Workers, two Technician Supervisors, and eighteen Factory Technicians. We will obtain top level staffing through the online employment site, Monster.com. Top management will be required to have their bachelor’s degree as well as at least a year of prior experience in their position. It will then be their job to find people to fill the positions of Accountant, six Sales Representatives, two General Maintenance Workers, two Technician Supervisors, and the eighteen full time factory technicians. Although we are looking for charismatic, diligent workers, the minimum requirements for these employees are a clean criminal record and their high school diploma. The operations manager, along with the supervisors, will be required to train the eighteen technicians on every aspect of the production from start to finish. This way they can cycle positions every few hours and avoid the lag caused by constant repetition. These employees will take their OSHA certification test in order to learn safety skills while on the job, and be required to retake it annually to remain certified (United States Department of Labor, 2013). The machines will be running for 7 hours a day and require a total of eighteen factory technicians. There will be one Figure 3-1
- 16. 16 worker on each machine to load the diapers from raw materials into the production cycle, and one employee on every two machines to load the finished goods at the other end onto pallets. There will be other employees on forklifts unloading raw material pallets from the storage area, moving pallets into finished goods inventory, or loading finished goods pallets onto the truck for shipment. Employee Motivation Plan- At The Wiper Diaper, we pride ourselves on being a family oriented company. We offer day care reimbursement for those employees who need it to ensure their kids are taken care of. We also offer four weeks of vacation, as well as four days of personal leave to allow an adequate home life to work balance. We believe that by providing a generous amount of time off, it will keep our staff happy and excited to come to work daily. In return this will create a desirable culture within the workplace, ultimately improving productivity. We also believed that cross training our employees will help them sharpen their skills and stay motivated, in order to progress onto future roles in the company (Kwoh, 2012). With the projected growth of the company, we plan to offer a 2.9% salary increase to all employees after the first year, bumping up to over 3% in the years to follow (Miller, 2013). For full details on the standard and premium benefits, see figure 4-2. Conclusion- Upon start-up of The Wiper Diaper Corporation, our company will be gathering $8,373,000 from private investors, a loan of $4,497,600 and a personal investment of $127,000, in order to successfully attain the capital necessary to create a profitable diaper manufacturing company. Given the estimated 3,992,466 births nationally in 2013, there is a large potential consumer base of parents looking to purchase a convenient diaper product. With a target market share of .67% in year 1 and a 1.5% market share in year 5, we plan to attain a market share growth rate of 23.7% annually. By capitalizing on differentiated features, our innovative diaper will provide parents with the ultimate convenience diaper product. The new features highlighted in our product will be promoted across numerous media channels including television and magazine, reaching the maximum amount of consumers at the lowest average cost possible. Along with our promotional donation of the Wiper Diaper product to national hospitals annually, we can successfully infiltrate the lucrative diaper market. By investing in The Wiper Diaper Corporation, we give each investor the fantastic opportunity to join an innovative, up and coming diaper manufacturing company before our national awareness has been established.
- 17. 17 Financial Narrative- The Wiper Diaper Company is looking for investors that are willing to accept a moderate amount of risk for the possibility of a high reward. We are looking to issue $8,373,000 worth of stock for sufficient start-up. These shares will be highly marketable due to estimated returns. Upon evaluation of our sensitivity analysis, we recognize the varied deviation in possible outcomes. When comparing our best and worst case scenarios of market share, the NPV ranges from $-31,193,880 to $62,627,517. Our internal rate of return is very attractive at 51% due to our dividend payouts. While no return would be the worst case, in the best case scenario, investors can expect to enjoy an IRR of 175%. We feel that our investors deserve this reward for their investment in our company. In comparing our ratios to the industry averages, we reasonably outperform the industry in 2018 in all facets. All ratios improve over time because of increased sales. Since our company operates strictly off of a cash purchase policy, there is no accounts payable system in place. With just accrued salaries and current portion of debt maturities as the current liabilities, our current ratio is very high, at nearly 30 times the industry average. While we have a net loss in 2014, we still possess the ability to pay off all debt in the beginning of 2016, reducing our risk of default. In years 2017 and 2018, we plan on taking excess cash and using it to repurchase stock to claim ownership of the company. After establishing a secure niche in the diaper industry, we intend for the Wiper Diaper Company to continue operations far past 2018, diversifying with a new plant on the East Coast for reduced distribution cost.
- 18. 18 Title Pay Range1 Annual Pay Mandatory Payroll Deductions2 Benefits3 Total Benefits Costs Total Costs per Employee General Manager $42,000-$178,000 $120,000 SS- $7,440 Medicare-$1,740 WC- $1,920 SUTA- $8,880 FUTA- $720 Total- $20,700 Premium Benefits $16,671 $136,671 Operations Manager $42,000-$178,000 $85,000 SS- $5,270 Medicare-$1,233 WC- $1,360 SUTA- $6,290 FUTA- $510 Total- $14,663 Premium Benefits $16,671 $101,671 Sales Manager4 $50,000-$170,000 $90,000 SS- $5,580 Medicare-$1,305 WC- $1,440 SUTA- $6,660 FUTA- $540 Total- $15,525 Premium Benefits $16,671 $106,671 Sales Representative4 (6) $24,000-$92,000 $55,000 SS-$20,460 Medicare- $4,785 WC- $5,280 SUTA- $24,420 FUTA-$1,980 Total- $56,925 Premium Benefits $16,671 $430,026 Human Resource Manager $66,000-$140,000 $80,000 SS- $4,960 Medicare-$1,160 WC- $1,280 SUTA- $5,920 FUTA- $480 Total- $13,800 Premium Benefits $16,671 $96,671 Accountant $24,000-$45,000 $65,000 SS- $4,030 Medicare-$943 WC- $1,040 SUTA- $4,810 FUTA- $390 Total- $11,213 Premium Benefits $16,671 $81,671 Technician Supervisor(2) $25,000- $56,000 $50,000 SS- $6,200 Medicare- $1,450 WC- $1,600 SUTA- $7,400 FUTA- $600 Total- $17,250 Premium Benefits $16,671 $133,342 General Maintenance Worker(2) $24,000-$58,000 $40,000 SS- $4,960 Medicare-$1,160 WC- $1,280 SUTA- $5,920 FUTA- $480 Total- $13,800 Standard Benefits $16,671 $113,342 Factory Technician(18) $24,000-$43,000 $32,000 SS- $35,712 Medicare-$8,352 WC- $9,216 SUTA- $42,624 FUTA- $3,456 Total- $99,360 Standard Benefits $16,671 $876,078 Grand Total of Salaries, Taxes & Benefits $1,526,000 $263,236 Total Benefits $550,143 $2,076,143 Figure 3-2
- 22. 22 Market Share NPV IRR Base case 1.03% 16,440,795$ 51.7% Worst case 0.40% (31,193,880)$ 0.0% Best case 2% 62,627,517$ 175.1% Sensitivity Analysis After-tax Component Debt: Components Weight Cost Cost Wells Fargo 4,497,600$ 34.6% X 2.4% = 0.83% Equity: Preferred equity none = Common stock 8,500,000$ 65.4% X 8.00% = 5.23% Total Investment 12,997,600$ 100.0% 6.06% Risk free rate: 3.89% Market risk premium: 5.00% x beta factor 3.7 4.11% 8.00% Capital Asset Pricing Model (CAPM): Estimated cost of equity capital > Weighted Average Cost of Capital (WACC) > Schedule of Weighted Average Cost of Capital Reconcilation from operating income to free cash flow Investment at Inception 2014 2015 2016 2017 2018 Terminal Value Earnings before interest and taxes (EBIT) (664,037)$ 4,134,199$ 4,947,104$ 8,238,353$ 12,830,343$ less: income tax expense (1,543,996) (1,862,338) (3,212,958) (4,939,583) Net operating profit after taxes (NOPAT) (664,037)$ 5,678,195$ 6,809,442$ 11,451,311$ 17,769,926$ plus: depreciation expense 400,000 400,000 400,000 400,000 400,000 Operating cash flows (3,946,521)$ 180,744$ 1,817,171$ 3,809,618$ 6,294,847$ change in working capital 5,768,465 2,665,835 2,989,617 4,113,196 5,318,869 change in capital expenditures (6,752,000)$ 11,613,716$ Free cash flow to creditors & equity investors (6,752,000)$ 1,821,944$ 2,846,579$ 4,806,788$ 7,922,814$ 11,613,716$ Present values > (6,752,000)$ 1,717,843$ 2,530,579$ 4,029,026$ 6,261,421$ 8,653,924$ Investment decision criteria: Weighted average cost of capital (WACC) 6% Present value of future cash flows 23,192,793$ less: initial investment (6,752,000) Net present value (NPV) 16,440,795$ Internal rate of return (IRR) 51.7% Modified internal rate of return (MIRR) 35.7% Payback period (years) 2.08 Schedule of Future Cash Flows and Investment Analysis Figure 4-7 Figure 4-8 Figure 4-9
- 23. 23 Breakeven Analysis 30-Count Box Selling Price 6.00$ Variable Costs: Diapers 3.00$ Wipes 0.32$ Cellophane packets 0.27$ Adhesive 0.15$ Box 0.16$ Total Variable Cost 3.90$ Gross Margin 2.10$ Fixed Costs Year 1 Year 2 Year 3 Year 4 Year 5 Advertising $4,000,960 $4,030,960 $6,060,960 $6,090,960 $6,120,960 Salaries $1,382,004 $1,570,254 $1,615,791 $1,662,649 $1,710,866 Employee benefits $175,046 $550,143 $550,143 $550,143 $550,143 Employee Taxes $238,410 $270,870 $278,725 $286,808 $295,126 License fee $110 $0 $0 $0 $0 Office supplies $3,000 $3,000 $3,000 $3,000 $3,000 Phone, fax, internet $2,400 $2,400 $2,400 $2,400 $2,400 Upkeep and Repair $10,000 $10,000 $10,000 $10,000 $10,000 Utilities $480,000 $480,000 $480,000 $480,000 $480,000 Interest Expense $178,462 $175,235 $171,877 $168,382 $164,744 Depreciation $400,000 $400,000 $400,000 $400,000 $400,000 Total Fixed Cost $6,870,392 $7,492,862 $9,572,897 $9,654,342 $9,737,239 Breakeven Point Units 3,271,615 3,568,030 4,558,522 4,597,306 4,636,780 Breakeven Point Sales $6,870,392 $7,492,862 $9,572,897 $9,654,342 $9,737,239 Market Share % Needed 0.48% 0.52% 0.65% 0.65% 0.65% Capital Formation Structure Capital Raised from Founders Money Invested Stocks Purchased Michael Calo $24,000 960 Zachary Conte $22,000 880 Tyler Faley $19,000 760 Gregory Heckel $19,000 760 Cal Rider $23,000 920 Joel Torreyson $20,000 800 Total from Founders $127,000 5,080 Issued Common Stock # of shares $334,920 334,920 par value $25 Total Cash Raised from Stock $8,373,000 Total Cash Raised $8,500,000 340,000 Debt issued Loan from Wells Fargo $4,497,600 Total Capital Raised $12,997,600 First Year Sales Forecast Month Dollar Sales Unit Sales January- April $0 - May $1,924,596 320,766 June $2,099,559 349,927 July $2,274,523 379,087 August $2,449,486 408,248 September $2,449,486 408,248 October $2,187,041 364,507 November $2,187,041 364,507 December $1,924,596 320,766 Year total $17,496,329 2,916,055 Annual Birth Projection United States 2012 3,952,937 2013 Projection 3,992,466 2014 Projection 4,032,391 2015 Projection 4,072,715 2016 Projection 4,113,442 2017 Projection 4,154,577 2018 Projection 4,196,122 Figure 4-10 Figure 4-11 Figure 4-12
- 24. 24 Notes to Financial Statements 1Cash- The amount of cash accumulated by sales over the 5 year period. We will accumulate large amounts of cash to eventually buy back the shares of stock issued at inception. Large levels of cash are held in order to provide a two months’ worth of purchases reserve. 2A/R- We have a 30 day credit period for our buyers. 3Inventory- The value of holding four weeks of finished goods inventory and two weeks of raw material inventory. Using FIFO, our inventory numbers increase over the five years. 4Warehouse- The building purchased in Provo, UT is a 42,000 square foot facility costing $2,600,000 which we took a loan against to provide start-up funding of $2,080,000 (LoopNet, 2013). 5Furniture & Fixtures- This is a one-time purchase at inception to furnish our facility with the necessary desks, chairs, all-in-one print/fax/copier, and warehouse improvements. 6Equipment- This includes the ten custom machines used to produce our diapers as well as the two forklifts to move the product around the facility. These are depreciated over a 10 year period using the straight line depreciation method. 7Accumulated Depreciation- Using the straight-line depreciation method, this figure will increase over the 5 year period as we recognize the expense over a 10 year period. 8Accrued Salaries- The amount of money owed to employees at the end of the year. This number is equal to one pay period, or two weeks. 9Current Portion- The amount of principal owed for the upcoming year from our 30 year loan. 10Long Term Debt- Wells Fargo supplied us with a $4,497,600 loan paid over 30 years at a 4% interest rate. This was possible due to securing the loan against our equipment and warehouse. 11Common Stock- As a corporation, we issued 340,000 shares of stock at $25 a share. The founders contributed $127,000, giving them 5,080 shares. The remaining 334920 shares are split among private investors. 12Treasury Stock- The dollar value of stock repurchased. Because of our growth and increased dividend payout, we will repurchase stock at $40 a share. At the end of 2018, the founders will hold a controlling stake in the company. 13Retained Earnings- Our net income minus dividends for each year. Our retained earnings decrease in years 2017 and 2018 due to the repurchase of stock to achieve 51% ownership. 14Revenue- The forecasted sales amount over the 5 year period. 15Cost of Goods Sold- The cost of all materials used in production of the Wiper Diaper. See breakeven analysis (Figure 4-12) for breakdown of costs. 16Advertising Expense- The amount per year we set for growing our business through promotions and advertisements. See (Figure 1-3) for full breakdown of costs. Starting in year 3, we will add another channel of TV ads. Additionally, we will increase the number of diapers given away to hospitals for promotion (Parenting, 2013). 17Salaries Expense- Salaries paid to all 33 employees growing at a rate of 2.9% each year due to raises, over the 5 year period (Miller, 2013). 18Employee Benefits- The amount paid to employees and their family for full health coverage (Kaiser Family Foundation, 2013). 19Employee Taxes- The amount paid by the employer for social security (6.2%) and Medicare (1.45%) (Social Security and Medicare Tax Rates, 2013), Workmen's Compensation (1.6%) (State of Utah, 2013), SUTA (7.4%) (State of Utah, 2013), and FUTA (.6%).(Automatic Data Processing Incorporated, 2012). 20License Fee- The business will apply and receive a business license on the first day of inception at a one-time cost of $110. (Provo County, 2013). 21Office Supplies- We have set aside $250 a month for general office supplies and paper. 22Phone, Fax, & Internet- We are using Verizon phone and internet for our business totaling $200 a month. 23Upkeep & Repair Expense- An account set aside for the maintenance men to perform routine maintenance and repairs on the facility. This money is allotted for new parts in addition to preventing wear and tear. 24Utilities Expense- The cost of electric, water, and gas per year. A large amount of power is consumed by our ten machines. 25Depreciation Expense- We chose to depreciate our equipment using the straight-line depreciation method over 10 years. 26Interest Expense- The expense is calculated from borrowing our long term debt from the bank at a 4% interest rate. 27Income Taxes- As a corporation, we are in a tax bracket where we paid a base rate of $113,900 plus 34% of any amount over $335,000. 28Dividends- Since we did not make a profit in year 2014, we began paying dividends in year 2015 at 10% of net income. In year 2016, the dividend rate increased to 15%, 30%, and 40% in the following years.
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- 28. 28