1. Introduction

"There is little left for the end of the month. We must present our business plan to potential investors early next month" thought Mara Salazar, looking out the window of her apartment as the afternoon fell in Vigo and the sun was hiding after the horizon over the waters of the Atlantic Ocean."We have to prepare the Business Plan and I have no idea where to start. Fortunately, Victoria is arriving and we both will be able to prepare and finetune it." Mara and Victoria have known each other since they were schoolmates. They kept in contact and are still good friends. Maria, a restless spirit, graduated in Fine Arts and immediately began teaching at high school in Pontevedra. However, life in the high school did not satisfy her so that she had been considering for several months to turn into something serious what until then, had been her hobby: designing and selling her product line of t-shirts and polo shirts. Victoria, who got an engineering degree at the University of Vigo, had always admired the creativity of her friend Mara and how she managed to transmit that fresh and innovative spirit on her designs, which was so well welcome by her friends. She spent a couple of years working for a well-known French automobile multinational and, at the same time, learnt and read about entrepreneurship and e-commerce startups. Finally, both friends decided to join forces and jump into the unknown world of entrepreneurship. Each one would bring their skills and form a great couple: Maria would be responsible for the designs and marketing and Victoria, engineer, after all, would manage the operations.

2. The business plan

After Victoria arrived at Maria's house, they both started enthusiastically preparing the document that they should present to a major investment fund in Madrid early next month. The idea was simple: Mara would design a first Spring-Summer line of short-sleeved T-shirts and polo shirts in high-quality cotton that they would start selling by internet early March next year. These shirts would be available in their web site until the end of September when they would replace Spring-Summer collection with another one of Autumn-Winter garments for your people. Each one contributed with 1,500 and founded Tropical Fruit Fashion S.L. which was registered as their brand too. Notary fees and registration amounted to 400 paid with the paid-in capital. The investment fund to which they presented the project had required an income statement for the first 12 months of activity as well as initial investment needs and, where appropriate, financing needs of operations.

2.1. The product

Both had agreed to launch a collection of T-shirts with 20 different designs and 10 shortsleeved polo shirts designed for women. Each design would be available in S, M, L and XL sizes. Based on the artisanal productions and sales they had made to friends and acquaintances, they thought they could sell up to 1,500 units of each T-shirt design and 500 of each polo design. Anyway, they were not clear how many units to produce in each size.

2.2. Purchase and procurement.

The family of Manuel Morrio, who is an old friend of Victoria, owns a small textile factory that works for a well-known Galician company in the sector. Manuel quoted them the following prices: T-shirts 8/unit, and polos 12/unit, including transportation and delivery at Tropical Fruit Fashion facilities. Manuel needed 3 weeks to produce the samples and, approximately, 6 weeks to schedule production and serve the complete order since he could not deliver partial orders because of the complexity that it entailed. Maria estimated between 2 and 3 weeks to design prototypes. In addition to the option of manufacturing the garments in Manuels factory, Mara and Victoria are considering sourcing from other countries to lower production costs. Searching on the internet and after reviewing a multitude of forums, the following additional alternatives to production in Galicia are proposed:

a) Manufacture in Morocco

b) Manufacture in India.

c) Manufacture in China.

To estimate transport costs, they found a couple of websites where they could get prices: www.icontainers.com and www.searates.com. On these websites, they would also find detailed information on the types of maritime containers that could be used. They decided to analyze suppliers located in Casablanca, Mumbai and Shenzhen. After several consultations, they concluded that the TARIC code for cotton textile products is 6109100010 for polo shirts and 6109100090 for T-shirts. Both codes have fixed duties of 12% for imports from third countries. Similarly, after searching for suppliers in the above-mentioned countries, they concluded that the average ex-works prices per garment in euros would be:

SHIRT POLO

MOROCCO 4,50 5,50

INDIA 2,50 3,25

CHINA 3,00 3,80

Asian suppliers offer a period of two weeks to produce the samples (to be sent by air express delivery) and 3 weeks to for the whole production of the campaign as of the approval of the samples. The Moroccan supplier needs four weeks including sample production and manufacturing. ON top of these timings, we must be added the transport time from the country of origin to Vigo where they were looking for a warehouse to store and manage the products. With all this information, Victoria and Mara should decide where to manufacture their t-shirts and polos.

2.3. The website

Both were aware that the design of the web was a key aspect of the business and asked for help from Lus Garca, architect, childhood friend, who had achieved local relevance for his daring and transgressive interior designs. The three of them designed several sketches that they discussed with a well-known owner of a small web design company who budgeted 5,000 for the design and implementation of the e-commerce site plus 200/month for web hosting and maintenance. Webdesigners, SL, that was the name of the company, needed at least 4 weeks to have the page ready. At the very beginning, Maria and Victoria did not consider more investments in ERP, WMS or CRM software.

2.4. Marketing.

Neither Maria nor Victoria were experts in on-line marketing, so they were planning to hire an intern with a monthly cost of 600 together with an expenditure of 1000/month in Marketing, AdWords and Facebook mainly. The fellow should be incorporated from the very first day keeping in mind that they would need about 3 weeks to select the candidate among the last graduates of the university with specialized studies in marketing.

2.5. Sales.

As already mentioned, they estimate that they could sell up to 1,500 units of each shirt model and 500 of each type of polo between March and September. The estimated monthly distribution of sales is shown in Table 1 (see annex 1). The autumn/winter season will begin with a line of items which will be defined in a later phase. Sales will start at the end of September and will last until the end of March. Mara and Victoria prefer to evaluate how initial sales of spring/summer season would perform to define items and sales objectives for the next fall/winter season. 6% of gross sales in value is commonly accepted as customers returns in retail. Mara and Victoria decided to maintain this ratio when calculating the net revenue. Both entrepreneurs devoted many hours to analyzing websites selling similar items. They concluded that the shirts with similar design and quality were sold between 20 and 35 euros (VAT included) per unit. The analysis showed that the price of polos was between 35 and 50 euros per unit, too. What price should they use? On the other hand, Victorias educated guess was that pricing shirts and polo above 30 and 45 euros respectively, could reduce sales between 10% and 15%. They estimated that they would sell 85% of the shirts and 90% of the polos they had produced despite units/size they had defined.

2.6. Payments gateway.

With regards to the payment gateway, Victoria compared the proposals she received from several banks. After analyzing prices and services, she decided on the VPOS1 terminal of a well-known bank in the e-commerce world for good rates and the ease of integration. Rates of the bank were 0.35% of the amount of each transaction, both for national and international credit and debit cards, and a maintenance fee of 15/month. Also, they would not have to pay additional amounts in chargebacks, disputes or recovery requests. They also integrated PayPal, a very popular payment method in Spain due to the protection it offers the buyer. PayPal rates were: 0.35 per transaction plus 2.5% on the transaction amount. They estimate that PayPal payments would be between 20% and 30% of sales.

2.7. The warehouse.

It was now time to organize the logistics infrastructure and flows of the company. Both planned to rent a warehouse located in an industrial area on the outskirts of Vigo with a 15m faade, 20m deep and 6m free height. The warehouse had a 4m wide gate at ground level and a 25m2 small office. See Annex 2. The building already had the Activity License issued by the City Hall. The previous tenant left several picking shelves and shelves for pallets storage, also. Picking shelves are aligned in 10 rows. Each row is 10 meters long and includes 10 modules 1m wide and 40cm deep each, with 5 shelves/module. The picking shelves are 2m high. The palletized shelves, designed to store Euro pallets (80x120cm), measured 18.9m long and 1m wide with three heights. It had 7 storage modules, 2.70m long each. Each module stores 3 pallets per height, 9 pallets in total. Victoria and Maria estimated that each folded garment measured, on average, 27cm wide and 35cm long. Thus, they could place 3 stacks with 10 units/stack on each shelf. Manuel informed them that the shirts would be delivered in board boxes with 80 units/box whereas the polos would be delivered in boxes with 40 units/box. In both cases, a full pallet included 18 boxes (6 boxes/layer and 3 layers/pallet). Would they have enough room in the warehouse? The landlord asked for a rental contract of at least 12 months with an initial deposit of 2 months. The rent of the building was 800/month (VAT excl.). According to the owner, the electricity, water and cleaning supplies could cost around 200/month. They were planning to buy two hand pallet trucks, 250 each, that should be available at the beginning of February. They also planned to purchase a second-hand electric forklift for 5,500 but they were not sure. Would they? Besides, they needed to buy two workstations for the reception and packing areas at 100/unit, two computers, one for each workstation, and a small label printer for 250. In the beginning, they would print the delivery notes in the office printer. On the other hand, they planned to buy functional furniture for the warehouse office in a well-known Nordic furniture shop: 2 tables with 2 wheelchairs, 2 chairs and a filing cabinet for a total amount of 300, two desktop computers with a unit cost of 600 and a printer for delivery notes in A4 size for 200. Finally, they hired a fiber line with enough data transfer capacity and a cost of 75/month that should be ready on January 1st. Purchases of furniture and computer equipment would be paid in cash. They should make small repairs and upgrades budgeted at 1,200 during January that would also be cash paid.

2.8. Outbound transportation.

Data published by different internet sources were quite homogeneous in terms of customer orders size: around two units per order. With this assumption, their estimation for the summer season shipments was that 90% would weigh less than 2 kg, 8% between 2 and 5 kg and only 2% between 5 and 10 kg. On the contrary, autumn-winter season shipments would be somewhat heavier, 40% would be below 2 kg, 35% would be between 2 and 5 kg and another 25% between 5 and 10 kg. The best transportation rates they got offered were a flat rate based on the real weight of shipments to the Peninsula (mainland) and the Balearic Islands. See table 2 in Annex 1. Shipments to the Balearic Islands will be 10% of total shipments. They will pay for a 25% tariff increase vs. mainland shipments. Transportation costs of customers returns will get the same price scheme. Also, they got a connection to the carrier webpage to print the transport label without any additional cost. To reduce costs, Mara and Victoria planned to use plastic bags to pack goods instead of board boxes. The carrier will provide plastic bags for free. In order not to penalize distribution costs, they decided that orders below 30 will be charged with a shipping cost of 2.50/shipment (VAT included). Orders over 30 will not be charged with shipping costs.

2.9. Operations and the warehouse team.

Victoria and Maria will need at least one person in the warehouse's office. They asked for advice to some entrepreneurs and concluded that, at least during the first year, the management of the warehouse would be completely manual. Productivity could be around 200 units/hour in the inbound area and 20 orders/hour in the order picking and packing processes. Considering breaks and stops, calculations were made with 7 net working hours per person and day. The company cost of a warehouse worker without experience is 1,200/month. An administration clerk 1,400/month. How many people should they hire throughout the year to ensure the successful management of spring-summer collection? Use 22 working days/month.

QUESTIONS:

1. They should calculate the landed costs of foreign suppliers and compare them with those offered by Manuel. Decide where to manufacture and justify it.

2. How much money should they spend before starting the project? Detail investments and expenses.

3. What would be the distribution costs of the campaign? Include the costs of reverse logistics.

4. What will be the Profit & Loss account for the first campaign? Use the format proposed in Annex 2 to present it. Consider all other operational expenses such as payment gateway, personnel, marketing, rental and supply, server, etc.

Annex I :

Table 1. Monthly sales

MARCH APRIL MAY JUNE JULY AUGUST SEPTEMBER OCTOBER TOTAL

SHIRT 5% 10% 20% 30% 15% 5% 10% 5% 100%

POLOS 5% 5% 15% 25% 20% 5% 15% 10% 100%

Table 2. Mainland transportation price

WEIGHT (Kg) /SHIPMENT

w = < 2 3,5

2 < W = < 5 4,5

5 < W = < 10 7,5

Annex III

Income statement Format

1 Net Revenues (Gross revenues - customers returns) ()

2 Cost of Products

3 = 1-2 Gross Margin

4 Outbound Transportation Cost

5 Marketing Cost

6 Payment Gateway Cost

7 Web page Costs

8 People

9 Warehouse costs (rental, power, water, fiber,...)

10=4+...+9 Other expenditures

11=3-10 Net Margin