Jamie Bailey, the owner and president of C. R. Plastics, had successfully grown his business every year since 1994, when he had begun producing his innovative line of recycled plastic outdoor furniture in his home town of Stratford, Ontario. However, each year presented a new challenge as rapid growth had constrained his financing, and the summer of 2010 was no different. Desperate for a new source of cash, Bailey had auditioned to be on Dragon's Den, a new network television show, where entrepreneurs could pitch their business to a group of five successful venture capitalists. With only one week left before Bailey was to make his final pitch, he had a difficult decision to make: how much money would he need to keep up with growing demand?

INDUSTRY

The outdoor furniture industry was highly fragmented and very competitive. The majority of the furniture was either being produced in the United States or being imported from low-cost overseas countries, such as China. Canada had traditionally been a net exporter of furniture, but as a result of the recent increase in the valuation of the Canadian dollar and new low-cost overseas entrants, Canada was now a net importer. In the United States, the furniture industry was in similar transition, as domestic employment had been down in 10 of the last 11 years.1 This trend was all the more evident in the plastic furniture segment, which now imported more than double what it exported.2 Manufacturing outdoor plastic furniture did not require a great deal of engineering or capital. In many respects, this industry was ideally suited for offshore production. However, some domestic furniture manufacturers were able to survive and even thrive by offering rapid response to requests for custom-made and highly fashionable products. The outdoor furniture industry had the added complexity of being highly seasonal. However, if a new product showed promise in the North American market, several low-cost competitors would be certain to introduce a similar product before the start of the next season.

Despite these challenges, several companies in both the United States and Canada were offering high-quality recycled plastic outdoor furniture. 1 Furniture Manufacturing - Quarterly Update, 4/4/2011, First Research Industry Profiles, accessed July 6, 2011, from ABI/INFORM Trade & Industry. (Document ID: 2311004651). 2 Industry Canada, "Trade Data Online," http://www.ic.gc.ca/sc_mrkti/tdst/tdo/tdo.php, accessed on July 5, 2011. Page 2 9B11D016 Within Canada, for example, Home and Leisure Group Limited in Brantford had introduced a line of recycled plastic chairs to augment its line of cedar chairs. In the United States, two of the larger suppliers of plastic outdoor furniture, Casual Living Products LLC in Pennsylvania and Poly-Wood in Indiana offered an extensive product line and operated at significant economies of scale. Sales of recycled plastic chairs and other outdoor furniture were primarily made through distributors or direct to small independent dealers, including swimming pool dealers, outdoor furniture specialists, cottage outlets and landscape nurseries. In total, these retailers offered significant geographical coverage but did not do a great deal of advertising and could not carry large amounts of inventory. Until recently, no national retailers had taken an interest in high-quality recycled plastic furniture. However, Costco had been looking at adding a few of the more popular products to its offering for next outdoor furniture season. Because Costco operated on much lower margins than most other retailers, its buying power could represent a significant change in the retail price.

COMPANY HISTORY

In 1994, Bailey started producing wood furniture, but quickly realized that the saturated market dominated by larger integrated companies left little room for a new start-up. Later that year, Bailey was introduced to new type of lumber made from recycled plastic. This new material not only offered an opportunity to differentiate Bailey's product but also a great way to divert materials that would otherwise end up in landfill. Bailey explained: Since 1994 when we first began manufacturing our own line of outdoor furniture, our mission to create beautiful and functional designs from recycled plastic has steadily increased in scope. What began as a small family operation has since expanded to include sales all over the world. We feel that using unwanted plastic that would otherwise be destined for a land fill site is important to ourselves and others' peace of mind. By purchasing recycled products, we all keep the wheel turning. New products made from recycled materials are a sustainable method of conserving finite resources. C. R. Plastics had seen impressive growth over the past four years (see Exhibit 1). The original Adirondack chair had captured the attention of retailers across the United States and Canada. In an effort to maintain a leadership position in the market, Bailey started introducing new colors. C. R. Plastics could now make chairs in 15 different colors to suit any backyard or cottage. In addition, Bailey decided to introduce other plastic outdoor furniture, such as tables, pub chairs, rockers, benches and a host of other furniture and accessories. In all, C. R. Plastics now offered more than 20 different outdoor furniture designs (see Exhibit 2).

Each year, Bailey added a few new colors and designs while removing those models that had not perform well the previous year. However, the original Adirondack chair in a few topselling colors continued to comprise 50 per cent of sales. As the company grew, more and more capital was required to finance equipment, inventory and receivables. Sales grew only as fast as the business could finance the expansion. However, because of limited income and unwillingness on the part of the company's lender to finance further growth, Bailey knew that sales could no longer expand without the injection of some new money.

MANAGING GROWTH

Despite the success of C. R. Plastics, the company faced challenges. The biggest challenge was financing the growth of the company, and 2010 had been a very difficult year. To keep up with demand, Bailey had used his line of credit, which had reached its maximum of $416,000 during the peak season, loaned the company an additional $150,000 of his own money and borrowed another $35,000 on the company's credit cards. Now with only a few months left in his fiscal 2010, he began to worry about 2011 (see Exhibit 3). His bank had agreed to increase his line of credit to $500,000, but remained cautious, given C. R. Plastics' financial performance and the recent credit crisis. Bailey was also uncomfortable increasing his loans to the company and instead wanted to start paying down the debt. With this financial situation in mind, Bailey had auditioned for Dragon's Den, but was still wrestling with how much new money he should request.

Dragon's Den was a relatively new Canadian Broadcasting Corporation (CBC) television show where entrepreneurs could pitch their business to five successful venture capitalists who would then decide whether to invest and, if so, under what terms. The rules of the show were simple: you could not settle for anything less than the amount of money you asked for, but the terms of the investment were negotiable. In the past, the dragons (i.e., the venture capitalists) had successfully negotiated royalties, financing terms, cumulative dividend rates, a board seat and even controlling interests in companies. Bailey knew that he did not want to give up control of his business but he was happy to offer 30 per cent.

PRODUCTION AND FINANCING

From the beginning, quality was important to the company. Bailey believed that to ensure appropriate quality, C. R. Plastics needed to control every aspect of the production process. The first step in producing its outdoor furniture was to mix the plastic pellets with the color concentrate to create the company's own color formulas. These batches of blended pellets were then moved in large boxes to one of several extruders, where the plastic and color concentrates were melted and pressed into molds that formed the parts for each chair, table and other products. Every part was then finished in a CNC (computer numerical control) router to ensure the correct geometry and to contour every edge for optimal comfort. Small-volume orders were then cut and assembled from large extrusions to make tables, bar stools, foot stools and some chairs. Larger-volume products were assembled from parts that were molded to size. All products were then packaged and warehoused on site before being delivered to C. R. Plastics' customers. Traditionally, Bailey had run his operations at full capacity on a single shift during the off-season and then added a second and third shift during the peak season (see Exhibit 4). Finding the people to work the second and third shift was not a challenge as Bailey was able to hire college students who returned home to Stratford for the summer. The work was hard, but the pay was considered good for a student. However, the second and third shifts were never as efficient as the first shift.

In addition, for this model to work during 2011, Bailey would again need to invest in new equipment for the five peak months of the summer (see Exhibits 5 and 6). Alternatively, he had been toying with the idea of running production at a constant output rate throughout the year, a process also known as level loading. Leveling loading would allow C. R. Plastics to not only save the $550,000 Bailey needed to invest in new equipment but also lower his operating costs and improve his cost of goods sold. First, the new machinery would cost $16,000 per month for depreciation, maintenance and other operating costs. Bailey also forecasted that his overall operating expenses would drop by an additional $135,000, as he would not need to go through the difficult process of hiring and training employees for the second and third shifts. Finally, Bailey had determined that if he ran everything on two shifts with a permanent crew, his scrap would drop, his labor efficiency would improve and his overall output should increase. For these reasons Bailey expected that C. R. Plastics could reduce its total cost of goods sold by an additional 1.2 per cent of sales. With only a week before his pitch to the venture capitalists on Dragon's Den, Bailey knew that he would need to come up with a number quickly. According to the rules of the show, he could not lower his number, but he also needed to acquire enough new capital to run the business successfully in 2011, otherwise C. R. Plastics might not survive the year.

EXHIBIT 1:

C. R. PLASTICS BALANCE SHEET AS AT SEPTEMBER 30, 2009

ASSETS

CURRENT ASSETS

Cash $ 89,111

Prepaid Expenses 39,408

Accounts Receivable 381,210

GST/HST Input Credits 35,971

Inventory 719,338

1,265,038

FIXED ASSETS Furniture & Fixtures 22,077

Computer Equipment 17,658

Shop Equipment 888,120

Leasehold Improvements 96,880

1,024,735

Less Depreciation & Amortization (374,039)

650,696

TOTAL ASSETS $ 1,915,734

LIABILITIES & SHAREHOLDERS' EQUITY

CURRENT LIABILITIES

Line of Credit $ 150,000

Equipment Loan 105,730

Accounts Payable 273,953

Accrued Liabilities 80,077 609,760

OTHER LIABILITIES

Shareholder Loans 1,118,931

Deferred Taxes (30,281)

1,088,650

SHAREHOLDERS' EQUITY

Share Capital 5,250

Retained Earnings 212,074

217,324

TOTAL LIABILITIES & SHAREHOLDERS' EQUITY $ 1,915,734

C. R. PLASTICS INCOME STATEMENTS, 2006-2009

(ENDING SEPTEMBER 30) 2006 2007 2008 2009

Sales $ 2,390,890 $ 2,767,003 $ 3,352,841 $4,288,432

Cost of Goods Sold 1,521,565 2,140,528 2,565,803 2,665,977

Gross Margin 869,325 626,475 787,038 1,622,455

Operating Expenses 228,241 465,570 604,825 662,651

Selling General & Administrative 288,835 284,421 388,759 493,579

Interest Expenses 48,349 50,101 78,262 148,344

Total Expenses 565,425 800,092 1,071,846 1,304,574

Other Income (Expense) (2,509) 42,648 (65,358)

Income (loss) before taxes 303,900 (176,126) (242,160) 252,523

Income Taxes 44,175 (32,445) (42,011) 43,531

Net Income (loss) for the period $ 259,725 $ (143,681) $ (200,149) $ 208,992

EXHIBIT 2: C. R. PLASTICS' PRODUCTS Adirondack Chair Dining Table and Chairs Bench Adirondack Chair and Foot Stool Source: Company Files Page 8 9B11D016 EXHIBIT 3: C. R. PLASTICS' SALES, OCTOBER 2009 TO JUNE 2010 AND SALES FORECAST, JULY 2010 TO SEPTEMBER 2011 (THOUSAND DOLLARS) Source: Company Files EXHIBIT 4: C. R. PLASTICS' CURRENT MONTHLY PRODUCTION PLAN Month Production October 4.7% November 4.7% December 4.7% January 4.7% February 4.7% March 4.7% April 13.4% May 13.4% June 13.4% July 13.4% August 13.4% September 4.7%

Required:

Define the problem

Formulate alternative solutions and evaluate each alternative

Recommend and justify an effective solution

Conclusion and circumvention of potential problems