Small Manufacturers

Marketing

Before you plan production, you must decide who your market is, where it is, why customers will buy your product, whether the market is a growth or static one, if there are any seasonal aspects of the market and what percentage of the market you will shoot for in the first, second and third years of operation. Your production goals and plans must be based on and be responsive to this kind of fact finding (marketing feasibility and research).

Market Area

Where and to whom are you going to sell your product? Describe the market area you will serve in terms of geography and customer profile.

Who are Your Competitors?

List the principal competitors selling in your market area, estimate their percentage of market penetration and dollar sales in that market and estimate their potential loss of sales as a result of your entry into the market.

How Do You Rate Your Competitors?

Try to find out the strengths and weaknesses of each competitor. Then write your opinion of each of your principal competitors, their principal products, facilities, marketing characteristics and new product development or adaptability to changing market conditions.

Have any of your competitors recently closed operations or have they withdrawn from your market area? (State reasons if you know them). Foreign manufacturers are a large threat today. Can your product be manufactured elsewhere for less?

Advantages over Competitors

On what basis will you be able to capture your projected share of the market? Below is a list of characteristics that may indicate the advantages your product(s) enjoy over those offered by competitors.

Price Performance Durability Versatility Speed or accuracy Ease of operation or use Ease or cost of installation Size or weight Style or appearance

Other characteristics not listed What, if anything, is unique about your product?

Distribution

How will you get your product to the ultimate consumer? Will you sell it directly through your own sales organization or indirectly through manufacturer's agents, brokers, wholesalers and so on? Write a brief statement of your method of distribution and manner of sales. You can use more than one method.

What will this method of distribution cost you?

Do you plan to use special marketing, sales or merchandising techniques? Describe them.

Market Trends

What has the sales trend for your principal product(s) been in your market area over the last five years? What do you expect it to be five years from now? You should indicate the source of your data and the basis of your projections. (This is a marketing research problem. You will have to do some digging in order to come up with a market projection. Trade associations will probably be your most helpful source of information. The U. S. Census Bureau publishes many useful statistics.)

List the name and address of trade associations serving your industry and indicate whether you are a member.

List the name and address of other organizations, government agencies, industry associations, etc., from which you intend to obtain management, technical, economic or other types of information and assistance.

Production

Production is the work that goes on in a factory that results in a product. In making your business plan, you have to consider all the activities that are involved in turning raw materials into finished products. The topics that follow are designed to help you determine what production facilities and equipment you need.

Manufacturing Operations

List the basic operations (e.g., cut and sew, machine and assemble, etc.) that are needed in order to make your product.

Raw Materials

What raw materials or components will you need, and where will you get them? What price will you have to pay for them?

What amount of raw materials and/or components will you need to stock? How long does it take for delivery on reorders?

Are there any special considerations concerning the storage requirements of your raw material? For example, will you use chemicals that can only be stored for a short time before they lose their potency?

Equipment

List the equipment needed to perform the manufacturing operations. Indicate whether you will rent or buy the equipment and what your cost will be.

Your equipment facilities, and method of operation must comply with the Occupational Safety and Health Act of 1970. You may obtain a copy of Standards for General Industry from the Superintendent of Documents, U.S. Government Printing Office, Washington, D.C. 20402, or a field office of the Occupational Safety and Health Administration.

Labor Skills

List the labor skills needed to run the equipment:

Skill Classification Number of Persons Needed Pay Rate Availability List the indirect labor (for example, material handlers, stockmen, janitors, and so on) that is needed to keep the plant operating:

Skill Classification Number of Persons Needed Pay Rate Availability If persons with these skills are not already on your payroll, where will you get them?

Space

How much space will you need to make the product? Include restrooms, storage for raw material and for finished products, and employee parking facilities if appropriate. Are there any local ordinances with which you must comply?

Do you own this space or will you buy or lease it?

How much will it cost you?

Overhead

List the overhead items needed in addition to indirect labor and include their cost. Examples are tools, supplies, utilities, office help, telephone, payroll taxes, holidays, vacations and salaries and benefits for your key people (sales manager, plant manager and supervisor).

How Much Money Is Needed?

Money is a tool you can use to make your plan work. Money is also a measuring device. You will measure your plan in terms of dollars, and outsiders, such as bankers and other lenders, will do the same.

When you determine how much money is needed to start (or expand) your business, you can decide whether or not to move ahead. If the cost is greater than the profits that the business can earn, there are two things to consider. Many businesses do not show a profit until the second or third year of operation. If this looks like the case with your business, you will need the financial reserves to carry you through this period. On the other hand, you might be better off putting your money into stocks, bonds or other reliable investments rather than taking on the job of managing a small business.

Getting the Work Done

Your manufacturing business is only part way home when you have planned your marketing and production. Organization is needed if your plant is to produce what you expect it to produce. It is also essential because as the owner-manager, you'll probably have to delegate work, responsibility and authority. A helpful tool in getting this done is an organizational chart. It shows at a glance who is responsible for the major activities of a business. However, no matter how your operation is organized, keep control of the financial management.

Making Your Plan Work

To make your plan work you will need feedback. For example, the year-end profit and loss (income) statement shows whether your business made a profit or loss for the past twelve months.

But you can't wait twelve months for the score. To keep your plan on target you need readings at frequent intervals. A profit and loss statement at the end of each month or at the end of each quarter is one type of frequent feedback. Beware of relying too heavily on the profit and loss statement. Since it only shows actual income and expenses for a given period, you may find that at certain times you have more losses than profits. Keep a close eye on trends in "cost of goods sold". Sudden changes in production costs signal a need for management action.

To keep a balanced perspective on your business, you must continuously review and update your cash flow projection. This will help you to anticipate changing levels of income and expenses.

You must set up a management control system that will help you to insure that the right things are being done from day to day and from week to week. This system should give you precise information on inventory, production, quality, sales, collection of accounts receivable and disbursements.

The simpler the system, the better. Its purpose is to give you and your key people current information in time to correct deviations from approved policies, procedures or practices. You are after facts with emphasis on trouble spots.

Inventory Control

The purpose of controlling inventory is to provide maximum service to your customers. Your aim should be to achieve a rapid turnover on your inventory; the fewer dollars you tie up in raw materials inventory and in finished goods inventory, the faster you can reinvest your capital to meet additional customer needs.

In setting up inventory controls, keep in mind that in addition to the cost of inventory, there are also the costs of purchasing, receiving and storing raw materials and the cost of keeping inventory records.

Production

In preparing a complete business plan, you will have estimated the cost figures for your manufacturing operation. Use these figures to measure the cost of your day-to-day operations to ensure that profits are not eaten away through excessive worker hours, processing time, delays or down time. Periodic production reports will allow you to keep your finger on potential drains on your profits and should also provide feedback on your overhead expenses. The scheduling of production quantities should be done only after considering the sales projections.

Quality Control

Poorly made products cause a company to lose customers. In addition, when a product fails to perform satisfactorily, shipments are held up, inventory is increased, and a severe financial strain can result. Moreover, when quality is poor, it's a good bet that waste and spoilage on the production line are greater than they should be.

A quality control system focuses on one question: What needs to be done to see that work is done right the first time? The details of the system checkpoints, reports and so on will depend on your type of production system. Also keep in mind that any quality control needed on raw materials can be an added expense.

Breaking Even

Break-even analysis is a management control device because the break-even point shows how much you must sell under given conditions in order to just cover your costs with no profit and no loss.

In preparing to start or expand a manufacturing business you should determine at what approximate level of sales a new product will pay for itself and begin to bring in a profit.

Profit depends on sales volume, selling price and costs. So, to figure your break-even point, first separate your fixed costs (such as rent or depreciation allowance) from your variable costs per unit (such as materials and direct labor). The break-even formula is done in two steps:

1) Compute "contribution margin" per unit: Selling price - variable cost per unit = contribution margin per unit 2) Break-even = total annual fixed costs divided by contribution margin per unit For example, ABC Manufacturing has determined its fixed costs to be $100,000 and variable costs to be $50 per unit. If the selling price per unit is $100, then Ajax's break-even volume is

1) $100 - $50 = $50 contribution margin per unit\ 2) 100,000 / 50 = 2,000 units to break even

Last Updated: June 2005