Category Archives: Operations/Logistics

Building Utah, 1 Utah Homes at a Time

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It’s always refreshing to hear when new businesses are starting in tumultuous markets. There are few industries that have been hammered worse that real estate. While the Utah real estate market hasn’t been hit near as hard as Arizona or California, there’s no question that it’s seen better days.

New Homes in Utah are being produced by a few very successful builders. A number of elements are contributing to the ability for new home buyers to afford great quality homes at a reasonable cost. Among these factors, reduced access to traditional credit has lowered the cost of sub contractors, building materials and land.

It goes without saying that current market conditions have created the perfect storm for buying a new Utah home. I’ve had the opportunity to see the 1 Utah Homes model from the inside, and the attention to detail, cost and customer service is among the very best of Utah Home Builders.

Franchise Management

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I’ve recently been working with a Rock Chip Repair Company. My job has been to identify and negotiate locations all across the Wasatch Front. I’m also in charge of hiring, firing and scheduling at each location. In a sense, it has a been a miniature model of developing a franchise chain.

Although fairly simple in its model, it has proven to be an incredible learning experience. Each location, although may look the same, has a number of dynamic characteristics. Zoning laws, landlords, customer traffic, location visibility, employee personalities, etc.

In managing this small franchise, I am learning the importance of… well… management. There is no way I can be everywhere in a single day. I need to get the right people in motion and on the right track and then go on to my next location.

I can also see how important management is in owning a business. I’ve had to significantly reduce my hours at Worldwide Book Drive, and our manager there is doing a phenomenal job. He allows me to focus in activities that provide funding and publicity while the daily grind of operations takes place.

I’m learning. I want to learn more. Anybody have any books or blogs they would suggest for good management tips?

The Next Step for Multilevel Marketing in China

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With the tumultuous past behind, multilevel marketers look to the future for real returns on their investments.

Companies such as Amway and Mary Kay have demonstrated that there is a significant amount of profit to be made through MLM and retail sales in China. Newcomer Nu Skin is eager for involvement in this market and has already committed more than $US80m of investment for a position in the market (Anderton, 2002, par. 7). As the leading MLM companies increase their momentum in the Chinese-marketplace, they must spend large amounts of money and time to push past the learning curve and obstacles that must be overcome to successfully pioneer the industry. These pioneered paths create a trail that can be more efficiently utilized by other companies that wish to pursue a similar course. Large companies have already done the majority of the work and are now positioning themselves for greater payoffs. Now is the time for emerging MLM companies to join in the Chinese MLM market.

Signs of Opportunity 
The changing economic climate in China and the major investment positioning of leading MLM companies are clear signs of pending opportunity and profit in China. For years China has been working toward a more open market. Within the past year, two of the greatest milestones in China’s market history have occurred. The first was China’s accession in the WTO in December of 2002. As part of WTO accession, China must open its banking, insurance, telecommunications, agricultural sectors and more (“A Dragon Out of Puff,” 2002, par.2, 6). The second major milestone included the successful transfer of congressional and presidential power in 2002 and 2003 (“A Dragon Out of Puff,” 2002, par.3, 9, 11).

Major player investment is another indication of the ripening situation. In June, 2003, Amway announced an additional US$100m investment in their Chinese operations (“US Businessman,” 2003, par.1), and in January 2003, Nu Skin announced their investment of US$80m dollars in their China operations. Nu Skin also announced expected yearly revenues to reach US$300m by 2007.

Accession into the WTO was seen as a major step towards lifting the ban on MLM companies in China. “As part of China’s pact with the World Trade Organization, restrictions on direct selling will be decreased by December, 2004” (“Nu Skin China,” 2002). Unfortunately the announcement of those revised policies did not meet the Chinese government’s original December 11, 2004 deadline, and MLM companies were forced to continue operating under the strict conditions of the 1998 policies. In more recent developments, however, it was announced in September 2005 that China was soon to lift its ban. “The State Council, Cabinet, of China has approved in principle new draft rules on direct selling management and banning pyramid selling, lifting the countries 7 year ban on direct selling” (“Breakthrough in Direct Selling,” 2005 par.1).

Although this policy remains to be approved, it does offer good indications for reduced investment costs and change in the marketplace. This recent policy indicates a higher allowed commission payout, 30% as opposed to the previous 25% and an end to a requisite number of fixed stores, at least one, as opposed to one in each active province. Also advantageous is a new limit to registered capital, raising the limit to approximately US$10m. (“Breakthrough in Direct Selling,” 2005 par.1). These changes have signaled a slowdown in investments from major companies such as Amway and Nu Skin, “We will not be obliged to open shops in every city.” (Li, 2005, par.4) The policy is expected to be approved by the end of the year, although no one is holding their breath.

Let the money itself speak for the opportunity in this market. By the end of August 2005, Amway reported to have reached US$2b in sales and Nu Skin predicts its year-end sales to reach over US$120m. If the ban on MLM companies is lifted, numbers are expected to be much higher (“Direct Sellers May Get a Foot in China’s Door;” 2005).
Balanced Approach

To maximize the probability of success in China, a firm must use both Western and Chinese methods in its business strategies. The Chinese government and its people are eager to learn more about Western business marketing strategies and management. Likewise, Western firms that wish to succeed in China must actively learn and implement Chinese social and cultural factors into their strategies (“Who Will Help Her Find Her Way in China?,” 2003 p. 5).

Present Strategies Of Nutraceutical Multilevel Marketing Companies in China

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Multilevel marketing companies have worked hard to adapt their business practices to meet the Chinese market demands.

The Retail/ Single Level Switch
The conversion from MLM to retail required a serious shift in MLM thinking and practice. At the time of the ban, Amway had already invested more than US$100m, Avon US$70m and Mary Kay another US$20m (“When the Force is Against You,” 1998, p. 5). This ban put hundreds of millions of dollars worth of equipment and liabilities at risk. The jump to retail sales was meant to protect investments and also to diversify revenue stream. Some of the specific changes in the Chinese-MLM strategies are listed below (“When the Force is Against You,” 1998, p. 5):

• Avon. Distribution branches were converted into retail and wholesale stores. Kiosks were opened in partnered-national retail chains and sales promoters and customers were allowed special customer discounts. Avon has more outlets than any other nutraceutical MLM company in China with 6,300 beauty boutiques and 1,700 beauty counters (“Still Off the Doorstep,” 2005, p. 2).
• Amway. Product distribution centers were converted into retail stores. Small fees allowed up to 15% special customer discounts on all purchases. Sales promoters can do product demonstration and customer follow-up. Sales promoters deliver items to customers homes and receive payment on commission. Amway has around 130,000 sales representatives selling some 180 products. It also operates more than 130 retail stores (“Still Off the Doorstep,” 2005, p. 2).
• Mary Kay. Practices will change very little. Whereas Mary Kay sales transactions were mostly done in their “beauty centers” before the ban, their new policy required all sales transactions take place in their specified sales locations and sales promoters work on a commission-only pay. Mary Kay continues to hold beauty education classes to promote their products (Hulme, 2001, p. 43).
• Nu Skin. Arriving late into the market in 2003, Nu Skin has since invested more than US$100 and is operating approximately 115 outlets. Nu Skin has announced their plans to increase the number of its retail outlets to 200 by the year 2006 (“Still Off the Doorstep,” 2005, p. 3).

Effect on Revenues
Transition of business models was not a smooth ride for the big MLM firms. Months of no sales revenues, extensive employee retraining and internal restructuring took a toll on the recovering giants. As a result of the ban, the big companies’ yearly sales were cut nearly in half for the first year (“When the Force is Against You,” 1998 p.5). Since then, however, revenues have seen strong growth for many companies. In 2002, revenues from China’s total sales volume brought Amway RMB$6b, approximately US$750m. In August of 2005, Amway reported to have already met $2b. These revenues accounted for nearly one fourth of Amway’s total global sales (Li, 2005 par.11; “World Consumer,” 2003). Other companies such as Mary Kay and Avon also reported very strong growth (Hulme, 2001 p.43; Ui-Hoon, 2001 par.3). Mary Kay’s 2002 sales numbers exceeded US$120m), Avon’s exceeded US$220m. Such phenomenal growth is what initially attracted other global companies such as Nu Skin Enterprises to try for a share of the industry. Nu Skin Enterprises obtained over US$100m in sales for 2004 (“Still Off the Doorstep,” 2005, p.3).

Adapting to Chinese Business
Making the jump to retail sales is only one of the big steps that MLM companies are doing to adapt to business in China. The learning curve associated with pioneering a business in China requires time, resources and an extensive amount of learning. When commenting about doing business in China, Blackman wrote,

People are unable to start doing business in China as if they were in the developed West. A business [firm] must learn how the local scene works and then decide to what extent he or she will adapt to local ways (Blackman, 2000, pp.14-15).

Making Connections.

Using guanxi to effectively maneuver within Chinese business has quickly become a top priority among many of the leading MLM companies. By establishing strategic relationships with the government and other companies that operate in China, MLM companies open doors to many opportunities, both transparent and inconspicuous. In August of 2003, a recent program brought over 60 top Chinese mayors and officials to Utah and Boston for a leadership training seminar (“Chinese Government Officials Visit Utah to Study American System,” 2003, par.1) Shawn Hu, a major organizer of this project, stated that this program was largely sponsored by MLM companies in China (personal communication, November 16, 2003).

Avon, the fastest company to recover from the ban of 1998, used special relationships to gain acceptance from the Chinese government when faced with a problem in establishing their manufacturing operations. After initially failing to convince the central government of its direct marketing program, Avon acquired the assistance of David Li, the head of the Hong Kong’s Bank of East Asia. Li used his cordial guanxi with the Chinese government to successfully introduce Avon to the appropriate industry in southern China (Luo, 2001, p. 56).

Can You Build Land?

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When I was in 4th grade, I remember learning about the problem of landfill waste and drawing up what I felt was a grand concept to compost waste and create land in floating barges in the ocean. I drew up plans with areation modules, anchoring systems, etc. When I learned that the Japanese had already developed land generation, my 11 year old heart was broken. I couldn’t believe it! But I moved on.

I had almost completely forgotten about this, until last week when I watched Superman Returns with my wife. When Lex Luther talks about how much money he would make by creating land… One of the only truly fixed resources–it got me thinking. I thought about my 4th grade idea, and then a few of the things I’ve learned since then.

Somebody asked me the other day what I would do if I already had hundreds of millions of dollars… I gave the question serious consideration and then responded that of course I would relax some, establish a helpful and strategic foundation or non-profit and then, I would like to make land :)

I know it sounds like a larger than life idea. But I can absolutely see a market for floating land creation. There are a number of available technologies that can meet the needs for cost-efficiency, independent energy and water. Moreover, in today’s environment of systems theory and networking, a network of floating real estate becomes even more valuable and useful.

I’ve seen whole floating colonies of fishermen and impoverished vietnamese. I’ve walked the piers of houseboats and cruiseliners… People are doing it already. It just needs the right team, the right funding and the right timing before we see an impressive reality of new land.

Start-Ups Credit Dream

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Taking a credit card for a brick and mortar shop can be expensive. It requires that you set up a merchant account, get the hardware and usually you have to pay for an extra line.

Working with service brokers can add up over time and adds an additional step. Early cancellation is a killer and usually has a minimum of a $500 dollar cancellation fee.

My research and experience at our little company showed there were pretty good ways to go for a small business that needs to take credit cards fast:

PayPal: is by far the fastest and least overhead of any credit card account. Unfortunately it is relatively expensive per transaction and requires that your customers have PayPal to get confirmation or refunds etc… Not quite what we wanted. It’s obviously more complicated than this depending on the card and transaction type, but here’s a general idea–

  • .30 per transaction
  • 2.5% fee

ModPay: A start-up company, (referred to us by a customer actually) recently bought out by Zion’s bank. It offers a handy little internet credit-card gateway. They are super understaffed and primarily meant for reoccuring accounts, but they are by far the cheapest per transaction and card swipe is a lot cheaper than your run of the mill credit card machine… Again, it’s obviously more complicated than this depending on the card and transaction type, but here’s a general idea–

  • .25 per transaction
  • 2.2% fee

So far our experience at Worldwide Bookstores has been favorable, and we’re looking forward to more satisfied citizens who can buy books with visa or mastercard…

Postage hikes in the Amazon Jungle

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As we all know, (or should know), postage has increased about 5.4% across the board. This makes sense considering the last postage hike hasn’t been since June of 2002.

Unfortunately for some online retailers, they’ll have to eat that cost while they wait for the consumers or their affiliate partners, (i.e.amazon to catch up.

I have one friend who had heard about the price increase just before she was about to send a letter from her home. After some minor deliberation, she decided to tape on two pennies and let the post office work it out.

Unfortunately for online retailers it may not be so simple. Many people fear that by passing the cost on to their customers they’ll lose business to those people who don’t.

Personally, I don’t think that increasing shipping costs by 5.4 percent will affect the sales–at least as long as the price has a nice marketing ring to it.

I’m curious to see when Amazon will pick it up and offer their sales partners an increased shipping credit. I’m sure they’ll take their time for now. We’ll see…

Floating Funds… Fun for who?

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So big corporations withhold money from each of their employees checks for taxes. They find some way to pay the money to government either quarterly or in one lump sum at the end of the year. So what happens with the money while it’s waiting to be paid for the taxes it was drawn for?

Chances are pretty good the money is being re-invested some type of maretable security making 10-12%. I’d imagine that some corporations give a share of it back in the form of a Christmas or performance bonus, or maybe they use it to fund their 401K and other benefit packages. I bet that a lot of places with low paying labor, (Fastfood joints, janitorial companies etc. simply keep it).

I’d be interested to see what really happens to that money.