Every week, we will find the expert advice to help a small or medium-sized company overcome a key issue it is facing in its business.
At first, Jackie Dinsmore wasn’t even sure if the April 5 e-mail from a buyer for Debenhams Retail PLC was the real thing.
The British-based retail giant, which has close to 230 stores worldwide, wanted to order a huge quantity of merchandise from Luvali Convertibles, the Toronto-based company co-owned by Ms. Dinsmore, her husband, Jamie, and her mother, Shirley Durk.
Not only did it want to place orders representing all of Luvali’s roughly 300 products, but it wanted the order filled in less than a week’s time.
It was a great coup for Luvali, created in 2007 as a maker of convertible bags that can be transformed into different styles by changing or reversing a slip cover or removing a strap, which has since expanded its product lines to include reversible sun hats, reversible jewellery, organic baby clothes and diaper bag kits.
But it was also a great challenge.
Luvali’s products are sold online, in 10 of The Bay’s flagship stores and through a network of about 700 independent boutiques across North America. None of them, or their orders, come close in size to Debenhams.
Its order – which Ms. Dinsmore says was about 50 times more than a typical one from her boutique customers – nearly depleted the company’s stock, which can take more than 90 days to replenish.
“Initially they were just interested in the bags, but after I told them about my other products, they wanted everything – every product in every colour,” says Ms. Dinsmore, who says she has no idea – and has had no time to find out – how she even got on Debenhams’ radar.
“In the end, the order added up to a couple of thousand units worth tens of thousands of dollars.”
To ensure she had enough to also meet the demands of her other clients, Ms. Dinsmore says she pushed back on some of Debenham’s requests, negotiating lower quantities on some items.
With Debenham’s order filled and Luvali’s sales continuing to grow, Ms. Dinsmore wants to make sure her company is now in a position to take on more large orders – but without the risk of jeopardizing her smaller boutique accounts as a result of suddenly low inventory levels.
She could keep more products in stock by ordering in larger volumes from her manufacturer in China. Instead of putting in 10 small orders a year, as she does now, she could buy in bulk twice a year – a move that would save her money because of volume discounts.
But the manufacturer will want to be paid upfront for the large order, which would create cash-flow problems for her young company.
The challenge: Ms. Dinsmore wants to be ready to meet large rush orders from big retailers– but without the risk of short-changing her small boutique clients. She has to ensure that she has enough stock to supply the network of small boutiques that have helped the company grow as rapidly as it has over the last two years.
THE EXPERTS WEIGH IN
Robert Blunden, associate professor, strategic management and family enterprise, Dalhousie University School of Business Administration, Halifax
It’s important that Ms. Dinsmore not fail to service her existing customers because they’re the backbone of the company she built. So she needs to ensure she’s adequately stocked to meet their needs while being able to react quickly to big orders.
I don’t think she needs to stock up to a level that anticipates the same size of order she just got from Debenhams – maybe just increase by a small percentage to start. I wouldn’t carry too much inventory, especially for products that might be considered trendy. Right now, we don’t know if the Debenhams order is going to be a repeat order or not – this will depend on how well their products sell in Debenhams’ stores.
On the financing side, what she needs is debt to enable her to finance her inventory until she sells the goods. Depending on her relationship with her bank, she may be able to get a line of credit. The bank may not want to extend a line of credit based on Luvali’s receivables or inventory, but if Ms. Dinsmore or her mother has equity in their house, then they may be able to get a line of credit that way.
She should tell Debenhams what kind of delivery time she needs in the future so she doesn’t get another surprise order from them. And she should try to improve her terms with her manufacturer in China. She’s a growing company with a lot of potential so it’s in the manufacturer’s best interest to work towards a better term for her. Everything is negotiable.
Praveen Varshney, principal of Varshney Capital Corp., Vancouver
Luvali’s challenge right now really boils down to a question of funding. The company’s growing and needs to be able to finance its growth, and there are so many ways to fund a business, each with pros and cons.
Luvali may not be suitable for venture capital at this stage as the business may be too small and not have growth prospects at the level that would satisfy equity investors.
Ideally, for a business like this in a situation like this, one of the best options would be to get an operating line of credit with a bank to fund orders. This would give Luvali the lowest-cost interest without giving up any equity in the company.
Alternatively, Luvali could sell shares in the company, starting with some close friends and family. They’re the easiest people to sell shares to, since they know you and are most likely to believe in you and support you.
A more creative solution would be combining debt financing with a small equity kicker. So, for example, if Luvali needed a certain amount to be able to place large volume orders with their manufacturer, they could borrow a portion of this amount from a group of friends and relatives and fund the remaining balance by selling shares in the company to the same people.
It sounds like this company has momentum, so they should do as much as they can to stay ahead of the curve.
Éric Wazana, founder and creative director, Second Denim Co., Montreal
Our company is all about serving smaller chain retailers with less than 30 stores, so I can understand what Luvali is going through, since we went through something very similar. Our products became very popular, very quickly, and everybody wanted them delivered in their stores yesterday.
My advice is to plan as aggressively as possible. Look at your sales projections and take the necessary actions to ensure you’ve got the products to meet these projections.
Ms. Dinsmore has a great problem: People want her stuff. She can negotiate with the stores and say, “Look, you can only buy this much.” This way, she can grow in a healthy way. If she bites more than she can chew, she is going to get into trouble because she won’t be able to deliver everything to everyone.
She also needs to secure a manufacturer who can work on terms that are more favourable for her. It’s true that there’s limited expertise in bag manufacturing in Canada, but there are a few people who are doing it well and I’d love to introduce her to some of them.
Local manufacturing is also more expensive, but don’t forget that prices in China are also going up; it’s only a matter of time before their manufacturing costs catch up to ours. The trick with local manufacturing is to make your product as production-friendly as possible and maximize your production line by not making your design so complicated.
THREE THINGS LUVALI SHOULD DO NOW:
Get funding to be able to place bigger orders with the manufacturer
But forget equity funding for now; instead get a line of credit from a bank or borrow from your family and close friends.
Spell out the delivery schedule to all current and potential customers
This way you can avoid, or at least minimize, surprise orders.
Negotiate better terms or find a manufacturer that will work on terms more favourable to your business.
Make sure you convey the fact that you’re growing fast and starting to mingle with the big players.
Special to The Globe and Mail
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