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Fabrica
6. Operations Strategy

6.1 Licensing

Our key strategic decision was whether to sell samples, looms, or both. We decided to sell only samples because:

What our target group wants is quick, quality samples at low cost, not additional machines in their mills, and the most effective way of satisfying this need is through sample sales. The next question was whether we should produce all samples in Thailand, establish branches overseas, or license others to produce for foreign markets. The attraction of licensing was immediate: we can recoup equipment costs at once, do not need to build deep familiarity with each market, and can expand with a minimum increase in headcount and overheads.

The basic of Fabrica's licensing program are:

The table below shows the licensee's earnings both as a distributor of imported samples, and later as a royalty-paying producer (based on target sales of 5,000 samples/year and 10 looms in operation):

COSTSImportingProducing
Selling Price per sample400400
Commission120-
Royalty-80
Selling Expense70.970.9
Material-2
Labor-64.35
Overhead-6.9
Shipping & Handling119
License Fee-20
Total Income38.1146.85

6.2 Production

A key theme in all our planning has been to minimize Fabrica's fixed assets, to enhance returns and even more to minimize the stake at risk to possible competition.

6.2.1. Looms

KS looms will continue to be produced by the same group of machine shops and fabricators Dr. Sathit has been using so far, with the critical dobby head made by a company in which Dr. Sathit himself has an interest. We will purchase the looms from Dr. Sathit. If current component suppliers are not able to expand to meet increasing demand, there are large numbers of competent alternative sources.

6.2.2. Yarn

Although we will stock 780 different yarns, which some of them are the left-over yarns from weaving factories, and expect to be able to produce 80% of all samples ordered from this inventory, it will be important to obtain quickly any of many thousand other yarns a customer may specify. After thorough investigation of the practicality of setting up our own small-scale dyeing operation versus outsourcmg, we have found that there are three dye works in and around Bangkok which are willing to undertake dyeing of single spools of yarn on short notice on a retainer basis. Delivery time will be no more than five days, which is acceptable to customers. Outsourcing will save us the need for acquiring additional specialist expertise, and maintaining a potentially burdensome stock of dyestuffs, which are not always available in small quantities.

6.3 Technology security / Intellectual property rights

Dr. Sathit has already applied for Thai patents on four key components of the KS loom9, and we have initiated filing for US patents. The likelihood of success is extremely good, but these patents will cover specific ways of producing the desired results rather than the results themselves.

As far as our security of exclusive access to Dr. Sathit's inventions and expertise is concerned, our option on the KS loom design includes a provision that we shall gain sole rights to any textile - related invention of Dr. Sathit's for the duration of his tenure as Fabrica's Research and Development Director and five years thereafter.

6.4 Research and Development

All of our R&D will be conducted externally by Dr. Sathit, who will continue to hold his academic position and enjoy access to a variety of facilities it would be impractical for Fabrica to duplicate. We will provide Dr. Sathit with an annual budget of 2% of net sales for further Research and Development projects.

6.5 Personnel

6.5.1. Compensation

Because of the need for shift work and close attention to the process, we have budgeted base pay and benefits approximately 20% above current market rates, and have included a very generous 8% real annual increase.

6.5.2. Supervision & Manpower

The Fabrica sample center in Bangkok will operate 16 hours a day, two shifts, under a shift supervisor. Employees will be locally recruited, with on-site training. Three main operational functions are required as full time employees: 63 in production, 9 in marketing, and 8 in finance and administration.

6.6 Risks and risk management

6.6.1. Internal

The primary internal risk is a failure of R&D, particularly some event that would deprive us of the services of Dr. Sathit. We are actively developing a list of other textile engineers to recruit in this contingency, but a major interruption of development programs would be inevitable.

A secondary risk is a rupture in outsourcing lines. This would be of much less consequence, since we already know of alternative sources for the comparatively simple loom fabrication and yarn dyeing processes.

6.6.2. External

Competitive

The great risk is that a competitor appears on the scene before we have established a commanding position. We do not believe that even an established loom manufacturer could bring a competitor to the KS loom to market within less than two to three years, but we have no way of knowing that such a competitive system is not already under development. Our response to its appearance would be accelerated geographic expansion and immediate price reduction, but project profitability would be almost sure to suffer however we react.

Country Political Risk

Southeast Asia is now in a state of political ferment that has (combined with the near-collapse of its financial institutions) reduced the flow of foreign direct investment to a trickle. The future of Indonesia, Malaysia, Burma and Cambodia is in sufficient doubt to deter many prudent investors. This is not true of Thailand. Prospects for a radical change in government are minimal: the only credible replacement for the present power structure is the military, which seems presently very little inclined to revert to its bad old habit of political activism. In the unlikely event that the military took power, policies affecting this project would in all probability experience no change.

Foreign Exchange Risk

Since early 1997, the baht has ranged in value from 25.4 = $1 to 55 = $1. The present exchange rate of about 37 baht to the dollar is widely expected to deteriorate slightly to 40 or 41, but a much larger decline is possible if China devalues the yuan, and in a number of other circumstances, and even an appreciable strengthening cannot be ruled out. Our partner/distributor will be substantially insulated from any effects because a weakening of the baht will reduce dollar costs (of labor, depreciation, etc.) at the same time it reduces the dollar value of dividends.

9 See patentable Appendix C for patentable features
Fabrica Co., Ltd.
Table of ContentsAppendices
0. Executive Summary
1. Company
2. People
3. Product
4. Market
5. Marketing Strategy
6. Operations Strategy
7. Financial Plan
8. The Deal
Sample Production Costs
Glossary of Terms
Patentable Features
Sample Order Flow
Financial Assumptions
Investment Structure
Yearly Income Statement
Yearly Cash Flow
Yearly Balance Sheet
Monthly & Quarterly
Proprietary to Fabrica Co., Ltd.