Woof (Design) Limited
"The recession has really hit hard," exclaimed Gill Campbell, President of Woof Design, a small cottageindustry manufacturer of knitted products located in St John's, Newfoundland. Company sales in 1990 had fallen by nine percent compared to 1989, a level not seen since 1987. Orders from retail customers had been poor since November 1990. To compound these problems Gill had to face the realization that a number of her current retail customers had gone bankrupt. Moreover, she had just returned from the national trade shows on March 15, 1991, with a 30 percent drop in orders. "Are my products at the end of their life cycle," she questioned, "or would it be wise to expand my distribution and promotion efforts to get the sales curve to slope upward again?"
Company Background
In 1976 Woof Design was only a concept in the mind of Gill Campbell, a parttime craftsperson who was trained and experienced in the art of knitting and weaving. Ten years later, in 1986, the company was awarded the Newfoundland Export Award for sales to the rest of Canada. By 1990, Woof Design had Canadawide sales in the range of one half million dollars in knitted garments and accessories.
This case was prepared by Professor Donna Stapleton and Mr Vernon Smith, BComrn 1992, of Memorial University of Newfoundland for the Atlantic Entrepreneurial Institute as a basis for classroom discussion, and is not meant to illustrate either effective or ineffective management.
Copyright © 1992, the Atlantic Entrepreneurial Institute. Reproduction of this case is allowed without permission for educational purposes, but all such reproduction must acknowledge the copyright. This permission does not include publication.
Gill established the company in 1977 as a graphics business. Over the next six years she nurtured her knitting and weaving of crafts to a fullfledged manufacturing business. In 1981, the company expanded to meet demand for knitted garments and accessories and was incorporated as Woof Limited with Gill Campbell being the principal owner. Gill was responsible for the overall direction of the company and was directly involved in planning, financial control, sales and marketing, as well as in product design and development. She felt that her technical and marketing skills were a major asset to the company, but as she explained, "I am not a creative person and hence product design has been a weak area in the company." Furthermore, the continued expansion of the company and its reliance on Gill in so many areas were in direct conflict with her desire to have a normal family life.
Woof Design operated from premises at 129131 Queen's Road, St John's, Newfoundland. It was here that the four fulltime management employees worked. In these two adjoining buildings, the company had 225M2 of office and storage space and 55M2 of retail space which was operated as a factory outlet. Company income was supplemented by renting a portion of these buildings to other businesses and individuals. Financing of equipment and working capital was accomplished by contributions from the shareholders, by bank loans, and most notably by mortgages on family property owned by Gill Campbell.
Between 1983 and 1990, the company had expanded to four fulltime management employees and to about 70 independent, homebased production employees. During this same period, sales had increased dramatically from $36,300 in fiscal 1983 to $522,000 in fiscal 1990 and profits had turned around substantially. The company's products were sold nationwide in Canadian craft and gift stores, many of which targeted tourists and the more affluent individuals who desired to purchase high quality gift items.
Gill had expended some effort to expand the market to the United States and to Japan, with minimal success. Sales to the United States through two retail accounts totalled only $800 in 1989 and $2500 in 1990, while sales in Japan had not yet been realized. Gill knew that her products appealed to the upscale woman who had an active, outdoororiented lifestyle and desired quality, individuality, comfort and fashion in her clothing, and who was willing to pay a slight premium to obtain it. Although Woof's products were positioned as high quality, high value, there was no deliberate policy of screening retailers to ensure that they portrayed this image.
In 1983 the graphics division of the company was sold. After this point, Gill continued to operate Woof exclusively as a cottage industry, using homebased craftspeople to produce machine knit scarves, cowl hats, vests, sweaters, and jackets as well as high quality handknit mitts, crocheted tams and hats, handwoven scarves, stoles, shawls and throws. Woof sweaters and accessories were made from an attractive blend of mohair, nylon, and wool and were uniquely designed and styled. The distinctive, classic designs were intended to provide the wearer with a fashion statement. The sweaters, in cardigan and pullover styles, were warm, yet lightweight, and could be worn with pants or skirts for evening, recreation, or work wear. Everything, including the company logo which was attached to each garment, gave the look of quality, style, and sophistication (See Exhibit 1). All garments and accessories were produced in onesizefitsmost, thus eliminating the need for retailers to carry a large inventory assortment and the need to have fitting rooms. According to Gill, Woof was seen to have quality products at much better prices than those of the competitors. In addition, she believed the retailers were also quite pleased with the delivery.
Woof Design sweaters wholesaled from $75 to $160, while the custom designed and coordinated accessories wholesaled from $12 to $50. These products were priced on a costplus basis and shipped by first class mail, FOB St John's. Items were added to the product lines only if production costs, including material and labour, could be held at, or below, 45 percent of the selling price.
New accounts were required to place a minimum initial order of $500 and on presentation of references were granted credit terms of 30 days net. Retailers were not granted any discounts, and subsequent orders under $250 were assessed a surcharge of ten percent of the order cost. Although Gill was occasionally approached by some of the weaker retailers for promotional assistance, Woof did not grant promotional allowances. Furthermore, none of the retailers were given exclusive selling privileges for Woof products.
Initially, promotion and sale of Woof Design products were through local craft fairs sponsored by the Newfoundland and Labrador Craft Development Association. Later, this was expanded by attendance at regional craft shows in the major Canadian cities. In early 1985, with the exception of the St John's factory outlet, the transition was made from retailing and wholesaling to wholesaling alone. In order to increase the volume and profitability of the business, the focus of the marketing effort became the wholesale spring and fall Gift Shows from Halifax to Vancouver. The travel budget to these shows averaged $3,000 per show with approximately $1000 being government subsidized.
To further enhance the promotional effort, a professionally designed brochure was produced for distribution to potential clients at an approximate annual cost of $2000. The brochure contained black and white lithographs and sketches of Woof Design products, coloured fibre samples, price lists, and order forms. In addition, a small amount of print advertising was run in Newfoundland to stimulate tourist and preChristmas sales. On average the Company spent up to $3000 annually on this advertising effort.
In October of 1985 Woof negotiated an agreement with Mr John Beale of Nova Scotia to represent the firm nationally as a manufacturer's agent. His role was to position the firm in the best possible markets. This freed up Gill's time and energy for creative pursuits and the operation of the company. For this service, Mr Beale received a ten per cent commission on Woof's wholesale price. Commissions had amounted to approximately $34,000 for each of the previous two years. Mr Beale had an excellent track record in this position having been instrumental in the national success of Suttles and Seawinds, a Nova Scotia based cottage industry with annual sales in excess of $2,000,000. Suttles and Seawinds produced a line of both competitive and complementary products. Although Mr Beale was given near exclusive responsibility for promotion, sales and distribution outside Newfoundland, Gill still remained active in the marketing area. She personally attended approximately seven national craft shows annually and continued to solicit new accounts. These shows each required one week of travel time and often conflicted with her personal and family responsibilities.
Woof had sales accounts with approximately 250 retailers of which just over 100 could be considered active. Of these active accounts, about 50 percent were located in shopping malls and downtown shopping districts, approximately 35 percent were in tourist and resort areas and nearly 15 percent were located in hotels and airports. In 1990, in excess of 30 percent of these accounts were only marginally profitable with purchases from Woof being less than $1000 annually. In contrast, 30 percent of them exceeded $3000, and 10 percent had purchases in excess of $7500. No single customer accounted for more than seven percent of Woof's sales.
Sales by Woof's retail customers were to a large extent dependent on seasonal fluctuations in the tourist industry which was being negatively affected by the recession. In many regions, sales were closely correlated to events such as trade shows, conferences, major athletic events, and carnivals. During 1990 and early 1991 many of these retailers were among the more than 1000 businesses which had gone bankrupt monthly during the past year. Bad debts, for Woof, prior to 1989 had not been significant, but in 1989 and 1990 they were in excess of $5000 and $7000 respectively.
Production in a Cottage Industry
In keeping with her management philosophy and her goals of remaining a modest, craftoriented business, and at the same time desiring industrial production capabilities, Gill organized Woof Design as a cottage industry. This meant that the manufacturing process was performed by independent craftspeople in their own homes. Consequently her products would not portray a mass produced image. The workers, most of whom were women, were trained by Woof in mechanized knitting and were paid a flat rate for the products produced. This type of arrangement permitted flexibility of work loads and of production scheduling so that the workers could work at their own pace depending on their personal commitments. In the event of unexpected deadlines for orders placed by retailers, the workers could undertake extra work in order to meet completion dates. The cottage industry method permitted Woof to readily expand or contract production according to demand with little or no cost. As Gill explained, "With our current craftspeople, the company could comfortably do $500,000 in sales annually and could readily expand to $800,000. Expansion beyond this point merely required training new knitters as needed. Our flexibility and responsiveness to the market, as well as our fast turn around time, gave us a really competitive edge."
As a cottage industry which engaged approximately seventy homebased producers, one of the biggest challenges facing Woof Design was to provide accurate, detailed, and uptodate knitting patterns that required the minimum amount of hand finishing and which ensured product consistency. In order to respond to the market rapidly, designs had to move from the concept stage, through to prototype, and into production as quickly as possible. Up to three prototypes had to be designed and manufactured before a final style was developed. At each stage, each piece of a garment had to be plotted and even minor changes required complete redrafting of the pattern. To contend with these problems, a computer software package was developed and implemented in 1988, enabling Woof to speed up design development and modification. In addition, the computerized design system facilitated the transfer of the finalized patterns to the large number of production workers.
To further maintain product quality and consistency, each piece returned from the knitters was weighed, measured, and logged into the computer. The knitters were penalized for any deviations from the required standards by an incremental pay docking system. Bulk buying of fibres from the same dye lot guaranteed that colours would remain constant in all items produced. Woof made every possible effort to produce a quality product and actively sought the opinions of its retail customers. Any complaints about its products were taken seriously and acted upon promptly.
The cottage industry method involved the distribution of raw materials to and the collection of finished items from the knitters. The entire cycle involved coordinating a large number of items from the order stage, through manufacturing, and then to shipping. Inventory control required weighing the materials which were sent to each knitter and matching the weight with that of the returned items. A computerized inventory control system automatically updated inventory and permitted accurate tracking of current and completed orders and the disbursement of raw material to the knitters. The system ensured that work was effectively distributed among the knitters, thereby assigning each knitter workloads to suit her individual preference and ability. The integrated function of the system allowed up to three employees to work at the same time without interference from one another. This feature meant that the company had the capability to at least double the volume of orders and clients with the same staff.