Thursday, October 9, 2008

Bidding, Beijing, Banks, and Backorders

What in the world do Bidding, Beijing, Banks, and Backorders have in
common? More than you would think. This is complicated and will take
quite a few words. Be aware, however, that if you are a fundraising
project sponsor in a school or sports league and are selling something
other than food items, you will probably have backorders. This is
true no matter what salesperson you deal with or what company you will
pay for your product. The problem is industry-wide and is significant.

Before we get to that, we need to describe the nature of the product
fundraising industry. The salesperson that visits your school or
league is likely either an independent businessperson using the
services of a pack/ship facility or an employee of a salesforce
company. (The third option is that he/she owns a pack/ship facility
and also works with client groups, but this is becoming increasingly
rare.) The pack/ship or salesforce company buys product from mid-
level or source-level suppliers. Mid-level suppliers purchase
product, arrange it into catalogs, publish catalogs, and sell the
products and catalogs to pack/ship or salesforce companies. Larger
pack/ship or salesforce companies my develop their own catalogs and go
directly to manufacturers or high-level suppliers. Finally there are
manufacturing facilities that make "house brand" goods upon demand, as
designed by their own creative staff, or on designs supplied by the
companies that buy from them. All of these companies are
interdependent, and also depend on banks for their financing for their
inventory, payroll, buildings, and equipment.

Now back to Bidding. What has this got to do with fundraising?

First of all, a LOT of fundraising "hard goods" such as wrapping
paper, tags, ribbons, bows, candles, giftware, and home decor items
come from China. Over the past fifteen years it has been cost
effective to design this type of goods in the US and then go to China
to find a factory to make the goods, because of the relationship
between US and Chinese currencies. Even with the cost of ocean
shipping, it was very cost effective. The push for lower cost on
goods came as more and more salespersons attended what in the industry
is known as "cattle calls" where PTA's and Sports Leagues had a
meeting where companies were invited to come and pitch their wares.
Salespersons, encouraged by their companies, started bidding up the
profit percentage in order to win the business, and to continue to be
profitable without raising retails to the "choke point" had to look
for lower cost of goods, and China was there willing and able to
provide he goods. That was about fifteen years ago when the balance
of trade and exchange rate between US and Chinese currency was
favorable to US companies buying product from China. Even WalMart
changed from domestic to imported goods about that time.

After the competition in the industry had maxed out the possible
profit margin for schools and leagues, the fundraising industry
"created its own monster" by increasing the number and variety of free
services, such as kickoff assemblies, pack per seller, complete
fulfillment of orders with no backordered items, increasingly
comprehensive prize programs, and ever-larger catalogs. The schools
and leagues came to see these services as the norm, so any company not
offering them lost business. To pay for these "free" services, just
about every company increased prices a little each year. In 1986,
there were $2 and $3 items on most brochures. Now the lowest price is
$5 or higher. All of this depended on cheap goods from China.

Things went smoothly until inflation increased and the dollar fell.
This did not have a great impact at first, but as the dollar grew even
weaker and the Chinese economy grew in strength, suddenly the retail
pricing of goods went past the "choke point" and schools/leagues
changed from post-pay to pre-pay sales because of increasing numbers
of uncollected sales. These events combined to create a level of
frustration on the part of parents that reduced their willingness to
participate in the sales. Where in 1985 70% to 80% of parents were
participating in sales, which were mostly post-pay, by 2005 the
typical participation rate was down to 35% to 40%. Gradually, over
time, sales were cut in half.

So much for the damage caused by bidding. The casualties included
five major suppliers, a number of minor suppliers, about half the
national sales force and half of the distribution companies. Schools
and leagues expected "business as usual" and the casualties mounted.

In 1985 there were as many as eight major suppliers, a dozen national
"sales force" companies, and over 500 small independent companies. By
2007 there were about four major national "sales force" companies,
about 200 small independent companies, and only two major suppliers--
Scott's and Giftco.

Now to Banks. Giftco's bank looked at their uncollected accounts
caused by the bankruptcies of several major pack/ship and sales force
fundraising companies and changed the company's terms for their credit
line at the bank. The ripple went industry-wide. This caused a change
in terms for pack/ship and sales force fundraising companies. Now
companies had to order 70% of anticipated needs in February for the
following fall, guessing on how many of each item to order, with the
assurance of 50% "backup" for a reorder in September. (That's why
product is priced high--so up to half the inventory of any item that
doesn't sell can be sold off to Big Lots or put into the landfill.)
Scott's followed suit as credit tightened in 2008. Where pack/ship
and salesforce companies had relied on supplier financing, with terms
as generous as "buy in February, take delivery in August, pay in
December", now the terms are quite a bit tighter, with payment
required in October or early November. The pack/ship and salesforce
companies had to get their own bank financing, and if that were not
possible, were forced out of business. This means that the pack/ship
companies now have to collect from the independent sales
representatives within 15 days rather than 30 or 45 days, and the
independent sales persons have to collect from schools and leagues
before shipment, or upon delivery. Any "late pay" school or league
has a domino effect all the way up the supply chain. The tightening of
terms is a direct result of the changing ratio of value between the US
and Chinese economies. Generous terms were initially financed by what
was called a "ten time mark" on products from China. In reality the
"mark" was even higher in some instances. The "out the door" price in
China for a $10 retail item may have been from 40 cents to 80 cents
back in the late 1980's. This allowed room for the cost of shipping,
allowed suppliers to sell the $10 product to pack/ship or salesforce
companies for $1.25, which allowed costs of buildings, warehouse
staff, packing, brochures, prizes, and shipping to the school or
league. This allowed the $10 product to be sold to schools/leagues
for $5, allowing a 50% profit (or 100% mark-up) by the school or
league. When the economic balance was changed, this scenario collapsed.

Companies cannot produce goods without cash. Companies cannot buy
goods without cash. If accounts receivable cannot be collected in a
timely manner, companies have to borrow money. If banks won't lend,
everything grinds to a halt. That has happened to some extent.

Enter Beijing and the Olympics. There are many factories around the
Beijing area and they are terrible polluters. To get the Olympics,
China had to agree to improve air quality in the areas where outdoor
events would be held. To make these improvements, they had to close a
number of factories temporarily during the late Spring and early
Summer, the exact time when many fundraising products are manufactured
in these factories. When the Olympics were over, it took some time to
get factories back up to speed. They were behind and stayed behind.
Because it takes weeks to months to get products from factories, to
port, across the ocean, unloaded at the port, and trucked to
suppliers' warehouses, the entire supply chain was interrupted for
certain types of products. Right now things like gift tags, ribbons,
and other paper products, along with some gift items are being
affected. Product that was ordered in February by pack/ship and
salesforce companies has not been delivered to their warehouses by
suppliers. It should have arrived in August. but did not. As time
passed and other matters were pressing, warehouse staffs didn't notice
the problem until it was too late. This was universal throughout the
industry. Everyone was blindsided by this.

We hear a lot about "just in time inventory" these days in business
circles. This works well as long as every company in the supply chain
performs as expected. We have had instances where port backups
delayed product, and this is something that is easy to see because
there are many ships on the ocean off the coast at Long Beach or
Galveston. But when the factories just don't produce the product on
schedule and do not inform their customers, and the word doesn't get
passed downline, we hit a crisis point in October when product hasn't
arrived when school and league orders are ready for packing. The
entire industry, in the non-food portion of product, is in that
situation right now.

It is not possible to delay packing until product comes in. Product
fundraising warehouses are seasonal businesses and hire workers to do
data entry and pack product during a fixed season in the fall and
again in the spring. Some of these workers also do seasonal work in
other industries, so their schedules are not all that flexible.
Product deliveries also are constrained by sports seasons or school
holidays. Replacing workers requires training time. There isn't any
time left. Warehouses have limited floor space for packed product on
skids waiting on trucklines to pick up, so the flow has to continue.

Thanks to Bidding, Banks, and Beijing, this creates backorders, and
they will be extensive across the country throughout all fundraising
companies where non-food products are involved.

So what is a fundraising chairperson in a school or league to do?
First, do not panic. (We have heard that quite a bit of late about
the financial situation, but it is true there and also is true in
fundraising.) Communicate to your parents the real reasons for this
unfortunate situation. Rest assured that the product will be shipped
to you when it becomes available. It will be inconvenient for
everyone involved--parents, end consumers, salespersons, company
owners, and bankers. You will get yelled at. It isn't personal, so
just hang in there and wait until the dust settles and the Christmas
Holiday arrives.

Yes there will be casualties. Some parents will become disgusted and
opt out of your next fundraiser. Some companies will go out of
business. Quite a few people working in the industry will be out of
work. It will become more difficult for you to find someone to fill
your fundraising needs in the future.

After the dust settles, you would be wise to switch to an all-food
project. Pizza, cheesecakes, cookie dough, cheese, chocolate bars,
boxed chcocolates, soup mixes, and microwaveable sandwiches are all
domestically-produced, and most are available from regional
manufacturers and suppliers. People buy food products sold in
fundraising from their grocery budgets and will support your sale.

If you have a sales rep or company that has served you well in the
past, stick with them. They are having as much trouble as you are,
and if they survive, will be stronger for it and will be glad to
switch you to an all-food program in the future. If your problem is
very severe, consider switching to $1 chocolate bars for your next
sale and then introducing other food items as time goes on.

Sorry for the bad news, but you deserve to know the truth.