Herbie Shapiro has worked as a retail footwear salesman in the New York City area for nearly 20 years. The New York City native has always worked for someone else, but he knows the business and its people very well. Shapiro has always felt that the supply side of the retail footwear business is poorly organized and that few if any distributors provide good service to the hundreds of retail outlets in the metropolitan area. Mei Zhao, a native of China, is a longtime acquaintance of Shapiro, and a manufacturer’s rep for several of the Pacific Rim footwear manufacturers. Zhao functions primarily as a foreign agent and freight forwarder for the Asian manufacturers, over-seeing the unloading and trucking of container ship cargo. Zhao shares many of the same views as Shapiro when it comes to the distribution and supply side of the retail footwear business. Both men are at the midpoint of their careers; have built a solid business and personal relationship with one another; and, following several meetings, have decided to form a partnership. S & Z East Coast Importers has the opportunity to lease a 60,000-square-foot warehouse with a buy option in northern New Jersey for purposes of establishing a distribution center for the metropolitan area retail footwear business.  Zhao already has many good links and relationships with the major suppliers and shippers of retail footwear. The partners plan to import a wide range of products, including casual shoes, athletic footwear, fashion and outdoor boots, slippers, socks, laces, pads, and inserts. Zhao has access to all of the major national brands as well as the bargain-priced no-name lines. In addition to his long association and membership in local and national footwear organizations, Shapiro knows many store owners and employees within the New York–New Jersey metro area. Shapiro is well liked and well respected. The partners believe that their strong combination of supply-side and retail experience will provide them with access to many good markets.  As is the case in many industries, retail footwear has a very small number of large suppliers of manufactured products coupled with a very large number of small retail stores. One of the major keys to success therefore is the existence of an efficient, well-organized system of distribution. Shapiro and Zhao are focusing their efforts on doing a better job than the competition and on filling that niche in the footwear market.

LOGISTICAL ISSUES AND CHALLENGES

Most of the aforementioned footwear products arrive at the West Coast on giant container ships. After clearing customs, the containers are offloaded onto tractors for local (western) delivery and onto railcars for Midwestern and East Coast dis-tribution. Shapiro and Zhao plan to set up their building as a warehouse and distribution center. Warehouse and distribution centers must purchase virtu-ally all of their products in large quantities. Shapiro and Zhao will typically be faced with buying shipments of 500,000 pairs of shoes, 1,000,000 pairs of socks, 600,000 pairs of running shoes, and so on. Retailers, on the other hand, typically must purchase very small quantities of mixed loads of products, primarily because of a lack of retail and storage space. Shapiro and Zhao will typically be faced with orders that call for 50 to 150 pairs of shoes, 50 to 100 pairs of socks, 100 to 300 pairs of running shoes, and so on.  Warehouse and distribution centers must therefore be set up to receive, unload, and store large shipments of product (railroad cars/tractor trailers); to “break bulk” (unpack, count, inventory, and repack); and to load and deliver small mixed loads to retail establishments. Many metro-area retailers are located on cramped and busy streets with limited access. The financial side of Shapiro and Zhao’s business looks very promising. Thanks to Zhao’s connections with suppliers and Shapiro’s connections with the New York–New Jersey metro market, the partners anticipate an average markup of 30 percent for their products. That is nearly twice as much as Zhao earns as a manufacturer’s rep.  For their business to succeed, several variables and logistics must fall into place and be properly managed. The warehouse and distribution process, quality of service, and financial management must operate at maximum efficiency. In addition to in-house efficiency and cost control, the company must also buy and sell enough volume of product to cover all costs and generate profits. Retail customers are looking for timely and frequent deliveries of small quantities of specific products. Some of those customers may need merchandising help as well. If products are not selling, the distribution centers and manufacturers will soon be backed up with product as well. Retail sales are the key to avoiding a bottleneck in the process and flow of manufacturing and distribution. The financial side of this business requires close and careful management of receivables and payables. Manufacturers typically expect and receive payment for their products in about 10 days. This is essential to the sustained cash flow of those operations (primarily for payroll and raw materials purposes). Retailers, on the other hand, expect and receive accounts payable terms ranging from 30 to 60 days. This is essential to the sustained cash flow of those operations, as customer sales are the primary source of funds. So while the prospect of a 30 percent markup is clearly attractive, the cash flow situation and challenge must be met. Shapiro and Zhao are unsure about the best way to facilitate and manage trucking and insurance. They have the option of buying or leasing their own trucks on both the supply and delivery side and also have the option of using independent trucking companies. They could select some combination of those two options. In addition, merchandise must be insured, but who exactly is responsible for that coverage, and when does that “ownership” change hands? The partners project monthly warehouse operating expenses of $55,000 (building, payroll, administration, and salaries). This does not include merchandise, trucking, or insurance. Given their 30 percent average markup on products, monthly sales of about $180,000 will be needed to break even. The partners have conservatively projected first-year sales to be $3 million. Their warehouse inventory capabilities are in excess of $30 million. Shapiro and Zhao realize that it will take some time to approach that level from both a sales and cash flow perspective. Their facility and market base clearly present the potential to achieve sales of $40 million or more. Cash flow is the current obstacle. They have just over $1 million in working capital for their start-up and believe that that will accommodate first-year sales of $3 million given their logistics of inventory purchase, sales, and cash flow. From a distance, the prospect of success is promising. The partners have the opportunity to buy low and sell high in large volume. A market niche is waiting to be filled. The partners have the experience and the connections on both the supply and sales sides of the business.

1. How can Herbie Shapiro and Mei Zhao use technology to achieve success in their new venture? Be sure to address each of the major categories presented—purchasing, transportation, operations, distribution, and financial management.

2. Select a specific business or industry that you may become a part of. How would you incorporate the technological aspects of the text into your day-to-day operations?