Matching supply with demand

Frame and Wheel has mentioned the idea of using eBay as a channel for selling framesets. Some believe that this would undermine the value of the brand given that eBay suggests used products. This is a fair observation, and Frame and Wheel agrees. However, Frame and Wheel sees that there are many organizations selling new items on eBay, and is aware that many consumers frequently purchase new items on eBay from eBay stores in order to obtain selection, speedy delivery and competitive pricing. Many vendors offer money back arrangements and privileges consumers have come to expect from all vendors.

Frame and Wheel is admittedly drawn to the auction mechanism of eBay, because it facilitates a market price, and the infrastructure is all there and many people are familiar with it. It is something that makes sense if Frame and Wheel has ten frames sets in inventory. But using eBay does not solve the problem of financing costs.

A large expense for bicycle brands is among other things the cost of financing an order: factories want 50% down payment for large orders, and for an order in the thousands of frames, this is a large sum of money. A bicycle brand will obtain a working capital or bridging loan to make the order . Frame and Wheel is too small to obtain a loan, and is not keen to do so, given the cost and the risk. A better way will be to act on the consumer's willingness to pay six months in advance for their frameset, and reward them for doing so by giving them "up front" the discount they would normally get at the end of the year.

For example, a frameset that retails for $2,000 at the beginning of 2012 typically can be had for 25-30% off at the end of 2012 as IBD's try to clear out inventory (think of all the odd sized frames languishing from the racks at the local IBD). Frame and Wheel envisages a scenario where a consumer pays $1,500 for a $2,000 frameset in September of 2011 and takes delivery of the frameset in March 2012. This is the amount they would have paid if they had waited until the end of 2012, but since they are ordering in advance, they pay less, and have the opportunity to choose colors and models. The only tradeoff is that they have to wait.

In addition to providing some choice, this model would match supply and demand and provide Frame and Wheel with the cash necessary to execute the order. This method will require an order book on Frame and Wheel's website or Facebook page: it does not necessarily require eBay, given that Frame and Wheel will order as many framesets as the market desires. Perhaps it is a model that is more suitable for Groupon. 

The business plan: simplifying the numbers

Frame and Wheel reads that the sale of smart phones surged in 2010 and is likely to increase yet again in 2011. This article in the Wall Street Journal reckons that one in five mobile phones sold in 2011 will be a smart phone, or one that can connect to the Internet and run various applications. Frame and Wheel believes that many consumers will begin their shopping for a bike on line and that they will have their smartphone with them while they are doing a fit or a demonstration ride. This means that the idea of a bike sale "originating" with an IBS is misguided, and perhaps too complex. Consequently, Farme and Wheel reworks the numbers below to simplify things: the consumer orders a frameset from his desktop or from his smartphone (because he his at the location where the demonstration model is located) and he has it shipped to his favorite IBS. The IBS receives the commission and the frameset and builds up the bike for the consumer. Frame and Wheel also eliminated the working capital loan primarily because to have a self financing arrangement is preferable than borrowing money: the idea here is that potential buyers bid for their order six months before delivery. The longer the lead up time, the less they pay: this is the structure of a futures contract. This is one way that Frame and Wheel believes existing infrastructure and resources can be used to more efficiently match supply with demand.  This idea needs more elaboration and will have to be a subject of a future post. Frame and Wheel changed order sizes in 2012 and 2013, assumes some overhead and that there are part time staff working for the company.

Year end 31 Dec	2011	2012	2013
Selling prices
Frameset price	2,000	2,000	2,000
Build kit	2,000	2,000	2,000
Wheels	1,700	1,700	1,700
Per unit costs
Framesets	700	700	600
Build kits	1,600	1,600	1,600
Wheels	1,300	1,300	1,300
IBS commission ($)	400	400	400
Volume
Framesets	10	20	50
Build kit	2	4	10
Wheels	2	4	10
Value
Framesets	20,000	40,000	100,000
Build kits	4,000	8,000	20,000
Wheels	3,400	6,800	17,000
Total	27,400	54,800	137,000
Cost of goods
Frame set	7,000	14,000	30,000
Build kits	3,200	6,400	16,000
Wheels	3,400	6,800	17,000
IBS commission ($)	4,000	8,000	20,000
Total	17,600	35,200	83,000
Gross income	9,800	19,600	54,000
Operating expenses
Rent	0	0	10,000
Staff	5,000	12,000	25,000
Insurance	1,750	2,000	4,000
Marketing	100	200	300
Accounting	100	400	600
Supplies	100	200	300
Legal fees	300	400	500
IT support	300	400	500
Total	7,650	15,600	41,200
Operating income	2,150	4,000	12,800
Interest expense	0	0	0
Income before tax	2,150	4,000	12,800
Tax	753	1,400	4,480
Net profit	1,398	2,600	8,320
Dividend	0	0	0
Gross margin (%)	35.8%	35.8%	39.4%
Operating margin (%)	7.8%	7.3%	9.3%
Net income margin (%)	5.1%	4.7%	6.1%
Dividend payout ratio (%)	0.00%	0.00%	0.00%
Cash Flow Statement
Operating cash flow
Operating income	2,150	4,000	12,800
Interest expense	0	0	0
Tax	(753)	(1,400)	(4,480)
Total	1,398	2,600	8,320
Investing cash flow
Capital expenditure	0	0	0
Financing cash flow
Borrowing	0	0	0
Dividends	0	0	0
Equity	0	0	0
Total	0	0	0
Net operating cash flow	1,398	2,600	8,320
Cash BOY	20,000	21,398	23,998
Cash in flow / (out flow)	1,398	2,600	8,320
Cash EOY	21,398	23,998	32,318
Balance sheet
Assets	21,398	23,998	32,318
Liabilities	0	0	0
Equity
Paid up capital	20,000	20,000	20,000
Net profit	1,398	3,998	12,318
Dividends	0	0	0
Total shareholder’s equity	21,398	23,998	32,318
Total shareholder’s equity and liabilities	21,398	23,998	32,318