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Kelley Enterprises In October 1989, Pat Kelley.wus in his office, preparing the 1990 budget and contemplating the recent races of his business. Orders had been plentiful Lately that he though that finally he could take the advice of his teachers at's "Strategy for Small Business course two year ago, who pointed out to him the importance of focusing his product line on his most recessful producte. Until year ago, this advice had seemed to be worthless, because customers had been few that any order that came his way Was welcome Now that demand was much stronger, however, perhaps he could afford to stop relling the products which interested him least. Background Pat was a master furniture and cabinet maker. He had always admired the skill of English and French 18th and 19th century furniture makers and the beauty of their products. As a hobby, he had made for his own use, an impressive collection of reproductions. Friends had asked him from time to time to make special pieces for them, and he had happily obliged in his spare time. Pat found that they were willing to pay good prices, and they had encouraged him to go into business full time. In 1985 he took the plunge he left the mas-production furniture company where he had been employed and incorporated Kelley Enterprises, with himself as sole owner, to make custom handmade domestic furniture Even though everyone agreed that Pat's products were beautiful, and represented good value for money, earning enough to make a living had been difficult at first. For the first four years, Pat's income was barely half of his former salary. He had prepared some advertising material with the help of a friend, but it attracted only a few orders, and Pat often had to work part time for a construction company to make ends meet The turning point came in March to luxurious executive Armchairs. Almost 1989, when Pat was just about to give up and return to a regular job. A large local immediately, Pat decided to focus his efforts on those two products alone. Since distributor of high-quality office each order was individually designed furniture products asked him to and priced, the selling and specification manufacture two products- of a customer's order were important top-of-the-line executive desk and responsibility. Pat enjoyed the matching office armchair. Of course, they face-to-face contact with his customer did not want any of the customizing that and they in turn were better able to Pat particularly enjoyed, but us luck appreciate the value and quality that Pat's would have it the piece sold very well craftsmanship provided. Customers for the distributor within three months could ask for just about anything they Pat's sales volume was over $10,000 a wanted - exotic hardwood veneers, month, and increasing. The distributor leather inlay, etc. --and Pat would typically placed an order once a month. happily provide it. Naturally, this Pat had some costing knowledge, and increue in demand called for more staff: knew that both the deak and armchair by August 1989, Pat had hired a total of gave him about 40% contribution margin. three cabinet makers to help with However, Pat suspected that the prices production and two office assistants to the distributor was paying him were help with administration. He reckoned rather low, and his suspicions were that they would be sufficient to see him confirmed when he saw the distributor's through 1990. catalogue, and the nearly 50% mark-up By the time Pat was preparing the over Pat's price. All negotiations to 1990 budget, it was clear that his. increase prices had been unsuccessful distributor customer would be ordering (the distributor had said that 50% was just over $200,000 worth of furniture - the absolute minimum mark-up he .. the standard model desks and chairs needed, and that he himself was facing; in 1990. The direct-sale customized severe price competition from imports), business was likely to amount to about so up until now Pat had had little choice the same dollar volume demand was but to take the price offered. strong and he had some concern that by Pat really preferred making the end of 1990, he might not have enough customized individual pieces of workshop space to fulfil all the orders furniture. They were, after all heirlooms that he could see coming. Pat decided to - something that you could be proud of. abandon reproductions of domestic But the significance of the high margins furniture for the time being that the distributor was getting on his products was not wasted on him, and Pat Production decided to get into the top end of the The three highly skilled cabinet office furniture market for himself. He makers who worked for Kelley prepared some new marketing materials, Enterprises all earned the same pay, and hired a miesman/assistant ---Jerry all three could work on any type of job. familiar with the office furniture Like Pat, who occasionally worked in the business, and in June of 1989 Kelley factory, they were craftsmen who Enterprises went after the custom-made preferred the customized jobs. Of course. office furniture market. these jobs were quite challenging. In fact, It was an immediate success! workers sometimes needed to spend as Customers were very attracted to many us four hours a day organizing the personally-designed executive deske, and special orders of materials - veneers and 20 / DAVID J. SHARP the like-needed for the customized pieces. They often had to Standard Costs He had already estimated quite accurately the telephone Pat or Jerry -- or even the customer directly -to sort average direct cost of each of his products from cost records. Although out design queries. (Pat did not discourage this because it gave each special was different, the total direct cost of each item-desk customent sense of the individual service they were getting or chair - did not differ greaty, while the cost of the standard Items and it also reduced the possibility of an expensive mistake.) The was very predictable Standard cools were as follows special desks and chain typically took ten to twelve weeks to Product SM. Armchair Sid. Dette Sp. Armchair Sp. Det manufacture. Much of this time was needed for waiting for the specially ordered materials, and for the sales administration Dired Malen $ 70 $ 130 $ 100 $ 210 person --Susan-to prepare the detailed instructions to the Direct Labor hrs) 2 6 6 16 factory. In addition special materials were often not locally DL Cost (530) $ 150 $ 180 5480 available, so finding a supplier and chasing late deliveries - also Susan's responsibility was time consuming and freight delays Total direct cost $ 130 $ 310 $ 280 $ 690 could take several weeks. (In fact, Pat suspected that because his were often very small orders, and Kelley was not big Operating costs The largest cont Item wu payroll and related customer anyway, that Kelley Enterprises had low priority with the muppliers.) expenses. Each production worker received

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