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Joint Venture Warrants a Long, Hard Look (Part 2 of 4)

Another institution in our area is proposing a joint venture on a new laundry facility to serve both of our institutions and perhaps some smaller outside accounts. Where should I begin in identifying the pros and cons of such a venture, and how can I estimate the impact that a joint facility could have on my overall operation?CONSULTING: Chip Malboeuf is vice president of operations for Turn-Key Industrial Engineering Services, Charlottesville, Va. It provides facility planning and process improvement services for companies in the laundry industry. His experience includes process engineering and plant design.
Before engaging in further discussions, your institution must do a self-examination and some soul searching. You need to analyze how well your facility is doing, your current operating costs compared to historical costs and those of other facilities with similar product mix, and how much additional growth your facility can handle. Can you meet the growth projections of your institution’s business plan?
If you have done your job as a laundry operator, you will know what your current operating costs are on a per-unit basis and have these costs trended. Examine your current cost per pound (direct labor), total cost per pound (including indirect labor), utility costs (natural gas, water, sewer, electric) per pound, product replacement and abuse costs, and delivery cost per pound.
If you don’t have this information already, gather it to determine your baseline costs and compare this information to projected costs for the joint venture.
Can your existing facility handle your current production requirements and are you positioned to meet the strategic growth projections of your institution?
If your operating cost trends are good and your facility can handle the projected growth, it’ll be a hard sell to take on additional debt associated with a new laundry facility.
If your current operation is inefficient (high labor costs, inefficient utility usage, “tired” equipment) and costs per pound are increasing disproportionately and/or you have a capacity problem, then you should begin to examine the pros and cons of a joint venture.
Do both institutions have similar inventories? Are your product types the same? Processing costs are easier to manage if each institution’s inventory is the same. If both facilities continue using different product types, the new laundry will have to stock multiple SKUs of similar products and your processing flow will not be as efficient. If you have inventories that are the same, can you negotiate lower costs with your suppliers?
Who’ll be responsible for purchasing linen and other products? Will your organization maintain control of the types and styles of products used at your institution?
How will you allocate linen replacement costs?
Are your accounting systems compatible? How will you bridge platform communication gaps?
Will this new joint venture be a profit center or a cost center? How will the facility’s revenues and costs be allocated between the partners? How will you calculate the costs per pound (piece)?
Who will run the new facility? Will you outsource the laundry management or will you run the laundry within the management structure of the two partners?
There are also many questions you need to address with regard to the physical plant:
Where will you locate the new facility? What will your transportation costs be? Do you need to purchase tractors and trailers? What is the labor pool like in the area?
Who’ll design the new laundry? Do you have the capability in-house to design the facility or do you outsource this process?
Design a safe and efficient facility to meet your current production needs. You must have a master plan that defines how the facility will grow to meet the future needs of the two institutions and other outside accounts.
Who’ll develop the equipment Request for Proposals (RFPs)? Who’ll evaluate them?
Who’ll manage the project? Do you have the resources to provide a full-time project manager?
What’s the capital budget for the new facility (design, construction and equipment)? How much can you afford to invest in this new facility and still lower your overall cost per pound?
How many full-time employees will you need? What’s the cost benefit of a highly automated facility versus the labor costs for the area?
The answers to these questions, and many more, will help you determine the projected operating costs. Will you lower your overall cost per pound in this new facility? The venture will also mean relinquishing some operational controls. How will you define and maintain your high quality standards?
The decision to form a joint venture and dedicate the resources and financing to this project is a major strategic decision that requires a highly detailed analysis. If you don't have the in-house expertise for this, you must hire experts that will help you determine if the proposal makes good business sense. What is best for your institution now and in the future?EQUIPMENT DISTRIBUTION: Jeffrey Barman became co-president of PWS-The Laundry Co., a full-service with offices throughout the West and Southwest, in 2005. He was CEO of LuckySpin Laundries, a PWS affiliate that acquired and sold the SpinCycle chain of coin laundries.
This question suggests a scenario that is fraught with danger. I can’t stress strongly enough that the key to your joint venture’s success will be having had it discussed, planned, tested and agreed upon in sufficient detail before you even think about breaking ground or placing an order.
Joint ventures are a lot like marriages: About half work out great and the other half are disasters. If yours falls into the first half, you’ll be thrilled with your long-term cost savings, high levels of efficiency and perhaps even some profitable accounts to defray fixed expenses. If you’re in the other half, you’ll experience just the opposite and have the scary additions of operational nightmares and the inevitability of post-deal legal bills.
What are your respective goals in entering into this partnership? What’s driving the other party to come to you with this proposal, and what makes you want to consider it seriously? What’s the mindset, philosophy, balance sheet, ownership, management style and long-term goals of each of your businesses? These non-OPL questions are critical to making wise OPL decisions for this venture.
You’ll need to consult with a bunch of experts. Calling in a distributor early into the process is a good move. But you’ll need to go beyond that, and I suggest you bring your legal and tax experts up to speed early on as well. Are the institutions going to be equal or unequal partners?
How will you agree on a budget? Who puts up the capital, on what progress payment schedule, and in what percentage? What if there are overruns or change orders? Will you buy or lease the real property? What will be the decision-making process within the facility itself on a day-to-day basis? Who’ll hire and be responsible for the employees, and for their managers?
What if, in the future, one of the parties gets sold, or moves, or goes out of business, or has new laundry requirements, or quite simply doesn’t agree to keep up its end of the bargain? These questions and many more must be discussed in an open dialogue and then addressed by a well-crafted legal document.
As for bringing some smaller customers in, I suggest you leave that for the end. After all, if it doesn’t make sense for you to enter into the joint venture, it doesn’t matter whether or not it’s realistic to expect to generate outside revenues from the project.
Also, remember that serving someone else is quite different from serving yourself, as by its nature it raises issues of customer service, collections, marketing and the like. Do you want to do laundry to support your business, or do you want to be in the laundry business?
The overriding theory is that you’ll gain significant operational and thus cost efficiencies by having one facility to share. The last part of the equation is where some people would normally start, and that is completing detailed due diligence on the laundry issues that any facility needs to address.
What type of laundry are we each doing? What are our mutual business requirements on handling, temperature, finishing, turnaround time, etc.?
What about governmental regulations? Do we have any conflicting needs or goals within these categories that might serve to limit, or even remove, the efficiencies we’re hoping to achieve?
Break down your operating costs into fixed and variable costs per cycle and per pound to make true apples-to-apples comparisons.
It’s not that the joint venture proposed here is a bad idea, but rather it’s a big idea, and big ideas usually require big risks.
You can greatly mitigate your risk by focusing on your goals, having an enormous level of communication and creating the joint venture with expert assistance. Good luck!
 

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