Before transferring to Illinois last year, I attended UIS in Springfield while working for my family's dry cleaning/laundromat business, Crystal Cleaners. My family has owned and operated Crystal for about 6 years now. When we took over the business, it was a little down on its luck, but my family has had years of experience in the industry and we felt we could turn it into a very successful and profitable business. We performed renovations on the laundromat and conducted a complete overhaul of the dry cleaning process. Still, our expectations were humble. We expected steady increases in profits, which we assumed would be due in part to increased laundromat revenue and improved efficiency in the cleaners. However, the actual increases were much more dramatic than our highest hopes! Soon, we were able to take over Crystal's sister-store, Family Pride Cleaners and Laundry, which, up to that point had been serving as a drop store and sending us their dry cleaning. While we weren't nearly as large as some of the other dry cleaner chains in Springfield, we were by far the fastest growing, and our two laundromats had (and still have) the best reputations in town.
Last year, we were given another opportunity to grow as one of the other dry cleaner chains came to us with a proposal to merge. Their dry cleaning plant was in need of tedious renovations and their income at that time made making upgrades impractical. Therefore, we took on their dry cleaning as part of a partnership. However, this nearly doubled the size of our business in terms of clothing items per week. We had dealt with gradual increases in output and shocks to our systems before, but nothing of this magnitude. We had to change our entire system of production. We nearly doubled the size of our dry cleaning/pressing staff, installed additional presses, completely reworked our production line, and even altered our hours of production. While undergoing these changes were difficult at the time, we learned that we can adjust and adapt to new shocks to our system, not only planned shocks, but unplanned ones too if they were to arise in the future. As we continue to grow, we will continue to make these adjustments as they are needed. Hopefully, they will be due to pleasant changes such as an increase in business as opposed to negative changes!
To specify some of the transaction costs incurred as we took on more business, they mainly regarded our plant and our production system. Before the merger, we were able to begin our dry cleaning process at 7 a.m. when we opened each morning. My sister, Emily, the co-owner and manager, or I will open the store and begin readying the dry cleaning items for cleaning. Soon after, our shirt team will come in and begin readying the shirts for washing, a sometimes lengthy process. The dry cleaning pressing team would come in a couple hours later, once the first load of dry cleaning has been cleaned, to begin pressing the items while the shirt team began doing the same to the shirts. As items were finished being pressing, they were inspected by Emily or I and then placed with their order, bagged and processed into our line for pick-up.
This process seemed to work well with the amount of items that we had at that time. However, when the number of items nearly doubled, we couldn't simply plan to work twice as long. Instead, Emily planned to come in earlier, either before we opened in the morning or during the evening before, to begin readying the dry cleaning. This way, we could have the dry cleaning pressing team come in and start slightly earlier in the day. Also, she began having the evening workers ready the shirts for wash before close and even load them into machines. This way, Emily could simply start the machines when she arrived in the morning and they would be ready for the shirt team when they arrived soon after. These prep changes seem minor but they are often the cause when production falls behind.
Some bigger transactions costs of increasing business were the costs of increasing the staff and installing new pressing equipment. Simply adding staff when adding to business is one thing, but we couldn't run our old system with a different amount of staff members. We added a new utility press on which hand-iron shirts and dry cleaning items could be done, as well as an additional "suzie" press, a steaming press for dresses, jackets, etc. Also, we moved one of our hand-irons, on which the shirt team would iron shirt sleeves, next to the hot-head press so that it was more quickly available to the shirt team and they didn't have to wheel their rack of shirts over to it from across the plant.
One last transaction cost was our transportation system. Before expansion, we had only a few deliveries and pick-ups to make each day and each of them usually involved smalls amounts of dry cleanings. Therefore, we simply used our own vehicles and made rounds after leaving the plant for the day. However, after expansion, we had far too much dry cleaning to fit in our vehicles, so we invested in a van to haul dry cleaning. Also, our new production system, in which we prep dry cleaning and shirts before the morning, required that we return to Crystal after making our rounds each day to drop off the pick-ups from each drop store.
These examples may not be particularly accessible for those outside the industry, but they were each very vital to the success of this expansion. We spent a great deal of time determining what parts we needed to change and how we needed to change them. I think we learned a lot from it.
This is quite an interesting post, down to earth and with good detail. Below I will offer up some questions about things you didn't talk about but might have. Then I'll also ask whether everything you referred to as a transaction cost really fits that label.
ReplyDeleteI have mentioned in class that in the late 1990s I ran a little Center on campus to support instructors with teaching online. That Center came about itself as a merger, from a soft money organization I ran previously (soft money means grant funded, where the funds will run out eventually) and a division of a different unit that supported instruction. The new Center absorbed staff from both of those other units and there were a couple of new hires. The old staff were used to a way of doing business that wasn't how I wanted us to do business moving forward. So there were lots of issues about getting everyone on the same page and coordinating things. Eventually I made one of the new staff the office manager to handle those issues, so I could devote my attention to the instructors we were supporting and to other issues on campus that were related to our mission.
Based on that experience, I wonder if something similar happened in your case. When you took over the other business, were staff from that business also brought in? Or were they let go? If they were brought in were there issues about how to do things (they preferring their old approach)? And if they were brought in did any of them previously have manager jobs? It seemed from what you wrote that post merger all the manager work was done by somebody in your family. Is that right?
In the new approach post merger, the install of new equipment may have entailed some transaction costs to assure that was done correctly according to your specifications. But that a larger organization in the same line of business uses a different approach than a smaller organization, so moving from the latter to the former required change, isn't necessarily a transaction cost. The transaction cost piece occurs if the changes to make aren't obvious (so this is an example of complexity) and if there is some learning by doing in moving to the new approach. Otherwise, the change should be called a production cost.
That is an important point you make and one I forgot to address earlier. The expanded staff did include the other business's crew and no lay-offs were made. There were some growing pains as they had to adjust to not only a new environment with new management, but also new coworkers and an entirely different system. The staff at Crystal did not need to make quite as much of an adjustment because in addition to already working at Crystal under Emily's management, we also tried to build our new system using some elements from our old one, which they were, of course, used to.
ReplyDeleteAnd you are right in your assumption that most of the merger work was done by our family and that no managers were brought over in the move. Since all of the stores the other business ran remained in business as drop stores for us, their managers stayed at those locations. Although one change for their business was that their plant manager became more of a store clerk instead.
Also, I see what you mean when you say some of the costs I mentioned in my post were more so production costs since we were expanding production in the same field we were already in. It can be difficult to tell which cost are transaction and which are production, but I feel I have a better idea now, looking back on it.