Case-3 Exporting Chopsticks to Japan
Ian J. Ward was an export merchant in trouble. His company, Ward, Bedas Canadian Ltd., had successfully sold Canadian lumber and salmon to countries in the Persian Gulf. Over time, the company had opened four offices worldwide. However, when the Iran–Iraq war erupted, most of Ward’s long-term trading relationships disappeared within a matter of months. In addition, the international lumber market began to collapse. As a result, Ward, Bedas Canadian Ltd. went into a survivalist mode and sent employees all over the world to look for new markets and business opportunities. Late that year, the company received an interesting order. A firm in Korea urgently needed to purchase lumber for the production of chopsticks.
Learning about the Chopstick Market
In discussing the wood deal with the Koreans, Ward learned that in the production of good chopsticks, more than 60 percent of the wood fiber is wasted. Given the high transportation cost involved, the large degree of wasted materials, and his need for new business, Ward decided to explore the Korean and Japanese chopstick industry in more detail.
He quickly determined that chopstick making in the Far East is a fragmented industry, working with old technology and suffering from a lack of natural resources. In Asia, chopsticks are produced in very small quantities, often by family organizations. Even the largest of the 450 chopstick factories in Japan turns out only 5 million chopsticks a month. This compares with an overall market size of 130 million pairs of disposable chopsticks a day. In addition, chopsticks represent a growing market.
With increased wealth in Asia, people eat out more often and therefore have a greater demand for disposable chopsticks. The fear of communicable diseases has greatly reduced the utilization of reusable chopsticks. Renewable plastic chopsticks have been attacked by many groups as too newfangled and as causing future ecological problems.
From his research, Ward concluded that a competitive niche existed in the world chopstick market. He believed that if he could use low-cost raw materials and ensure that the labor-cost component would remain small, he could successfully compete in the world market.
The Founding of Lakewood Forest Products
In exploring opportunities afforded by the newly identified international marketing niche for chopsticks, Ward set four criteria for plant location:
Access to suitable raw materials.
Proximity of other wood product users who could make use of the 60 percent waste for their production purposes.
Proximity to a port that would facilitate shipment to the Far East.
Availability of labor.
In addition, Ward was aware of the importance of product quality. Because people use chopsticks on a daily basis and are accustomed to products that are visually inspected one by one, he would have to live up to high quality expectations in order to compete successfully.
Chopsticks could not be bowed or misshapen, have blemishes in the wood, or splinter. To implement his plan, Ward needed financing. Private lenders were skeptical and slow to provide funds. This skepticism resulted from the unusual direction of Ward’s proposal. Far Eastern companies have generally held the cost advantage in a variety of industries, especially those as labor-intensive as chopstick manufacturing. U.S. companies rarely have an advantage in producing low-cost items. Furthermore, only a very small domestic market exists for chopsticks.
Yet Ward found that the state of Minnesota was willing to participate in this new venture. Since the decline of the mining industry, regional unemployment had been rising rapidly in the state. In 1983, unemployment in Minnesota’s Iron Range peaked at 22 percent. Therefore, state and local officials were eager to attract new industries that would be independent of mining activities.
Of particular help was the enthusiasm of Governor Rudy Perpich. The governor had been boosting Minnesota business on the international scene by traveling abroad and receiving many foreign visitors. He was excited about Ward’s plans, which called for the creation of over 100 new jobs within a year.
Hibbing, Minnesota, turned out to be an ideal location for Ward’s project. The area had an abundance of aspen wood, which, because it grows in clay soil, tends to be unmarred. The fact that Hibbing was the hometown of the governor also did not hurt. In addition, Hibbing boasted an excellent labor pool, and both the city and the state were willing to make loans totaling $500,000. The Iron Range Resources Rehabilitation Board was willing to sell $3.4 million in industrial revenue bonds for the project.
Together with jobs and training wage subsidies, enterprise zone credits, and tax increment financing benefits, the initial public support of the project added up to about 30 percent of its start-up costs. The potential benefit of the new venture to the region was quite clear. When Lakewood Forest Products advertised its first 30 jobs, more than 3,000 people showed up to apply.
The Production and Sale of Chopsticks
Ward insisted that in order to truly penetrate the international market, he would need to keep his labor cost low. As a result, he decided to automate as much of the production as possible. However, no equipment was readily available to produce chopsticks because no one had automated the process before.
After much searching, Ward identified a European equipment manufacturer that produced machinery for making popsicle sticks. He purchased equipment from this Danish firm in order to better carry out the sorting and finishing processes. Since aspen wood is quite different from the wood the machine was designed for, as was the final product, substantial design adjustments had to be made. Sophisticated equipment was also purchased to strip the bark from the wood and peel it into long, thin sheets. Finally, a computer vision system was acquired to detect defects in the chopsticks. This system rejected over 20 percent of the chopsticks and yet some of the chopsticks that passed inspection were splintering. However, Ward firmly believed that further fine-tuning of the equipment and training of the new workforce would gradually take care of the problem.
Given this fully automated process, Lakewood Forest Products was able to develop a capacity for up to 7 million pairs of chopsticks a day. With a unit manufacturing cost of $0.03 per pair and an anticipated unit selling price of $0.057, Ward expected to earn a pretax profit of $4.7 million in the first year of operations.
Due to intense marketing efforts in Japan and the fact that Japanese customers were struggling to obtain sufficient supplies of disposable chopsticks, Ward was able to presell the first five years of production quite quickly. Lakewood Forest Products was ready to enter the international market. With an ample supply of raw materials and an almost totally automated plant, Lakewood was positioned as the world’s largest and least labor-intensive manufacturer of chopsticks. The first shipment of six containers with a load of 12 million pairs of chopsticks was sent to Japan.
A new Product’s success depends on Product Trial and Product Repurchase. Discuss the two success factors. What should Lakewood do?
2 pages, double space, analysis of the case