Assignment 2

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Journal of the International Academy for Case Studies, Volume 15, Number 5, 2009

TICO MANUFACTURING

Todd D. Mick, Metropolitan Community College Lou Fowler, Missouri Western State University

CASE DESCRIPTION

The primary subject matter of this case concerns Lee Tipton, who founded Tico in rural Missouri and quickly became a leader in pallet re-manufacturing, then dealt with a crisis in faith and family succession. The case has a difficulty level of three, appropriate for junior level. The case is designed to be taught in one 90 minute class and is expected to require 2 hours of outside preparation by students.

CASE SYNOPSIS

The primary subject matter of this case concerns Lee Tipton, who faced bankruptcy after a union strike, then found an entrepreneurial idea as a gift from God. Creating and successfully operating a small business is a challenge for virtually all entrepreneurs. In particular, the challenges facing rural entrepreneurs can often seem insurmountable. The entrepreneurial subject matter of this case concerns the successful growth of a backyard hobby to a thriving corporation. Willingness to adapt to changing market conditions and customer expectations were key criteria for this entrepreneur who went from bankruptcy to a multimillion dollar organization within one decade. The case emphasizes the organizational growth from a sole proprietorship, to a subchapter S corporation, to a spin-off of subsidiary corporations. Also seen in this case is the pivotal point technology has made for small rural entrepreneurs to compete on a global level.

The Teaching Note reviews the pivotal points in the case; entrepreneurship and spirituality, creativity, business evolution and the usefulness of segmented financial statements, which are included. This case is designed for an undergraduate entrepreneurship, accounting or management class and is based on Lee’s own words and interviews.

INTRODUCTION

The rain was coming down in what the old timers still called a gully washer. Lee stood in the rain, drenched, his face upturned, eyes closed, letting the dark, wet Missouri night enfold him. His mind thought that all he needed to do was outstretch his arms and he could play out the pivotal scene from Shawshank Redemption; even funnier how your mind wanders when your soul is broken Lee thought quickly. He was a Teamster without a trucking firm in small town Missouri; his benefits exhausted, no job prospects, his wife taking care of two children and delinquent notices had

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started arriving. Lee believed he was a good man, had provided for his family, his community and his church, so how could God leave him at a time like this? Despair washed over even stronger than the rain as his eyes fell on the trash heap behind his work shed and suddenly, he knew the answer.

CHILLICOTHE AND CHURCHILL TRUCKING

Chillicothe, Missouri and Churchill Truck Lines were synonymous. Both owed their success to the other. Chillicothe gained a strong, growing employer with jobs that covered the salary scale. Churchill gained strong community and political support with a willing and able workforce. Over the years, Wal-Mart came to town along with upscale jewelers and clothing stores. Every so often someone mentioned that a town of 10,000 might want to think of a broader economic base, but this was northern Missouri and the heart of America; employers and employees were loyal to one another and those thoughts quickly vanished. Unfortunately, in 1994, so did Churchill Truck Lines. Virtually overnight, which is a case study in itself, Churchill Truck Lines ceased to exist and laid off drivers, secretaries, dispatches and executives. The only ones left were the lawyers and no one was talking to them. One of those truck drivers with over 20 years with Churchill was Lee Tipton.

UNIONVILLE AND LEE

Lee had lived in Unionville, northeast of Chillicothe, his entire life. Naturally, he knew everyone since you could hit a baseball clear across the entire town, but small is good when he thought back to growing up and now raising his children. Small is safe and small is secure. Farming was the lifestyle of choice, in fact, if you didn’t farm; you made your living off those that did. The Tipton family was no different, until Lee became the family rebel and took a union job in Chillicothe driving for Churchill. Of course, rebel was a loose term since the family knew that at some point, children would have to work outside Unionville or leave. Corporate farms were reaching into even rural Missouri creating larger and larger farm operations. At the turn of the 20th century, a farm over one hundred acres was a sure sign of wealth; at the turn of the 21st, wealth generating farms were counted in the thousands of acres. Increasingly, families had to concentrate their farmland in one branch of the family and expect the other family members to find non-farm jobs. Education was one path, moving to Kansas City or St. Louis was another, but in north central Missouri, there was a third option, Churchill.

Driving a truck is not a major career move for most people, but the steady income, benefits, regular hours and schedule, took Lee by surprise and he kept driving for 20 years. One common aspect of many of Churchill’s deliveries were wooden pallets used to ship and unload freight via forklift. These pallets were made out of pine for the most part, poor wood not able to be used elsewhere, but useful in making pallets. Unfortunately, being of poor wood quality, the pallets did break or simply wear out and landfills were increasingly refusing to take them. For landfills, the pallets were difficult to crush, did not break down quickly biologically, and were space consuming

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as a result. The result was landfills refusing to haul away broken pallets or charging a surcharge to do so. For most rural firms, it was simply easier to throw the pallets out back and even in Kansas City and St. Louis, urban firms would stack them up and let employees or locals use the wood for whatever they liked, as long as they took the pallets away. Lee even had a few broken pallets behind his work shed that he used for various reasons.

Then in year 18 of driving with Churchill, a trucking client, seeing Lee load up a few broken pallets into his empty truck before heading back to Unionville, asked what he was going to do with those. Lee responded that they were good scrap wood for whatever came along. The client, however, mentioned that he would buy the pallets back if Lee would fix them. Lee was taken aback; the price the client offered was roughly half what a new pallet cost, so he saw the advantage for the client, Lee basically had no costs, so he thought, why not.

PALLETS, PLLETS AND MORE PALLETS

Refurbishing pallets was a fun hobby; Lee could use the truck to haul them back and forth, for the most part, and make some money on the side, which was always welcome with a mortgage and two children. Slowly, other firms would hear about Lee’s business by word of mouth and his side business actually started to become an actual business. However, Lee didn’t take it too seriously; if he could work on pallets, he did, if not, he didn’t. The money wasn’t that great to become a major part of his life.

Then came the Teamster strike against Churchill, mismanagement by Churchill of virtually every aspect of the strike, and then Churchill’s sudden bankruptcy filing and complete shutdown. What Lee saw outside behind his shed that fateful rainy night was a pile of broken pallets. What he believes God showed him that night was his future. And so in 1995, Lee got to working on refitting and reworking pallets so they could be used and he then set out to sell these same pallets to former Churchill customers that he knew. He called his fledgling firm Tico, organized it as a proprietorship, and started work in his backyard shed in the evenings and spent the morning and early afternoon contacting clients. Quickly the business grew beyond just his shed and beyond just Lee’s ability to do all the work. Within a year he had a worker to help refurbish the pallets, leased a small shop in Unionville and devoted himself to selling.

The second year the state of Missouri also played a pivotal role in developing Tico. Given the savings on landfill waste by recycling pallets, the Missouri Department of Natural Resources issued grants totaling over $150,000 to Tico for acquiring equipment and building expansion. Lee was able to hire three additional employees and leased a bigger building. A year later this happened again until year five when he simply built a new building and continued to hire more employees. By year five he was not only recycling used pallets, but building new ones as well, and had broadened his manufacturing base to include cardboard recycling and producing mulch. By 2002, Tico had grown to close to $2,000,000 in gross revenues and housed some $3,000,000 in total assets.

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Tico had also been good for Lee personally. His house was paid for, he owned a lot at a private recreational lake, a pontoon boat and had carefully managed a portfolio of investments. It began to worry him that, since Tico was operating as a proprietorship, legally, his personal assets were considered no different than his business assets. If for some reason the company were to fail, his personal assets could be taken to pay any company debt that had amassed. Lee decided to incorporate. In corporate law, the business is considered a separate legal entity from the owner and if Tico, Inc. were to fail, only business assets would be at risk. Because Lee wanted to keep Tico small and family owned, he incorporated as a Subchapter S Corporation. This type of business organization has several desirable features for small business owners, the most important of which is that it avoids the double taxation that can occur in a regular C Corporation. Sub S allows tax characteristics to flow through onto the individual’s 1040 and provides a much simpler tax return; furthermore, Sub S has only one class of stock and can be entirely family owned. Thus, with Lee as the majority stockholder, he maintained control of Tico.

Throughout this time, Lee continued to feel God’s calling in operating his business. His primary business plan was, and still is, to seek out God’s guidance and follow it. His priorities are to provide a living for his family, provide good jobs for his employees, and make a positive impact on his community. Lee’s son, Allen, is production supervisor at Tico and his son-in-law, Tony, is employed as a truck driver. Lee pays and treats his workers well, he believes, and this is born out by Tico’s low turnover rate. In addition, Lee is treasurer and a deacon for his local church and serves as a board member for the local hospice organization. Naturally, Lee would like to turn a healthy profit, but he feels that to focus only on the bottom line is not what God has in mind for him. Furthermore, Lee states that “the business owns me, I don’t own it.” Lee feels strongly that Tico is a tool that he is to use to accomplish God’s plan for him.

TICO TODAY

Today, Tico occupies three different buildings in Unionville’s Industrial Park; one manufacturing building, a warehouse and a heat treatment facility to cleanse pallets without using chemicals thereby destroying insects and bacteria. These heat-treated pallets can then be used for food transport, since chemically treated pallets cannot because of the potential for leaching chemicals into food. Tico was the first heat-treating pallet facility in Missouri. Currently, there is an increasing market for heat-treated pallets and only one other heat treatment facility in Missouri, a clear competitive advantage. In addition Lee thinks that it is probably one of their more profitable product lines. Lee received a $50,000 grant (Missouri Department of Natural Resources) and invested an additional $20,000 to get the heat treatment facility up and running, grossing revenues of $1,200 daily with costs of $30 per day to operate. And in regards to heating, the Tico facility is heated in the winter by unusable scrap wood generated throughout the year. Scrap wood that is still usable is ground up and sold to landscapers as mulch. Very little is allowed to go to waste.

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Tico currently employs over 50 full-time and over 10 part-time employees, operating five days a week. On a weekly basis, Tico ships out over 5000 pallets, while repairing roughly 500 per day and dismantling 1000. While allowing for custom pallets, 85% of Tico’s pallets are standard size.

For hardware, Tico has 14 semi-trucks and 33 trailers, with 14 drivers. Initially, the trucks hauled pallets away from Unionville to whatever firm needed pallets; however, the trucks would come back to Unionville basically empty, except for additional recyclable pallets. As fuel prices climbed, so did the need to efficiently maximum it’s use. Lee acquired his brokerage license to haul freight. Now rather than his trucks returning back empty, he finds hauls he contracts to haul freight to north central Missouri and south central Iowa and make money on the return trips (roughly a 300 mile radius from Unionville). Tico would find these haul loads by using various web portals and business websites to locate firms needing immediate or even long-term shipping needs. In addition, the high number of trailers allows for drop-and-hook, where the trailer is just left at the client’s place of business, and when full of broken pallets, is picked up and an empty trailer dropped off. This method is what started the cardboard recycling part of Tico; customers were looking for somewhere to throw their boxes and asked Lee if they could put them in with the pallets. Seeing another business avenue, Lee agreed and now ships several trailer loads a week.

LEE’S DILEMMA

Lee’s son, Allen, 37, and Lee’s son-in-law, Tony, 35 and married to Lee’s daughter Cathy, both work at Tico. Lee wants to sell Tico and retire from active business management; however, neither Allen nor Tony can afford, on their own, to buy Tico. If Lees wants to retire and sell, he will have to go outside the family to capture the full value of Tico. Unfortunately, potential buyers have all insisted that Lee stay with the business in some capacity. Faced with this dilemma, Lee approached both Allen and Tony again with the option to buy. However, they cannot either individually or combined obtain the financial backing for a buyout. Combining their finances they might be able to buy Tico on a payment plan of over 15 years, but that is a risky proposition, since Tony is not sure he wants to commit to staying in Unionville and with Tico for such a long period of time. Lee is 58 years old and feels he is not in a position to start over if things do not work out so he wants the full value of Tico upfront. As with most people facing retirement, Lee wants to minimize risks and be free to travel. His desire is to be able to walk away from Tico; he does not want the firm dependent on him, yet he does want Tico to go on after he leaves and provide jobs for people in Unionville.

Another concern for Lee is that there is a lot of liability associated with owning and operating a truck line. Lee worries that even one fatality accident with one of those big rigs could result in a law suit that might be beyond his insurance limits. Another major concern for anyone working in the pallet industry is the constant threat of fire in the manufacturing plant. Lee would

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like to find a way to protect his manufacturing business if something were to happen with his freight line and a way to protect his freight line if something were to happen to the manufacturing plant.

Income statements from Tico’s last three years are shown below:

Tico Inc. Income Statements

2004 2005 2006

Sales

Certified Heat Treated Pallets 43,500 239,840 310,310

Corrugated Packing Boxes 11,830 3,540 8,970

Mulch 15,880 22,000 28,620

Pallets 2,722,820 2,858,070 2,836,500

Packing Paper 71,620 87,160 66,830

Freight Hauling Revenue 825,340 1,406,670 1,850,100

Total Sales 3,690,990 4,617,280 5,101,330

Cost of Goods Sold

Lumber to Make Pallets 440,700 526,000 570,000

Material to Make Boxes 5,080 3,500 5,030

Recovered Pallets Purchased* 387,900 540,000 615,300

Raw Paper Material 57,080 55,340 48,160

Total COS -890,760 -1,124,840 -1,238,490

Gross Profit 2,800,230 3,492,440 3,862,840

Expense

Propane for heat treatment 1,530 7,750 10,400

Freight Hauling Truck Expenses 4,090 13,040 17,410

Lease Payments for Trucks for Hauling Freight 33,880 51,320 136,250

Advertising 4,800 2,010 2,590

Janitorial 6,350 6,000 5,520

Donations 1,500 3,920 4,950

Saw Blades for Cutting Pallets 10,755 23,454 5,220

Nails Used in Pallet Construction 110,167 65,891 45,438

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Tico Inc. Income Statements

2004 2005 2006

Journal of the International Academy for Case Studies, Volume 15, Number 5, 2009

Shop Supplies and Tools Used in Making Pallets 42,500 26,250 35,370

Fuel for Freight Hauls 384,750 656,400 918,600

Depreciation on Building & Equipment 16,160 14,241 14,664

Insurance on Truck and Trailors 48,078 49,572 62,556

Interest Expense 31,380 45,350 70,320

License and Permits for Trucks 21,950 19,500 20,500

Office Supplies 7,670 10,150 9,050

Payroll** 980,000 1,125,500 1,117,000

Payroll Taxes** 81,190 113,150 101,000

Insurance for Employees** 70,420 55,870 29,480

Work Compensation Insurance** 65,250 97,480 89,340

Professional Fee/Dues and Subscriptions 5,070 5,000 5,300

Equipment Repairs & Maintenance 19,130 15,180 15,953

Trailer Repairs & Maintenance 14,870 17,500 18,860

Truck Repairs & Maintenance 93,400 114,500 66,300

Taxes 108,900 115,000 121,200

Utilities*** 29,800 34,500 41,750

Total Expenses 2,193,590 2,688,528 2,965,021

Net Income 606,640 803,912 897,819

* recovered pallets are refurbished and resold as regular pallets ** Payroll is allocated as follows: Pallet Production 60%, Freight Hauling 20%, Administration and Office 15%, Heat Treatment 2% , Mulch 1%, Boxes 1%, and Paper 1%. *** Utilities are allocated as follows: Office 10%, Heat Treatment 30%, and Pallet Production 60%.

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