Conditioning for growth

Ford, Wash. -- Growing up, Monica Simeon and Marina TurningRobe were introduced to the challenges of running a family business by their father, one of the first Native Americans to open a casino after a 1987 court ruling paved the way for unfettered gambling on tribal lands. A member of the Spokane tribe, Ronald "Buzz" Gutierrez built his casino on the reservation 50 miles northwest of Spokane, Wash. His dutiful daughters tackled every job in the joint: opening the doors to eager gamblers at noon, flipping burgers, dealing cards, counting cash, mopping floors, and locking up at 4 A.M. Someday, they told each other, they would establish their own business - and it would be one with more regular hours.

Today they are partners in Sister Sky, an eight-employee firm that makes natural bath and body products based on recipes handed down from their ancestors. Launched in 1998, Sister Sky has thrived by selling tiny bottles of shampoo and lotion to hotels at Native American gaming resorts. The company also sells online, mostly to customers who have sampled the merchandise during hotel stays. Revenues in 2007 will top $550,000, up from $225,000 in 2006.

But the sisters face daunting challenges - among them manufacturing and logistics. Only ten months ago Sister Sky installed a $100,000 production line in a small facility on the Spokane reservation. Sister Sky has benefited from the increasing number of resort hotels on tribal lands, and as orders pour in, the company is quickly outgrowing the factory. Production costs are high, and some potential buyers, including retail stores, have declined to place orders, pressing for lower prices. Simeon and TurningRobe hope to trim costs without compromising the integrity of their family recipes.

Selling to hotels beyond those owned by Native Americans is a high priority for the sisters. They are also eager to push into retail, where they believe margins are higher. One idea is to set up specialty shops in casino resorts. "We want our stores to celebrate the best of our heritage," TurningRobe says. "We know the opportunity exists - and we want to jump on it now!"

Gaming on native lands is a $25-billion-a-year business, growing about 11% annually. It draws tens of millions of fun seekers to reservations every year, and some tribes are plowing gaming profits into new destination resorts, with deluxe hotels, spas, and shopping malls sprouting up across the country.

When FSB arrived for the Makeover, the founders of Sister Sky were in talks with Mohegan Sun in Uncasville, Conn., one of the most successful tribal gaming resorts. They had made their pitch - they said it went well - and were thinking about an order that could put Sister Sky products into 1,200 more hotel rooms and change the trajectory of their business. But the thought of landing such a major customer made the sisters focus on their operational problems.

Born just 16 months apart, Simeon, 40, and TurningRobe, 41, are often mistaken for twins, with their matching long, black, glossy hair and flawless skin. They also share a passionate commitment to Sister Sky and see the company not only as a means to share their pride in their heritage but also as a way to make life better for other Native Americans living on the reservation. "One of our main goals is to improve the tribal economy by expanding opportunities for jobs beyond the casino," Simeon says. Unemployment on the Spokane Indian Reservation (pop. 700) is about 50%.

Meet the Experts

To help the two women tone up their business plan, we recruited three experts. Michael Butler, 46, came home to Seattle in 1999 to co-found the boutique investment bank Cascadia Capital after 15 years on Wall Street.

Mary Ann Odegaard, 49, is director of the retail management program at the University of Washington at Seattle and a former entrepreneur. She owned a photo-finishing business with stores in Washington and California during the 1980s and 1990s.

Jim Ayers, 65, a no-nonsense former Navy man, is a principal in CGR Management Consultants in Los Angeles. He boasts extensive supply chain management experience.

After the experts arrive in Spokane, we set off for the reservation, about an hour's drive from the city. Eventually, after barreling down a quarter mile of rutted dirt road, the group pulls up in front of a small building, Sister Sky's headquarters. With pride, Simeon and TurningRobe beckon everyone inside to see their new production line - proof that they've overcome the first big growth hurdle. Only a year ago they were still cooking the lotions, then filling each bottle by hand. (At one time even the sisters' children pitched in, affixing labels and tightening caps.)

Using their homes as collateral, they borrowed $100,000 from a local bank to buy the new equipment, which automates the bottling process. Now Sister Sky lotion and shampoo rolls off the line at the rate of 30 bottles a minute.

The 1,200-square-foot facility is spotless but cramped. The entrance is lined with empty water jugs, stacked on shelves that nearly reach the ceiling. There's barely space for a few visitors.

Tackling supply chain logistics

Ayers quickly pegs the critical challenge for many small manufacturers: juggling time, inventory, and cash. Each batch of 15,000 bottles costs $3,500 to produce. Should Sister Sky keep enough product on its shelves to fulfil incoming orders immediately, pleasing customers but tying up cash? Or should the company wait to manufacture product, preserving funds but scrambling to fill orders at the last minute?

Ayers says the sisters should focus on streamlining production while minimizing the amount of money tied up in maintaining a large inventory. Instead of cooking, bottling, capping, and labeling large batches of lotions, shampoo, and conditioner, Ayers suggests cooking one large batch of product weekly or monthly and then storing smaller portions in separate vats.

As orders come in, Sister Sky could add scents such as cedar or sweetgrass to the smaller batches, then bottle, label, and cap them just before shipment. "Great idea," agrees Monica's husband, Richard Simeon, who recently left his job as a casino audit manager to become Sister Sky's production manager.

Ayers praises the sisters for installing a sophisticated quality-control tracking system (an add-on feature they invested in as part of their new production line) early in the life of their business. It stamps cases of product with a series of numbers, allowing the sisters to analyze batches and fix missteps if they get customer complaints.

Saving product quality while cutting costs

Simeon and TurningRobe discuss cost cutting. The sisters chose gentle but pricey ingredients such as extra-virgin coconut and sweet almond oils over cheaper mineral oils and lanolin. But at 35%, their gross margins are about five percentage points below the industry standard, Butler notes.

The sisters have been considering easy cuts, such as buying bottles directly from a supplier in China rather than using a distributor. Like many small manufacturers, Sister Sky does not get volume discounts on most supply purchases. They could save as much as 20% on bottle caps, but only by buying - and storing - a two-year supply.

A bigger decision looms. Sister Sky now uses distilled water - the gold standard in toiletry production because it has no impurities - to make its lotions and shampoos. But at $1 a gallon, it's one of the firm's biggest costs. Simeon and TurningRobe are debating whether to substitute deionized water. At less than 2 cents a gallon, the replacement would drastically lower costs. "I'd make that change," Butler advises. "Very few of your customers will know - or value - the huge investment you're making in distilled water."

After a quick tour, Simeon and TurningRobe herd the group back into two cars and drive us to the site on which they plan to build their new corporate headquarters in a few years. Owned by their father, the 75-acre parcel of reservation land is only a quarter mile from the main highway to Spokane and has access to power and a high-speed Internet connection. They expect to have the funds to build in about five years.

Ayers and Odegaard seem concerned. "Your next move may have to be an interim one - and it may come sooner than you think if you keep growing," Ayers cautions. "Build a 5,000-square-foot production facility that will take you to $1 million, maybe $2 million in annual revenues." Adds Odegaard: "Find an architect who understands flexibility. As you grow, so will your facility."

Focusing on expansion

On the drive back to Spokane, Simeon notes that with her husband handling production, the sisters can now focus on sales. "But we're in a vicious cycle," she adds. "We're so busy selling, we have no time to step back and strategize."

Butler advises, "Put down the cellphone at least once a quarter. Step out of day-to-day operations and set milestones: Make one-, three-, and five-year plans. Your lenders and future investors - if you want to raise capital someday - will want to see you run the business thoughtfully. You can't race from sale to sale."

After learning that Sister Sky maintains a revolving line of credit with a local bank, Butler floats an idea. "Ask your banker for a receivables line of credit, which is a loan against future payments by your customers - reputable companies. You'll get better terms and save money."

Later, over lunch at the hotel, Odegaard asks about the firm's branding strategy. To counter buyers' resistance to their high prices, the sisters discussed introducing a lower-priced product line. "Don't do it," Odegaard warns. "Stay true to your product. Let the big manufacturers stake out that turf. You have a specialty product with a story: tribal recipes, natural ingredients. You're worth the premium." Simeon and TurningRobe agree to drop the idea.

Weeks after the Makeover, the sisters have big news: After a yearlong approval process, Sister Sky just received its Minority Business Enterprise Certification from the National Minority Supplier Development Council, which will give the firm an edge with major corporations eager to fulfill supplier diversity quotas. Sister Sky is now making contacts at big hotel chains such as Hilton and Starwood. Meanwhile, Mohegan Sun is still pondering the bid to stock Sister Sky's products in its hotel rooms, and the sisters hope to land their first multimillion-dollar contract soon. We'll stay in touch and let you know how things turn out for Sister Sky.  

Could your business use a makeover? In general, successful Makeover candidates are profitable small companies with at least $1 million in annual gross revenues. To submit your firm for consideration, e-mail the FSB makeover editor here. Please describe your business briefly, provide your most recent and projected revenues, and explain why you think your company would benefit from a Makeover.