Selling Ice to Eskimos and Chopsticks to the Chinese

We’ve all heard the term “he could sell ice to Eskimos” to describe the consummate salesman who is able to convince someone to buy something for which they either have little need or likely have ample supply on hand.  Or perhaps we’ve heard “he could sell them the shoes off their feet.”  In either case the idea is that for those with the gift of persuasion, it is possible to convince someone to purchase something based less on need and more on charisma and charm.  There may soon be a new term in our vernacular that could describe one U.S. company, Georgia Chopsticks—“They can sell chopsticks to the Chinese.”

In a town ironically named Americus, Georgia two hours south of Atlanta, that is precisely what Jae Lee has set out to do, producing 2 million Chopsticks each day destined for Japan, Korea and yes, even China.  In May of this year, the Americus-Sumter County Payroll Development Authority (PDA) made a formal announcement that Georgia Chopsticks, LLC would open a production facility in Americus that employs 150 people.  According to Lee, China with its 1.3 billion population lacks ample natural resources to support demand for chopsticks and on Tuesday, May 31 a formal ribbon cutting ceremony was held to mark the opening of their plant.

According to the Atlanta Journal Constitution Lee who started his chopsticks business in Cochran last November, sent a couple of samples overseas, and within a few months needed to expand.  Said Lee, “I knew there was a need and I thought I could make a profit.”  Imagine that.

“We tend to think that the Asians take care of that pretty well,” said David Garriga of the Americus-Sumter Payroll Development Authority, the economic agency that owns the plant that Lee rents in the city’s old industrial park. “For Americus, the chopsticks factory represents a flashback to its days as a manufacturing center,” Garriga said. But as many companies shifted work overseas, many shops shut down.

So why aren’t more companies strategizing to include China in their plans?  In an October 6, 2010 Bloomberg Press report it was estimated that China market was valued at $150 billion in potential goods and services or a top ten global opportunity for U.S. companies. “U.S. companies have experienced tremendous commercial success in China’s market and the prospects for future growth are significant,” says Erin Ennis, vice president of the U.S.-China Business Council.

China has become the U.S. third largest customer for things like Greentech, machinery, luxury items and even wine.  China’s expanding consumer market clearly has an appetite for Western brands.  Thanks to the gateway of information available through the internet, television and other media there is almost built-in demand for products from the West.  As long as companies are focused on things like quality and safety the market is stronger now than in the history of our trade relationship.

“The Chinese appetite for fashion has become voracious,” says Farooq Kathwari , chairman, chief executive officer, and president of Ethan Allen Interiors.   “The observation that ‘we first dress ourselves, then we dress our homes” applies equally in China. For years, French, British, Japanese, and American clothing designers have taken China by storm. It was a natural evolution that consumers so immersed in couture and inspired by the biggest names in fashion would turn next to fashion for the home. The demand is there and growing.”

Kathwari should know.  He’s been in China since the 1970’s when he began buying arts and crafts there.  Today they are marketing Ethan Allen —a quintessentially American brand—in 53 locations in major cities across China. They ship 60 percent of what they sell there from their well-established U.S. manufacturing base and in turn buy Chinese products to be marketed in Ethan Allen Design Centers in North America.

The U.S. exports about $100 billion annually to China in goods and services, supporting about half a million American jobs.  According to the White House new deals in the works with China will support up to 235,000 new jobs in the U.S.  In addition to major players such as General Electric, Honeywell and Navistar, there are opportunities for companies of all sizes to exploit increased demand by the growing Chinese middle class.

For now, the man who would sell chopsticks to the Chinese quietly goes about his business of working toward a goal of producing 10 million chopsticks per day.  As of June he’d received 450 job applications.  For many of those Americans out of work in the little Georgia town, the Chinese market for their products could soon mean the good fortunes in their cookies may very well come true.

What a Great Idea!

As a company plugged into the ecosystem of New Product Development we are fortunate to see a new idea for a great product almost every week.  Admittedly some fall into the “Why didn’t I think of that” category while others seem more limited in potential.  In both cases there is one key element missing 95% of the time and that is research.  Research leads to a plan.  Sometimes this roadmap leads to an impasse like a mountain range on an expedition.  Other times it reveals a small but certain path to success if followed and measured by each step.

Inventors and new product developers usually fall into two categories—those with the Eureka moment of inspiration and those with pragmatic vision and instinct to see what next great opportunity exists.  Both are blessed with creativity but only a few are successful in taking their idea to marketable concept.  Why?  Most inventors spend a disproportionate amount of time, resource and capital on product development, manufacturing and cost without first doing the necessary research and analysis on the product’s market potential.  Furthermore they lack a business plan and budget for getting their product into appropriate retail channels.  Following are four overlooked steps to success in launching a new product.

Understanding Patent & IP Protection vs. First to Market

An entire book could be written on the merits of weighing protection of intellectual property vs. being first to market.  The time and expense of applying for a patent are daunting.  Many become paralyzed when they believe their product launch is hostage to receiving a patent.  In 2013 the first to file provision morphed into the First to Invent under the 2011 America Invents Act which provides a grace period by which products are reduced from an “application” to practice.  If an inventor can demonstrate due diligence such as showing a product at trade shows, preparing prototypes and sending out sales samples he/she will have dominion over the invention.

What this means for everyone is that they need to be taking steps toward getting feet on the street and being first to market.  The innovation that intersects with opportunity, demonstrates value and provides a new and better mousetrap is the one whose brand equity gets the head start.  The single greatest omission we see frequently is inventors not adequately budgeting for selling activities which means planes, trains and automobiles.  There is expense and time involved with creating collateral material, a web site, participating in tradeshows, traveling to buyers’ offices, meeting with distributors (an entire topic on its own) and creating and executing a sales & marketing calendar.

Retail Landscape

Products fall into hundreds of categories such as health and fitness, hardware, DIY, home improvement, etc. The marketplace is a vast, ever expanding and complex territory to navigate.  In addition to Big Box or brick and mortar, the internet will be involved in more than 60% of retail sales by 2017 and will climb with the use of mobile such as smartphones and tablets.  While this may seem to open up even greater opportunities to sell products, an internet strategy requires an entirely new set of disciplines and skills for selling and fulfillment.

Furthermore, inventors who have a new weed killer device or pooper scooper may have never worked with or sold to lawn & garden or pet buyers.  Consider also that depending on the retailer, responsibility for multiple categories may fall under one manager.  Does your contacts list include retail buyers?  You might consider using brokers who have relationships at retail and can combine your single line item SKU with others they represent.

Reality vs. The Universe

Here is yet another breakdown in analysis and planning occurs.  Some inventors invest their life savings—up to six figures attempting to see their product come to life.  The reality is it is difficult to capture a substantial percentage of the potential category or market for a product in the first year of sales.  A break even analysis can serve as a forecast or budget which will tell you how many widgets you will need to sell on an annual basis to recover your outlay and total investment.

Baysource blog

This isn’t true just for inventors.  Product managers are expected to create pro-formas based on empirical data rooted in research and facts.  The first thing they analyze is suggested retail price (SRP) what the market will bear.  Working backward they deduce what their wholesale cost needs to be which then leads to manufacturing and landed cost targets.  Included also are startup costs such as tooling, prototypes and samples.

China, Inventory and MOQs

Many turn to China to have their products produced.  When approaching suppliers the better you can demonstrate a well thought out plan the more credibility you will have.  A documented Request for Proposal (RFP) is the first step toward building this credibility with potential factories.  Engineering drawings, material specifications and guidelines for “fit and function” should be clear. They may in turn ask questions about how you plan to be successful with your product and want to better understand your game plan.  China is inundated with requests for quotations.  Unless you are an established entity it may be difficult to be taken seriously or with a sense of urgency.  Sometimes it makes sense to hire an agent who already has established relationships in place, can monitor the project and be on hand for product changes and quality control concerns.

Another example of putting the cart ahead of the horse is predicting the capital requirements for that first order.  Surprisingly we see many who have put months of work into their projects without yet having their finances in place for initial orders.  Minimum order quantities (MOQs) can begin around $25K on the low side and up to $100K for the first purchase order.  The last thing you want is capital tied up in slow moving inventory.

Preparation, homework and analysis is key.  Done properly and well ahead of time will reveal the “Go-No Go” decision providing a framework for success.

The Real Cost of (Not) Doing Business in China?

 

As the #1 manufacturer in the world China now produces nearly $2.5 trillion of goods.  While this is around 28% greater than the U.S., manufacturing makes up an astounding 30.5% of China’s GDP vs. 12.3% for the U.S.  One thing experts acknowledge is at $2 trillion in manufactured output the U.S. produces more with less labor.  It also indicates that low value added jobs with less profit margin have gone and remain overseas.  So what does that mean for us?  It means that China is still the factory to the world and if operations decision makers haven’t developed a competent model to outsource redundant, high labor and low value add processes, they are tempting fate.  There is a cost to and not to doing business in China. and the time has come for most organizations to analyze synergistic offshore-onshore manufacturing & distribution strategies.

Assume for a moment that you are the SVP of Operations for a U.S. firm in Des Moines that manufactures some sort of metal and plastic assembly.  Sales have been flat and finally in that Monday morning meeting the inevitable question arises.  “What are we doing about China?” your boss asks.  You have a solid team of purchasing professionals, none of which can point to Hong Kong on a map.  However, through the internet one of your go-getters, Bill, has begun to put a spreadsheet together of die cast and injection molding companies in the Guangdong Province, which he’s researched as being a hotbed for these industries.  Since Guangzhou is a FTZ (Free Trade Zone) Bill with his Operations Management degree, has identified this as the logical place to start.  He’s shared a couple of months of emails with “agents” posing as direct factory managers and is ready to take his associates to China.  Just say the word.

Assuming that Bill and the others now have passports and visas in hand, they begin booking flights, hotels, trains, and ferries to venture out into the Middle Kingdom.  In all they’ll be gone for just under three weeks.  Since this is the company’s first sojourn to Asia, you’ll undoubtedly accompany them on this exciting new foray into the land of the dragon along with your Ops VP.  Now you and your four valuable employees will be out of pocket the majority of a month leaving yours and their day to day responsibilities to others or to simply take a break from existing projects.  How much time and capital do you think this will require?  You may be surprised.

The following lists conservatively typical expenses by line item for a 2 ½ week trip to China.¹  Remember, you’ll require a full 24 hour day of travel to and from and a day of recovery once you’ve arrived.

Cost analysis of doing business in china

The good news is there are competent firms in place to assist in your project management initiatives.  In a poll on Linked In, 150 Supply Chain professionals weighed in with their response to the question, What is the best way to manufacture outsourcing in China?” (See diagram below). 57% of respondents chose “Establish a trusted partner in China.”  Perhaps a good portion of the voters had already been through the trial and error process.  Or it could be that those who have succeeded in tandem with a firm watching out for their best interests can easily quantify the decision to engage a reputable partner for monitoring manufacturing, quality control, packaging, labeling and logistics.

what is the best way to conduct manufacturing outsourcing to china

In his article  http://baysourceglobal.com/10-tips-to-better-china-sourcing/ William Atkinson of Purchasing Magazine explains that regardless of their China story, those who have enjoyed a successful relationship with China have done so through proper guidance and preparation.  In this critical juncture of global commerce, fluctuating currencies, and competitive pressure, it is imperative to select a reliable partner whom you can trust, knows the local governments and regulations, has engineers on staff who understand your products and who can help you gain a foothold in this valuable region of the world.

¹Airfares, four star accommodations and RMB exchange rates as of September, 2014

Baysource Global President, David Alexander can be reached at david.alexander@baysourceglobal.net

Using a China Agent vs Going Direct

As companies weigh the pros and cons of working directly with a factory vs. dealing through an agent for their China sourcing needs there are many points to consider.

Top 10 Pros and Cons

1.  The scale or dollar volume purchased annually. (I published an article in M&A Magazine which argued it requires $40-$50MM in throughput for any ROI on a direct sourcing office.)

2.  The number of varying categories and SKUs being sourced.

3.  The complexity of products being sourced. Cotton socks are a lot less difficult to make and package than electromechanical items with sophisticated firmware and specialized components.

4.  Experience levels, competence and proficiency with the language of the country with whom they’re dealing.

5.  The  sheer number of factories the buyers/agents have worked with including access to the owners or very least factory bosses and relationships with those individuals; the length of time and history with those factories and dollars of business placed with them; the ability to get production bumped forward in the schedule;  the ability to receive favorable payment terms which impacts cash flow of any business.

6.  Competency with provincial government regulations and requirements. (How would a New Yorker fare in an Alabama factory or vice versa?)

7.  Ability to travel to/from factory within one day for urgent matters, product/packaging changes, and production oversight.

8.  Quality Control-Generally considered the most critical.  The standard process for measuring QC and the depth of practices such as random and in production sampling, testing equipment and facilities, reports, photos, and now video.

9.  Experience with logistics, freight terms and all export documentation and activities.

10.  Does the agent or factory (for direct) share your sense of urgency and same philosophies and principals?  Are they vested in the outcome and long term success of the business?