New Product Development and the Adaptation Curve Part II

In our 4 part series dedicated to new product developers, innovators and inventors, we explore the 8 top considerations when developing a new product.  Whether a seasoned marketing professional or first timer, these eight critical components include aspects related to product design, positioning, manufacturing, distribution and financing.

What You’ll Need to Start: Ample Capital  

Beyond personal savings, innovators look to family and friends, explore small business loans and even tap into retirement accounts to raise money for their startup products. The initial outlay of inventory capital—that which could be tied up for months is often the greatest obstacle to overcome. Minimum order requirements (MOQs) by factories usually cause a lump in the throat for the first time product developer.  Even if you have the greatest gadget in the world, how do you plan on financing that first big P.O.?  You’ve likely invested significantly to develop your innovation—a figure that has hopefully been taken into consideration for ROI and overall budget.  While established corporations have ample cash flow for typical starting inventories, this may be the greatest initial hurdle for those new to the process.

Inventory Financing / Purchase Order Funding / Factoring

There are a half dozen inventory financing groups (IFGs) in the U.S. who provide bridge capital, purchasing and taking title to inventory which goes to a third party distribution warehouse. You then pay the IFG as for the cost of goods plus any in and out fees required by the warehouse as you sell merchandise.  Purchase order financing is a new twist on Factoring, an older practice in which small businesses sell invoices at a discount for faster recovery of cash, providing the factoring company with a substantial fee.  The caveat is that the invoices must be to reputable clients, i.e. Walmart to be considered.

Advantages

These can be good options that allow you to purchase greater quantities thus commanding volume discounts.  Another benefit is that you don’t have to give up equity to outside investors.  Many times the factories’ terms require money down at the time of placing the purchase order.  IFGs make it possible to abide by these terms.  These companies will want to know:

  1. Your sales and marketing strategy (refer to Part I of the series) and about your team
  2. The quality of the products produced
  3. Your margins
  4. Inventory turns
  5. Your credit worthiness and track record

Disadvantages

Personal guarantees and background checks are almost always standard protocol which usually means demonstrating some form of net worth whether savings, retirement funds, property, creditworthiness and no criminal records.  They may also not take a chance on a new client—one who has no real balance sheet to speak of.  Another downside is that these lenders charge interest rates that can be as high as 40% annually.  Lastly, there is always a time requirement (term) for making good on these loans which are usually around 60 days. If you are unsuccessful in meeting your sales plan, stiff penalties may be imposed.

 

Crowdfunding

In just the past few years companies like Kickstarter have created tech based forums which bring creative projects to life and are open to investment by the general public.  To date, over five million people have pledged over $800 million and funded more than 50,000 projects to date on Kickstarter in categories such as films, music and the arts, video games and inventions.

Advantages

Crowdfunding is catching on and becoming more accepted as a means of raising capital.  Investors do so at their own risk and there is little to no governance or regulation meaning no reporting or other administrative overhead.  Crowdfunding is really an eco-system for philanthropy and those playing in this space have an entrepreneurial spirit.  Mostly, investors do not generally require any form of equity or preferred stock so your ownership is not diluted.  On April 12, 2013 the JOBS (Jumpstart Our Business) Act, was signed into law and is designed to increase job creation and economic growth.  The good news is that it eases fundraising regulations imposed by the SEC enabling more entrepreneurs to raise capital.

Disadvantages

Because blocks of investments can be minimal—as low as $1,000 or less, investors may be less motivated to provide insight or contribute to the long term success of a project.

Seed Capital / Angel Investors

Advantages

The difference between Seed Capital and Venture Capital is that Seed money comes from individuals vs. institutional investors. Most angel (seed) investors have a wider appetite for risk and a savvy track record for assisting startups with building their businesses.  These professionals are also versed in providing feedback on pro-formas (financial targets for top line revenues and margins; cash flow models and debt.  Generally seed investors are less hands on in the day to day running of the business once they have a sound idea of your business plan.  Seed investments are less administratively complex with less formal corporate contracts and governance.

Disadvantages

Seed capital usually comes at a cost—Equity. There is risk on both sides.  The investor may never recover their investment or you may give away too much ownership.  Usually the latter results because it is just so tempting for the inventor to commence their dream.

Read Part III of New Product Development

A Conversation on doing business in China

baysourcelogo The following is a recap of a January 21, 2009 panel discussion hosted by the Orlando Chapter of ACG (Association for Corporate Growth) on the ins and outs of doing business in China. David Alexander, president of BaySource Global www.baysourceglobal.com was one of the featured speakers along with Brian Su of Artisan Business Group and Jim Gaynor, CEO of Lightpath Technologies.

ACG Moderator: Discuss how this global recession has impacted doing business with and in China

Alexander: The Credit crisis affecting all industries. Volumes are down and many factories dependent on U.S. retail and consumer volume have closed. People are strongly revisiting “In-Sourcing” due to attrition in volumes. A local trade association predicts that by late January, Dongguan and its neighbors Shenzhen and Guangzhou will lose 9,000 of their 45,000 factories.“Many factories are looking at completely empty order books,” warned Stephen Green, head of China research at Standard Chartered, who believes the export sector may even shrink next year. Green believes China will see 7.9% growth in 2009 – well below the double digit figures of the past five years.“Government statistics show that 67,000 factories of various sizes were shuttered in China in the first half of the year,” said Cao Jianhai, an industrial economics researcher at the Chinese Academy of Social Sciences. By year’s end, he said, more than 100,000 plants will have closed. The wave of factory closings began in Guangdong province, where the nation’s economic reforms were launched three decades ago. The region accounts for about 30% of China’s exports, but over the last couple of years, Shenzhen, Dongguan and other cities in the area have sought to clean up the environment and create an economy based more on services and higher-value products. Makers of labor-intensive goods such as shoes, garments and furniture no longer felt welcome.”Stanley Lau, deputy chairman of the Federation of Hong Kong Industries, a trade group with 3,000 members, has estimated that as many as 15% of the 70,000 factories run by Hong Kong businesspeople in the mainland will close this year. He says many more are likely to shut after Chinese New Year in February, when millions of migrant laborers will return home for several days. “Once workers go home, they can close down the factory quietly,” he said in an interview in Hong Kong.

ACG Moderator: Given this recession, specifically, how has the outsourced manufacturing space been impacted?

Alexander: People have been forced to re-analyze bringing manufacturing back due to lower volumes. Less scale means reduced leverage with factories. Reduced demand = longer lead times with higher volume/less frequent orders. Carrying costs of capital increases; customer response times impacted. IKEA for instance has recently opened a plant in Virginia.In an April survey of nearly 1,000 companies by RSM McGladrey, the number planning to move offshore fell by 20% from a year earlier

ACG Moderator: Further explore the costs of shipping/freight as they impact this model

Alexander: Increased energy costs toward the end of 08 meant freight as a % of COGS increased. There were fewer containers coming into port—first declines since 2006; down 1.5% from Nov 07. At $150 barrel 40’ container $8,000 vs. $3,000 a year ago or $100. At $200 it would be $15K. Through July 19, U.S. railroads had carried 5 million shipping containers, down 3.4% with the same period last year. Containers that slow to 23mph from 29MPH save 20% but this means freight lines have to add containers. However, freight increases alone not cause in wholesale trade pattern shift back to US mfg. The Economy is key driver. Higher fuel costs will also cause a shift in Lean inventory. May see proliferation in warehouses to be closer to customers. The Freight Transportation Services Index dropped 1.4 percent from October to November to 107.6, the lowest level since January, 2004. The index is down 4.9 percent from its historic peak of 113.1 reached in November, 2005, the Department of Transportation’s Bureau of Transportation Statistics reported.
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ACG Moderator: Discuss the Chinese economy both how it’s being impacted by this economy internally and how externally the commodity markets are being impacted around the world.

Alexander: China’s exports fell in November for the first time in seven years and manufacturing activity shrank in December for a third straight month. Material costs will always fluctuate globally and are consistent around the world. With fuel and energy costs subsiding a bit and with material costs softening, Labor is still the key driver for the feasibility of offshore manufacturing.

Still it seems like the economy is chugging along normally though. In the city where one colleague lives there were more than 4000 cars newly registered in the first week of Jan alone. This is a city of 3M people and the roads are already crowded. We are not sure how many weeks like that one in Jan. we can survive and still keep cars moving along. Also, remember, the Chinese are good at saving money. The China economy is predicted to be as large as U.S. by 2030. All this said, this crisis has been a time of reckoning. Americans are buying fewer Chinese DVD players and microwave ovens. Trade is collapsing, and thousands of workers are losing their jobs. Chinese leaders are terrified of social unrest. Having allowed the renminbi to rise a little after 2005, the Chinese government is now under intense pressure domestically to reverse course and depreciate it. China’s fortunes remain tethered to those of the United States. And the reverse is equally true. The Treasury conducts nearly daily auctions of billions of dollars’ worth of government bonds. For the past five years, China has been one of the most prolific bidders. It holds $652 billion in Treasury debt, up from $459 billion a year ago. Add in its Fannie Mae bonds and other holdings, and analysts figure China owns $1 of every $10 of America’s public debt. The Treasury is conducting more auctions than ever to finance its $700 billion bailout of the banks. Still more will be needed to pay for the incoming Obama administration’s stimulus package. The United States, economists say, will depend on the Chinese to keep buying that debt, perpetuating the American spending habit.Many firms in the auto, luxury, travel & tourism and real estate industries have begun reporting a significant decline in spend. Where the greatest opportunity lies, is in the rural economy. It is the economy that has lagged far behind the others – It is the economy that has more than 700 million people – It is the economy were small nominal gains can equate to large.

ACG Moderator: Discuss the idea of building markets in China coming from the U.S. or Europe

Alexander: According to The Kiplinger Letter, for 2009, trade will shrink worldwide by 2.1 percent to $115 billion and U.S. exports will drop 0.5 percent. It said the hardest hit areas will be machine tools, chemicals, plastics, mining gear and turbines, while medical products, farm goods and construction equipment should weather 2009 relatively well. Kiplinger predicted no worldwide growth for gross domestic products in 2009, and negative growth in the U.S. There are still good opportunities for growth. Certain products that sell well in China and come from USA are mostly niche items. Examples: Zippo Lighters, cosmetics from famous names like Estee Lauder cars, and famous brand clothing. Western brands will always be in demand.

ACG Moderator: Discuss how the Chinese government is impacting companies that want to either invest in China financially or via a joint venture or with manufacturing facilities – VAT rebates, and clean industry versus smokestacks

Alexander: In July, 07 VAT rebates were rescinded for 553 industries. The gov’t just increased the VAT refund for exported goods to help with the economy. The price of raw materials is way down now so batteries, and other items have gone down in price about 30%. China will increase the export tax rebates for some machinery products as of Jan. 1, 2009, in a bid to alleviate cost burdens on exporters (back to 17%). The most recent increase took effect on Dec.1, covering 3,770 items of labor-intensive, mechanical and electrical products, or 27.9 percent of the country’s total exports.

ACG Moderator: Discuss product quality concerns in Chinese manufacturing

Alexander: Any U.S. concern marketing a product manufactured in China is ultimately responsible for product/project management. This means clearly stating product specs and tolerances, material specs, defect rates, etc When we leave too much in the hands of Chinese manufacturers is when we run into issues.China does need better IT and process control. There is a lot of opportunity for IT/IS but also the Chinese don’t know they need this. They don’t even use part numbers in most businesses… Our biggest opportunity from US to China is to engrain our production management know-how. One of the main problems in producing quality here is that the workers and managers themselves don’t know what to expect in a quality product because they don’t consume such items. “They have no feel for what quality is.”There is also little accountability for goods that fail after some time in service. Example: If you buy a new house, everything will be perfect when you buy it but things will soon start to break because they weren’t made well. They might try to fix it but how can you fix a tile floor if all the tiles were installed following a standard that is not up to par? Example: they paint bare wood or walls without priming the wood first. The paint looks great for a year, then it lifts off in big sections but it’s too late for anyone to be accountable then. Your average Chinese homeowner has no idea how to paint or do other home repairs compared to the average American.This is why you need to have your interests well looked after. Also, a serious weakness of Chinese engineers is their reluctance to ask questions. This has to do with the cultural myth of “lose face.”Because of the importance of relationships and family sometimes they will hire their friend/family member instead of hiring the best person for the job. This also limits their success in some ways. Take Auto parts for instance. The Speed at which China has been industrialized means quality concerns and recalls are growing. Their revolution happened in a quarter of the time that ours did.The Chinese are unfamiliar with or don’t care about U.S. auto quality standards. Under federal law the importer of record is responsible for recalls and quality concerns. Many small importers (anyone can be importer) aren’t familiar with regulations and suppliers don’t have the capital to handle recalls.We also have to communicate the long term implications of the business opportunity to the Chinese factory. If they think a project is ‘one and done’ then this impacts price Everything is a negotiation.

ACG Moderator: Discuss the cultural differences especially as it relates to building relationships in China.

Alexander: The Chinese always consider their relationship with another person when they do business with that person. For example, they can never turn away from doing business with a friend even if there is a better product they should be seeking. At least they can’t do it in front of everyone so they might do it secretly. The Chinese prefer to deal with people they know and trust. Western companies have to make themselves known to the Chinese before any business can take place. Furthermore, this relationship is not simply between companies but also between individuals at a personal level. The relationship is not just before sales take place but it is an ongoing process. The company has to maintain the relationship if it wants to do more business with the Chinese. The relationship sometimes begins based on money then moves to integrity and trustworthiness. Frequent contact is important.

ACG Moderator: Discuss other emerging markets such as Vietnam, South America and Mexico briefly as they relate to the evolution of the Chinese markets and increased shipping costs.

AlexanderMuch is predicated on fuel costs. Also higher expenses, plus higher taxes and stricter enforcement of labor and environmental standards, are causing some manufacturers to leave for lower-cost markets such as Vietnam, Indonesia and India.Despite its huge pool of unskilled rural laborers, China’s supply of experienced, skilled talent falls far short of demand. The gap has been pushing wages up by 10 percent to 15 percent a year.Inland cities like Luoyang and Wuhan, outside the traditional export zones of Guangdong and the Yangtze River Delta, near Shanghai are emerging. In inland China, wages still lag far behind the richer eastern and southern coastal areas.

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From Reactive to Proactive: Redefining Safety Standards in the Promotional Industry (A Four-Part Series)

The following article is the final installment in our monthlong Promo Marketing Headlines series titled, “From Reactive to Proactive: Redefining Safety Standards in the Promotional Industry.” For the past four weeks, we’ve discussed product testing, quality assurance and how both suppliers and distributors can work in tandem to ensure the items they sell are safe for children and adults alike. Read on for the last chapter, which addresses the dangers and benefits of offshore manufacturing.  From Promo Marketing Magazine written by Christen GruebelPart 4: The Global Sourcing Gamble There’s a reason why Tylenol is still on drugstore shelves across America. Johnson & Johnson’s response to its 1982 cyanide debacle (and the subsequent redux in 1986) was prompt, honest and ethical. It’s really no wonder, even 25 years later, the event is still upheld by public-relations practitioners as the paradigm for crisis management.

Accepting blame is certainly tougher than assigning it, yet what saved the Tylenol brand was swift admission, and an open line of communication between Johnson & Johnson and America.

While this situation and that of the recent product recalls have similar elements, in today’s news stories, by contrast, the perceived “enemy” of global outsourcing has taken center stage as the guilty party—not the companies.

They may be apologizing. They may be collecting harmful items. Yet, the common implication that China is at fault for each and every product defect is a conception that they aren’t going far to discourage, either.

Shades of Gray

It’s no coincidence that with cheap labor comes the added risk of sub-par quality, however, there’s a big difference between design flaws and manufacturing defects. According to a study titled, “Toy Recalls—Is China Really the Problem?,” published in the September 2007 issue of the Asia Pacific Foundation of Canada’s proprietary publication, Canada-Asia Commentary, “A design problem will result in an unsafe toy irrespective of where it is manufactured. … Only toy companies can prevent problems associated with designs.”

For example, instances with lead paint are manufacturing defects. But anytime a recall involves something like choking hazards or sharp points—it’s a design flaw. Whether the mistake occurred in the Chinese factory or in the boardroom where the design was finalized, one fact must hold true: A company must accept accountability for the products it puts on the shelves.

“Product recalls have happened across a vast number of industries for a good number of decades, regardless of their manufacturing origin,” noted David Alexander, president of BaySource Global—a sourcing company that partners with American companies to facilitate day-to-day business dealings in Asia. He added, “Any company marketing and selling a product to the U.S. consumer is ultimately responsible for the safety and performance of that product.”

Cause and Effect Patterns

But why has China become the scapegoat? Mel Ellis, president of Humphrey Line, suggested it’s because, in general, trade with China just isn’t fair trade. And the reasons that send American companies overseas—cheap labor, low overhead—are the very same ones that lead to product defects. “There is no effective OSHA in China, and they recently executed the head of their FDA. They can use child labor … their wages are very low,” he added. Not to mention, Ellis said, “We know that our intellectual property rights are not respected in China.”

To wit, most Chinese factories are far from centrally located. According to Don DePalma, president and chief research officer at Common Sense Advisory, a research and consulting firm based in Lowell, Mass. that aims to increase the quality of international business, “The reality probably is, the factories that you’re operating in are not in the first-tier cities … but are probably in the third- and fourth-tier cities where labor is cheaper. And those are places where ‘you can’t get there from here.’”

Although Ellis manufactures his entire product line in the United States, he has a sense of how the recalls will affect promotional products suppliers and distributors, whether they import or not. “First, companies with very high brand equity values may be reluctant to trust our distributors to provide products that are free from defects. This may result in reduced demand …” He went on to say the potential for injury as well as significant financial liability for those involved in a recall will also contribute to a modicum of instability in the industry moving forward. However, he has hopes that China will respond from the market pressure to develop higher standards.

Yet, until that happens—and even after it does—the burden of stewardship falls squarely on the shoulders of the company that puts out the product. DePalma maintained that it will cost more for companies to adhere to more stringent corporate principles, but in the long run, the potential for brand damage is too great not to.

Outsourcing Infrastructure

Whether you’ve already gone overseas, are weighing the advantages or considering a partnership with a company that is doing either of the above, the tips below are good starting points to ensure safety and quality assurance at every turn.

• Develop a code of ethics and stick to it. This step is simple. If your company does not have corporate moral code, create one. Determine the values upper management wishes to uphold and keep the line firm through every offshoot of the company. Alexander discussed some common elements in the factories he uses that ensure the working conditions are above reproach—that they are safe, clean, pay fair wages and are free of child labor. This is an important way to do due diligence with regard to offshore manufacturing, and as an added benefit, it helps maintain brand integrity.

• Keep quality control stateside. While numerous suppliers readily admit to allowing their Chinese manufacturers to take the lead in testing and product safety, some matters are best done in the homeland. Companies should have a usability lab, a safety lab and quality assurance lab in the United States, DePalma said. “It all comes down to the sorts of things that you hope are part of every company’s design and product-review process. … You want to make sure whatever you’re manufacturing does no harm.” Build quality assurance into the equation.

• Maintain an iron-clad “process.” Though quality needs to be a domestic concern, documenting standards for overseas manufacturers will leave corporate expectations unambiguous. This process of checks and balances, said Alexander, is “cradle-to-grave.” He added, “This means creating a documented paper trail outlining all specifications and requirements for a product from inbound raw materials inspections, in process quality systems, all the way to packaging and shipping.” Bear in mind, the process also must be correctly translated.

• Bring a third-party inspections company on board. Companies such as Alexander’s BaySource Global have overseas teams that can handle the ins and outs of global sourcing so you don’t have to. Among other things, Alexander reported that companies trying to do this on their own typically make mistakes in the following: “Not performing quality audits at factories …, making broad assumptions that what was said was understood, leaving anything to chance, not having someone present during manufacturing runs, [and] … not managing the process.” Similarly, if the third-party contractor has locations overseas, conducting unannounced factory checks is a more practical possibility.

• Expect to pay more. The catch-22, of course, is that while suppliers of promotional products might go to China because the price can’t be beat, cementing responsible business practices will add to the bottom line. While Alexander maintained that the extra costs incorporated into the product are far outweighed by the benefit of his company’s services, at the end of the day, whether or not a company can allocate its budget to accommodate these extra expenses is a choice, not a law.

Stories that relate to this series:

CCTV International—

“China: New quality standards cause toy recall”

http://www.cctv.com/program/bizchina/20071030/102525.shtml

China Outsourcing Advice

Linking East and West, BaySource andEastlink Global Ltd represents a “safe pair of hands” for companies looking to do business in Asia today. Focused on innovative new products and manufacturing components, Eastlink Global is committed to building long-term partnerships with industry-leading companies who share our values of integrity, transparency and uncompromising customer service.In Asia today “Everything is possible… yet nothing is easy” however, our on-the-ground team is dedicated to providing the day-to-day execution needed to ensure your company’s success. Our extensive manufacturing networks, design engineering, program management capabilities and robust logistics infrastructure provide the “end-to-end” solution needed to win in today’s fast-paced environment. Partnering with BaySource and Eastlink Global allows you to instantly unlock the opportunities and benefits of working in Asia, optimizing cost savings and mitigating execution risk. Allow us to help navigate your next outsourcing initiative here in Asia.  www.baysourceglobal.com

Offshoring Pleasures and Pitfalls

Does it or doesn’t it pay?

Robert B. Aronson, Senior Editor Manufacturing Engineering

The loss of many manufacturing jobs to overseas sources or “offshoring,” is a serious concern and the subject of a lot of debate. Statistics and reports are available supporting both the positive and negative aspects of this event. They range from concluding, “US manufacturing is about to die,” to “No problem, nothing to worry about.”

Much data on offshoring is subject to question because of the variety of ways many sources, including the Federal government, report data. For example one company may report product manufactured domestically and overseas together. Others report them separately. But unquestionably, US jobs are being lost. In addition to offshoring being added to our new buzzwords, so has the word “deployees.” It indicates those who have lost jobs or business because of offshoring.

The offshoring situation is not a case of deciding if you will or won’t be involved. The issue is how much it will influence your work and what you can do about it.

Offshoring may not last forever. Offshoring will be with us for the foreseeable future. But, there are indications it will not be as pervasive as it is today.

The middle class in advanced Asian countries, particularly China and India, is growing. Workers demand higher wages and more of the population is becoming a market for their own country’s products, thus reducing the drive to export.

There is also evidence that Asian countries are becoming more willing to carry out reforms, such as protecting intellectual property, and honoring patents. Such moves take away some of the negative factors of offshoring.

Stories of quality problems with overseas suppliers are common. But the recent problems with lead in paint and hazardous materials in imported grain and pet food have done a lot to shake confidence in Chinese products in general.

It also caused the Chinese government to change, or at least report they are changing, quality-control regulations. They have also executed a few officials reportedly to blame for the problems.

For those faced with an immediate decision as to whether or not to try offshoring, and if so, how deeply, here are some comments by those who have been involved with this situation.

One of the first suggestions given to manufacturers who want to avoid an offshore arrangement is to evaluate their own operations to determine what can be done to reduce production costs. And this means all costs. Many companies make decisions on a limited number of cost factors, chiefly machine operation and associated labor. More accurate evaluations look at costs from the time the raw material comes in until it’s shipped, plus any support or warranty action that might be required.

Among the more prominent techniques for cutting at-home manufacturing costs is the Design for Manufacture and Assembly (DFMA) software developed by Boothroyd and Dewhurst (Wakefield, RI). It is software that combines Design for Assembly (DFA) and Design for Manufacture (DFM) programs. DFA software reduces part complexity by consolidating parts into multifunctional designs. DFM helps identify parts that can be improved and indicates what the cost of the new part might be. The result is a design that can be optimized while the product is being developed. DFMA therefore provides a way to evaluate and understand the cost effects of design decisions. The result can be a lower-cost product.

Many companies neglect to take advantage of the latest technology, so production techniques and equipment becomes dated. Or, cost-saving opportunities are ignored in the rush to meet immediate needs. A minimal change in equipment or process often can significantly lower costs.

One option to the yes or no offshore question is a partial yes. Some companies, after a thorough evaluation of their production costs, decide to offshore only those parts where there are significant data supporting the change.

Companies such as BaySource (Tampa, FL) www.baysourceglobal.com specialize in this work, chiefly with small and midsize companies who want to get work done in China.

“We have saved a number of companies from going out of business by arranging for them to have only those parts they cannot make economically go overseas,” says company president David Alexander. It is chiefly those that require a lot of low-talent labor.

Setting up any offshoring is safer with competent help. Team 2000 (Austin, TX) is a training and consulting organization that specializes in dealing with India. Company President Rai Chowhary admits, “Offshoring decisions are a real minefield, particularly because there are no hard and fast rules. Every situation is very product and process specific.”

It is not just the small companies that have trouble. “Many US manufacturers have been swept into offshoring in the lemming-like rush to cut labor costs, andthe herd mentality that anything made offshore will be very beneficial,” says Chowhary. “Often, in a short time, they find there are problems they had not counted on.”

For example, there is the case of a large manufacturer who committed to a long-term agreement for a major number of parts with an offshore supplier, without thorough investigation. When the overseas-made parts started showing up, it was found they needed a lot of rework before they were in a usable condition. As a result, special repair shops had to be set up in the US to rework the parts. The parts kept coming because of commitments made earlier and so did the rework costs.

“This does not mean it can’t, or shouldn’t, be done,” says Chowhary, “But it has to be done carefully with the guidance of someone who knows the capabilities of the foreign suppliers as well as the real needs of the US manufacturer. I have advised many of my clients not to go overseas because their particular needs could not be met overseas at a cost advantage to them.”

False assumptions are a frequent cause of offshoring problems. A survey sponsored by technology providers E2open (Redwood City, CA) and Manugistics Group (Rockville, MD), found that many companies that had elected to offshore have unexpected logistics costs as well as erratic delivery times. The report concludes: “If you just do it based on pricing negotiations and have not thought through the logistics of delivery, assurance of supply, flexibility of supply, and quality, your total cost very quickly outweighs the price savings you made in the negotiations up front.” The report also notes that, too often, companies look at the current design of a product and naturally, but mistakenly, assume that its redesigned predecessor will cost the same amount to produce.

Properly managed, offshoring can be a profitable move. As Gisbert Ledvon of Charmilles (Lincolnshire, IL) notes, “To remain competitive you have to recognize you are operating in a global environment.” He suggests those considering such a move stay with parts that need a high degree of low-skilled labor such as simple drilling, punching, or bending processes.

“Another area where overseas help may be beneficial is start up cost,” Ledvon comments. “For example, if someone needs a complex die that requires a lot of hand polishing, that might best be done overseas.”

Ledvon also notes now this might be a good time to reverse offshoring to some degree. The US dollar might make US goods more attractive to overseas buyers.

Both good and bad results from offshoring are reported by Mike Rickabaugh, president of Livonia Tool and Laser (Livonia, MI). In one case his company, which specializes in laser cutting and steel stamping, benefited from low-quality Chinese work.

On a contract for metal stampings used for industrial shipping containers, a company had to quickly fill an order. It was placed with a Chinese manufacturer. The Chinese ignored the spec to make caster holes in the braces. Casters are critical to this type of container, so the container maker had to quickly farm out all the Chinese parts to have them reworked so he could meet a contract obligation. As a result, Rickabaugh gained a customer.

And it isn’t just toys that the Chinese have painted improperly. “We know of other contracts with the Chinese that were cancelled when the buyer, warned by the toy-painting scandal, found his Chinese-manufactured products tested high for lead content,” says Rickabaugh. “Several US manufacturers that discovered the same problem now specify American production only.

“You don’t always know why the Chinese beat you out on price,” Rickenbaugh explains. “It’s strange, but we have found that the more weight a product has the tougher it is to beat the Chinese price.” For example, his company makes two brackets used for container bracing. “One part’s weight was just one pound, and we beat the price on that easily. But the Chinese, making a second part weighing two pounds, using the same processes with comparable machines, were cheaper. Possibly it’s an issue with shipping costs or the raw material,” he observes.

Vicount Industries (Farmington Hills, MI), is a contract manufacturer with about 25 employees that has been in business for over 30 years. About 90% of their customers are in the auto market, and much of their work involves the manufacture of stamping dies.

The company uses advanced processes, such as laser scanning and 3-D modeling, to establish designs and evaluate manufacturing processes.

“About four years ago, we began looking at some help from overseas suppliers,” says company president Leonard Lavoy. “On our own we began a dialogue with some Indian companies. We now have a supplier producing low-tech parts for us. These parts require a significant amount of labor because of set up and handling. So far that has worked out well.”

Currently, Lavoy is working through a broker to evaluate some Chinese suppliers.

“Overall, our experience has been on the positive side. We did not lose any workers. In fact, offshoring allowed personnel and machine time to handle more detailed work.

“I would caution any shop considering using an overseas supplier to be sure of their capabilities before you jump in. I find the work quality from India and China below what I would expect from a US company. You have to be as certain as possible that they can do what you expect them to do,” he concludes.

It’s not practical to make all products or parts offshore. According to a recent Boothroyd and Dewhurst report, the “don’t try it” list includes products that:

  • Need some highly automated process,
  • Have a weight or size that incur high shipping or air-freight charges,
  • Require scheduling flexibility,
  • Require engineering and design changes to ensure quality, and
  • Have intellectual rights and/or patents that may be copied and marketed less expensively.

What the CFOs Think

A survey of CFOs and senior financial executives by Alix Partners LLP (Southfield, MI), a global restructuring, consulting, restructuring, and financial advisory services firm, gives both positive and negative views on offshoring. They looked at selling and general administrative trends at 35 blue-chip North American companies and divisions. Their survey found:

  • Outsourcing projects were already under way at 55% of the respondents.
  • Within the next two years 74% reported either continued or planned outsourcing.
  • The hoped-for cost savings of 15%, or expected operational improvement such as enhanced flexibility and access to best practices, was not enjoyed by 60%.
  • Expertise and stability of the overseas supplier was most important for 48% of those surveyed.
  • Reduced cost was the key factor for 31%.
  • Outsourcing projects were considered less than fully effective by 38% of midsize companies, and 15% reported being worse off.
  • Among companies taking six months or more to implement their outsourcing programs, 40% realized savings only after two years or more, while 20% realized no savings at all. But, all companies that carried out their implementations in six months or less realized their expected savings.

The survey also found that the top two reasons for not outsourcing SG&A functions are reluctance to count on overseas suppliers for highly critical parts or products and the perceived risk of losing confidential information.

Alix Partners analysts concluded that companies don’t look ‘inward’ enough, to adequately prepare for all that successful outsourcing demands inside their own companies. Internal resource issues placed well above poor vendor performance, when it came to major problems with outsourcing. “The overriding reason companies aren’t getting the returns they want,” said Neal Ganguli, co-leader of the survey and a director at AlixPartners, “is they don’t … adequately prepare themselves for all that successful outsourcing demands inside their own organizations.”

An executive summary of the survey is available at <!– var username = “nganguli”; var hostname = “alixpartners.com”; document.write(‘‘ + ‘nganguli@alixpartners.com’ + ‘‘); //–> nganguli@alixpartners.com.

Here’s What You Need to Know

Here, a sampling of the questions taken from an 80-question survey developed by Team 2000. It is suggested you know the answers before committing to any offshoring deal.

  • What is driving you to outsource: Because others are doing it? Cost, quality?
  • If you are outsourcing to save cost, how long is your planning horizon?
  • Do you have a cost-benefit analysis for the short and long term? What does this analysis include?
  • How will you deal with rejects and rework? Where will this work be carried out? At whose expense? Is that specified in your contract?
  • What about delays? What assurance do you have on delivery time?
  • What do you know about the suppliers and their capabilities? What is the source of your information?
  • How will your product be packaged to prevent damage or pilferage during shipping?
  • Is your staff conversant with the culture in which the supplier is located? Can they accurately pick up the true meaning of what is said? For example, what does the potential supplier mean by “soon,” “accuracy,” or “best possible?”
  • How much does the supplier know about the ultimate use or function of your product? And, how do you know that your supplier understands this?

Private Label Use to Grow

Many distributors are facing that crucial question at this point in their business evolution, weighing the decision of what to do with the “date that brought them to the dance.” Early on in most models, distributors leveraged the brands they carried to solidify their position within their target markets. The brands represented the “Seal of Approval” that the DSRs carried in their bag. What do you do however, when there is no longer a national brand requirement on a line where little tangible value is in the brand’s product lines or where a product has become “commodified?” Some national branded companies make the decision easy, exiting the space for a respective line and the margin erosion in a category deems it unprofitable to support a line. However, when the Distributor is held hostage to a certain brand and the brand no longer remains cost competitive, the distributor needs to make a choice. The key is does the distributor have the clout and relationships with their book of business to pull off stocking a private label line of goods to compete with a branded line.

In Modern Distribution Management, Adam Fein discusses the “Pros” of embarking on a private label program. For the branded guys, they had better take note for the Distributors’ leverage is growing as brand support continues to dwindle in non traditional retail channels. BaySource Global www.baysourceglobal.com  is working with distributors in various industries such as boating and marine, building products, and agricultural to help them in their strategic sourcing initiatives in China, sourcing items that executives have identified as being lost leaders. Better defined, these are items where there is no brand requirement, yet the actual products are commodities that a distributor must carry for the every day functionality to their customer base.

Questions to ask are:

  •   Do we have economies of scale or volumes to justify sourcing direct from China?
  • Do we have someone on board to “champion” the management of offshore sourcing?
  • Are we jeapordizing our business relationship with the branded incumbant in bypassing them to source direct and will this affect my costs on other items?
  • Have we determined realistic target costs for the items that we will take offshore?  If we obtain these costs have we factored in other crucial benchmarks such as carrying cost of capital for additional days on hand of inventory, physical plant requirements (storage)?
  • Are items we intend to source directly protected by patents or other measures?
  • Do we have the necessary information to have the product(s) manufactured offshore such as material specifications, quality requirements and standards, ratings, drawings, samples–note this is where resources have to be relegated to championing the project.
Strategy will strengthen but also strain relationships

In his book, Facing the Forces of Change, Adam J Fein, Ph.D discusses the evolution ofPrivate label products—products branded by a wholesaler-distributor—and how they represent a break from the more traditional wholesale distribution approach of reselling manufacturers’ branded products. Facing the Forces of Change®: Lead the Way in the Supply Chain, discusses private label strategies by wholesaler-distributors will expand substantially over the next five years.

Fein asserts that Wholesaler-distributors will need to build new capabilities in manufacturing and design in order to create products with unique, premium benefits. They will also have to select the right opportunities for private labels and manage the new supply chain risks associated with global sourcing.

Today, according to Dr. Fein, “an average, 43 percent of wholesaler-distributors currently sell their own private label products, although there are substantial differences between the six major product types in our study. For example, almost one-half of building materials wholesaler-distributors currently offer private label products, compared to only 23 percent of contractor supplies wholesaler-distributors.” Fein goes on to say “the lower costs and ready availability of overseas sourcing opportunities in Asia and South America accelerate the ability of wholesaler-distributors to get their own value-priced private label products manufactured. About 57 percent of wholesaler-distributors with private labels currently source their private label product from an overseas plant. By 2012, 81 percent of these wholesaler-distributors expect to be sourcing overseas.

According to Fein, Private label products offer three major benefits to wholesaler-distributors:

  • Buy-side margin. Private label products can be priced lower than comparable national brand products, especially when sourced directly from an overseas manufacturer. Since private label products are less expensive to purchase, a distributor can earn a higher margin even when the products are priced at a discount to national brand products. This option simultaneously grows margins for the distributor and aligns the distributor more closely with its customer’s objectives.
  • Sell-side profitability. A wholesaler-distributor’s private label products offer the opportunity for increased profitability by capturing the branded margin that would otherwise flow to an upstream manufacturer. The distributor also gains the ability to control the entire profit stream from production to sale, allowing for more flexible sales compensation models and higher commissions to drive sales. For example, a distributor can reduce the advertising overhead of a national brand manufacturer, especially on certain products for which customers see no value differentiation.
  • Differentiated product assortment. A private label brand name can be exclusive to a wholesaler-distributor and provide a point of differentiation. For example, some wholesaler-distributors find that they can fill gaps in the marketplace by offering the good (value) alternative in a good/better/best hierarchy. Availability can be another point of differentiation. A private label product can be sourced from multiple manufacturing companies and this gives a distributor the opportunity for more consistent product availability than when sourcing from uniquely branded manufacturers.

More can be found in his Facing the Forces of Change®: Lead the Way in the Supply Chain, which is available online from the National Association of Wholesaler-Distributors at  (http://www.mdm.com/stories/fein3701.html)

*Pembroke Consulting is not in any way affiliated with BaySource Global or its China office Eastlink Global Ltd.

How Chindia will impact the world economy

25jagdish1.jpgJanuary 25, 2008
Among the large emerging economies such as Brazil, Russia, Nigeria and Indonesia, it is the rise of China and India (Chindia) which will have (and already has) enormous business implications during the first half of this Century mostly beneficial to the world. First, both nations will require enormous natural resources because not only are they manufacturing and service centers of the world, but because of their own rapidly expanding domestic consumer markets. And this demand for natural and industrial resources such as oil, gas, coal, copper, bauxite, aluminum, iron and steel will be for many years.While China today is roughly nine times as big as India, it is expected that China will very soon become an aged and affl uent nation, similar to what happened to Japan, Singapore, Taiwan and others and will begin to plateau its economic growth. Also, it will outsource manufacturing to other nations, especially in Africa and other resource rich nations.The rapid aging of Chinese population attributed to its one child policy implemented over two generations will impact its domestic economic growth. On the other hand, while India is at present one tenth in size of China, it will experience accelerated growth in less than ten years with better infrastructure, political reforms and fi nancial transparency.

Also, India will refocus on manufacturing both for global supply as well as for its domestic demand. Unlike China, however, India’s manufacturing will be selective and largely concentrated on high-end aerospace, military, space and consumer durables including automobiles and appliances. It will begin to catch up with China and some experts even believe that its growth rate will surpass that of China. In any case, both nations with more than a billion people each, will have enormous need for industrial, agricultural and other natural resources and raw materials.

Since a vast majority of these untapped resources are in other dormant or emerging economies in Africa, Caribbean, Latin America, Central Asia and Russia, the rise of Chindia will create economic boom for them which otherwise did not happen for nearly 200 years of colonial rule.

Second, the global integration of China and India will be radically different. India’s economy and enterprises will be globally integrated especially with other advanced countries (Europe, US, Canada, UK, Australia, Singapore, Japan, South Korea) through large scale acquisitions of well established and well respected foreign companies with technology, branding and manufacturing assets.

The journey has already begun with Mittal Steel’s acquisition of Arcelor, Tata Steel’s [Get Quote] acquisition of Corus Steel, and Hindalo’s acquisition of Novelis (largest North American sheet aluminum company). And it will not be limited to industrial raw materials and to private enterprises of India. For example, several large public sector units (PSUs) of India such as ONGC [Get Quote] (Oil and Natural Gas Corporation), Indian oil [Get Quote] and SBI [Get Quote] (State Bank of India), who have the domestic scale and capital reserve, are starting to fl ex their acquisition muscles. Similarly,

Wipro [Get Quote], an information technology (IT), engineering services, as well as consumer products company, has recently made several worldwide acquisitions (including Infocrossing, a data center company in the US, and Unza, a personal care consumer products company in Singapore).

Finally, Ranbaxy [Get Quote] and Dr. Reddy’s have become significant players in the global pharma industry largely through acquisitions. So have Mafatlal and Raymonds in fashion and garments. In other words, India will contribute to global growth as much, if not more, through revitalizing and investing in Western assets as it would through growth of its domestic consumer markets.

On the other hand, China’s growth will be proportionately more domestic and only on a selective basis through global acquisitions. This is due to several reasons. First, China has begun to focus on domestic demand especially in consumer markets such as consumer electronics, appliances, automobiles and financial services. It has the physical infrastructure as well as large scale domestic state-owned enterprises such as Haier, Lenovo, China Mobil, Petro China and China Development Bank [Get Quote] to capitalize on domestic demand.

Second, the advanced world seems less willing to sell their assets to China (especially technology assets) due to what I believe are myopic misperceptions about the peaceful rise of China (in contrast to rise of India).

For example, Chinese oil company, CNOOC’s attempt to buy Unocal as well as Haier’s (the largest Chinese appliance company) attempt to buy Maytag Company in the US, met with political resistance. The obvious exception is IBM’s sale of its personal computer (PC) business to Lenovo. But it is more an exception.

Consequently, Chinese enterprises that have the scale and incumbency advantage to dominate the domestic Chinese markets will end up expanding globally by first going to other emerging economies such as countries in Africa, Caribbean, Latin American and the ASEAN as well as in Central Asia and India, both through trade as well as foreign direct investment (FDI). In addition, despite history and current uneasiness of rise of China, it is inevitable that both Japan and South Korea will quickly integrate their economies with China, just as what Taiwan has already done.

This will result in rapid growth in bilateral trade as well as reciprocal foreign direct investment between China and Japan and China and South Korea. Consequently, the largest trading bloc will be Asia especially with free trade with India. This will require formation of a new currency comparable to the Euro; and it will become the dominant currency of the world similar to the rise of the dollar as a global currency after World War I.

While the global integration paths taken by China and India will be different, their impact on businesses worldwide either as suppliers, customers, partners or competitors will be benefi cial and enormous. In fact, it is no exaggeration to state that the future survival of most admired enterprises from all advanced economies including the United States, Canada, Europe, Australia, Japan, and South Korea will depend on how quickly they participate in ensuing rise of China and India even if they have to distance from their own government’s politics and public opinion.

This includes companies such as General Electric, HSBC, Mercedes Benz, Siemens, Alcatel and many others.

Extracted from: Chindia Rising by Jagdish N Sheth.

Made in China page four

”Chinese businessmen would never send their CEO to do the groundwork straight away so it sends the signal that you’re not nearly as important as you present,” Goodham says.

If you’re small, talk yourself up, says Austrade’s senior trade commissioner in China, Peter Osborne.

”Talk about who you sell to, who your buyers are. Spruik your big clients. And make sure you meet the Chinese equivalent of yourself in the factory. If you’re the chief executive but you’ve never met your counterpart, they’re not taking you seriously,” Osborne says. 

One lesson often painfully learned by Australian business owners is that every order placed has to be extremely clear and detailed.

Emails between DealsDirect staff and Chinese manufacturers are in dot points to minimise the risk of miscommunication. 

”Ordering whatever you’ve seen in a picture, or even ordering the sample, will get you into trouble. You need to spell out exactly what you want. If you want the blue MP3 player you’ve got to specify the exact colour, size, and what accessories, if any, you expect to be included,” Goodhand says.

Negotiating a contract with each manufacturer is important. It forces each party to settle on procedures that kick in when something goes wrong. It is also an opportunity for the Australian business owner to gain respect and build a relationship with the manufacturer.

”The Chinese are likely to say yes to any order. They want to get their products out of the country. But they’ll work out the other party’s weaknesses very quickly.

”If in your eyes you don’t offer long term potential they will take advantage of whatever short term opportunity you represent. But if you can convince them that you’re serious and you’re the right company to work with, long term benefits will flow,” Hunt says. 

Made in China-page three

Their Shanghai representative now runs an office of eight. He receives a commission for each product he sources himself, and he is paid a fee for maintaining close relationships with each of the factories DealsDirect buy from.

A big part of his job is quality control. He gives factories 3-4 hours out of Shanghai spot checks and arranges for each container load to be randomly sampled before it leaves China’s ports. If faults are found the goods are sent back to the factory.

”We do visit factories and I’ve never seen sweatshops. We wouldn’t deal with sweatshops. We go to professional factories that are impressive by any standards. Quality is important so the goods can’t be manufactured in a backyard,” Greenberg says.

Faulty products do occasionally reach Australian customers, but Greenberg says he has never dealt with a manufacturer that refuses to send replacements in a later shipment.

”If you go in there with the right attitude and work with courtesy you’re not going to be left in the lurch. In any case, the Chinese are looking for repeat business. They don’t want to sell one container, they want to sell 101 and more,” Greenberg says.

For business owners without the resources to hire a Chinese representative, the experts stress the importance of researching the manufacturer you plan to buy from.

”Especially with business to business portals like Ali Baba, it can be difficult to establish the true nature of the person holding themselves out as the manufacturer,” Goodhand says.

Goodhand outlines a common scenario. ”You strike up communication with someone who claims to be a manufacturer, you’re sent a sample and asked whether you like it. If you like it, you’re asked to transfer the money to a bank account and you’re told the goods will arrive soon. After waiting patiently, nothing arrives.

”But the only record you have of the contract of sale is a bank account number and a hotmail address. Impossible to track,” Goodhand says.

The importance of local knowledge and an understanding of business culture cannot be underestimated.

Gaffs are often made by Australian business owners when they jump on a plane to check out the Chinese manufacturer and turn up in board shorts and thongs while claiming loudly that they are the manufacturer’s next biggest client.

Made in China-page two

”Or worse than that, business owners import blindly. They figure that the different culture, the different laws, the work that needs to go in to building maintaining a relationship with a manufacturer, is all too hard. The goods are so cheap they figure they’ll risk it. They mentally prepare to throw their money to the wall,” Goodhand says.

No one knows this better than John Hunt, who sits on the Australia China Business Council’s committee in Queensland, and runs Mox Group, an industrial hardware and software provider with more than 400 employees.

He says that alongside wilful blindness, many business owners who come to the ACBC for advice have been arrogant in their dealings with Chinese manufacturers.

”The dictator approach runs something like this: ‘We know exactly what we want and we’re going to tell you how it needs to be done.’ That attitude is hardly conducive to a long term relationship,” Hunt says.

DealsDirect.com.au, a fast-growing online retailer with revenue of about $40 million in 2006-07, has been buying direct from Chinese manufacturers since 2005.

The founders, Michael Rosenbaum and Paul Greenberg, started out as most Australian business owners do – attending trade fairs and using a local agent.

But the big profits were out of reach while middle men carved out commissions.

”The future of retail is selling direct from the manufacturer in China to the customer’s front door,” Greenberg says.

They spent the first few months of 2005 testing their business model with trading companies (these are similar to wholesalers in Australia).

”It’s important to get comfortable before committing to sourcing on your own,” Greenberg says.

Their next step was to hire a Shanghainese buyer that had spent the previous decade working with Go-Lo – the pioneers of discount retailing in Australia – and open a small office in Shanghai.

Their representative then started sorting through the factories that presented at trade fairs and building relationships with those that had a strong reputation.

”Now that we’ve been in China for a few years manufacturers will travel to us [in Shanghai] and line up in the passage way to show us their wares,” Greenberg says.