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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?

New Product Developers Part III

In our four part series dedicated to new product developers, innovators and inventors, we explore the 8 top considerations when developing a new product.  So far we have covered:

  • Product Development Costs
  • Distribution Channels
  • Inventory and Startup Financing Capital

Educating the Masses

How will you announce the arrival of your new product to the world?  Magazines?  PR campaign?  Put an ad in the paper?  Direct Response Television (DRTV) is a great but often expensive form of advertising and one of the best ways to demonstrate a new application or use as well as building brand equity.  It’s great to have a video on your web site but again, how will you drive viewers and a following?

For Part Three we turn to renown and widely respected author and expert, Jim DeBetta, who has led firms such as TV Goods, Rymax Marketing and Carson Optical.  As one of the foremost authorities in helping inventors and consumer product entrepreneurs develop and launch their products through infomercials and retail store placement, Jim is widely sought as a guest speaker at many nationally recognized events.

BaySource Global: What are emerging methods, tactics and strategies for introducing new products in the public domain?

Jim DeBetta: “DRTV can be effective to quickly brand a product but the costs are very high.  Internet marketing techniques offer the least costly and potentially most effective way to introduce new products – whether your own or on other’s sites.  Its also critical to have a comprehensive social media campaign that can include Twitter, Facebook, Pinterest and others.  This can be a fast and effective way to reach many people while allowing them to provide instant feedback.”

BSG: What are overlooked tactics for getting a product into retail distribution?

JD: “Using a broker or rep is always a good idea as they have the contacts and experience to get products introduced to retail buyers.  Again, it’s also a good idea to start by marketing your products online.  Having a powerful internet marketing plan is a great way to start and often not seriously pursued.  Also, using distributors to sell your products to mom and pops and even larger chains can be effective as they already sell other products to their customers and can offer yours as well.  You may make less working with a “middle man” but the sales you achieve more than compensates for it.”

 

 CostvsPrice 

Price vs. Value 

In the initial phase of a product’s life-cycle there will likely not be the scale (volume) to drive down production cost.  Unless you can convince consumers they should pay a premium price point at retail break even may be longer off than you expect.  Plus, buyers will tell you whether your SRP (Suggested Retail Price) is in line with their category.

BSG: Where do inventors miss the mark on price vs. value, either in over pricing or under estimating suggested retail price? (Retail sometimes dictates a cost not attainable in the startup phase due to lower initial volumes at manufacturing)

JD: “Many inventors often feel their products are worth more than they are and so they price them at too high of a retail.  Also, they often do not offer enough margin for the retailer…So instead of them offering a cost of lets say 10.00 to a retailer when the MSRP is 20.00, they offer them a price of 12-13 dollars which does not give the retailer enough margin.  It’s critical for inventors and startups to make money but they cannot get too greedy and have to understand the margin requirements of big retailers

 

Jim DeBetta is President of DeBetta Enterprises and is a mentor, coach and consultant.  He is the author of The Business of Inventing and offers Group Coaching courses for inventors.  Jim can be reached at jim@jimdebetta.com Facebook-Get Retail Ready or 770-826-2606.

David Alexander is founder of Baysource Global specializing in contract manufacturing, new product development and distribution.  David can be reached at david.alexander@baysource.net or 813-251-4184.

 

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

New Product Development and “The Adaptation Curve”

Nobody has an ugly baby.  The same goes for new product developers.  Whether an independent entrepreneur or seasoned marketing team, once a new product concept is developed and months, even years in some cases are invested, our babies become prettier every day.  The same unconditional love and support that builds as our children mature and develop transfers into the professional mindset of innovators.

Calling All Product Developers

Creating a viable and robust market for a new product takes enormous resource, planning and resolve.  The sheer capital to unveil and furthermore generate brand equity is often the most overlooked aspect of getting a product to market.  Take the Segway for instance.  This emission free, efficient mode of personal transportation has been around for over a decade.  With some quick, simple training even children can master riding this marvel.  Reaching top speeds of 12.5 mph it has a range of up to 24 miles on a single charge.  Still commercial acceptance has been scant.  Why wouldn’t every warehouse and airport have a fleet of them?

Recently two Swedish designers have developed an entirely new concept for biking safety in the form of the Hovding, an airbag which deploys vies-a- vie algorithmic intelligence protecting riders from head trauma in the event of a fall or crash.  This revolutionary “bike helmet” is worn around riders’ necks and actually becomes a stylized accessory.  At $520 prospects for commercial distribution of any scale in the next five years may be slim.  However according to Forbes writer Jeremy Bogaisky this startup has already taken in $13 million in venture capital.  He cites bicycle industry analyst Gary Coffrin who gives a great summation stating “The adaptation curve for such a unique product at this price point is not likely to be rapid.”

Taking the tech factor down a notch, in my own gym sits a clever form of a door stop called “James the Doorman.”  I would imagine the designers, Black+Bum had their “Eureka” design moment and the wheels started spinning.  Honestly I have never seen such a cool variety of a door stop and  without knowing much about how they developed this unique version of an age old application, I can’t comment on what lengths they went to in commercializing their product.  I do know that the one in my club is the only that I have ever seen.

Every week we hear from inventors and product developers who have put great thought into products which offer unique solutions to every day needs.  Often though there are many missing pieces to their overall strategies.  Below are the Top 8 Hurdles to Successful New Product Launches.  In the coming months, I will be writing a series which individually expands on each of these, why they are often overlooked and how they are important for taking new products to market.

1. Product Development Costs 

Most inventors underestimate the cost for designing a manufacturing ready product.  Tools and molds can easily run into the five to six figure range and can dwarf first year profits.  Developing engineering drawings—those that translate into production and material specifications  require time and money.

2. Distribution Channels

Some products are ideal for Big Box retail but unless you know how to navigate this space, most category managers are not going to take a chance with a single line item vendor.  It creates additional administrative work for the system, and most inventors don’t have the capital to market their products.  Specialty and on-line retailers generally are better proving grounds for a products’ acceptance but you still have to generate interest and traffic.  Oh, and did you get a UPC code yet?

3. Inventory Capital 

Minimum order requirements (MOQs) by factories usually cause a lump in the throat.  Even if you have the greatest gadget in the world, how do you plan on financing that first big order?

4. Educating the Masses 

How will you announce the arrival of your new product to the world?  Magazines?  PR campaign?  Put an ad in the paper?  Direct Response Television (DRTV) is a great but often expensive form of advertising and one of the best ways to demonstrate a new application or use as well as building brand equity.  It’s great to have a video on your web site but again, how will you drive viewers and a following?

5. Price vs. Value 

In the initial phase of your product’s life-cycle there will likely not be the scale (volume) to drive down production cost.  Unless you can convince consumers they should pay a premium retail price, break-even may be longer off than you expect.  Plus, buyers will tell you whether your SRP (Suggested Retail Price) is in line with their category. 

6. Regulatory and Testing Requirements 

With your product in the public domain, most retailers will require some sort of regulatory or product safety testing and compliance with groups such as the Consumer Product Safety Commission (CPSC), Underwriters Laboratories (UL) and others.  Depending on what industry you are in, your item may require testing and certification by default.  To you this means additional time, red tape and money.

7. Patent and Intellectual Property Protection 

This is perhaps the most critical and misunderstood area of product development.  In many cases developers could have saved themselves months of work simply by doing some basic research and analysis.  The United States Patent and Trademark Office site has become more navigable and efficient thanks to improvements in their search functions.  There are three ways to begin your inquiry using key words, designs or a combination to see if someone else has registered a similar product.  Even if they have you may be able to make some functional changes to distinguish yours but again, many underestimate the time and capital required to protect the investment of your innovation.

8. Aftermarket Sales and Support

Now that you’ve got a patent pending, finalized your business plan, raised early stage capital, have product on the warehouse shelf and are starting to generate traction don’t forget the basic administrative requirements.  If you hit the lotto and are selling to Wal Mart, using retail link is a requirement.  This entails sending a staff member for training and ultimately using their on line tool daily or weekly.  Is someone manning the phones for product questions and concerns?  How robust is your web site?  Oh, we haven’t even discussed how much this will cost to build.

While these hurdles aren’t surmountable, it is critical to factor in all the critical and time consuming elements of bringing a product to life.  Even this list is not comprehensive enough to account for the unexpected turns in the pathway to new product development.  If it were easy, everyone would be doing it.

Read Part 1: New Product Development and the Adaptation Curve

David Alexander is president of Baysource Global and has a decade of experience with new product development and contract manufacturing.

Protecting Brand Integrity While Manufacturing Overseas

manufacturing in china

In the world of business, financial objectives have traditionally prevailed over the values of social responsibility and ethical behavior. As the global business landscape continues to flatten in an increasingly competitive economy, companies have to find ways to reduce costs and uncertainty more than ever. Supply chains are the low hanging fruit for finding new buckets of savings.

For much of the last 20 years U.S. firms have followed the trend  to low cost country sources for labor savings offered through outsourcing. Technology and globalization have made manufacturing parts in one nation, assembling them in another, and selling them in a third a reality. Although controversial at times, outsourcing has proven itself to be expedient and highly profitable.

Without proper due diligence there can be a dark side to outsourcing. Throughout the years a series of highly publicized public relation nightmares regarding child labor violations and reprehensible working conditions at Asian factories have impacted companies such as Nike and Apple. If not managed carefully, manufacturing overseas can cause serious damage to brand reputation. Consequently, this can have devastating effects on the bottom line for businesses who’ve either shrugged a cold shoulder at or simply overlooked the social welfare aspect of global manufacturing. In a world that’s outsourcing more than ever, the idea of social responsibility has become inextricably linked to a company’s identity.

Consumers and the businesses that ultimately serve them through the B2B framework can no longer simply assume that products are being safely manufactured by highly skilled, adult workers in favorable work conditions. Nor can we afford to assume that all foreign workers are recipients of the same high standard of worker’s rights, as seen here in the United States and Europe. With social media, and the general transparency that the internet brings, today’s highly informed consumers are holding businesses to a much higher standard when it comes to manufacturing responsibly.

Outsourcing affords small and medium sized businesses the opportunity to compete  in the same marketplace as their giant, corporate counterparts. Socially responsible outsourcing must be approached cautiously with a partner you can trust. Having a reliable overseas partner that can provide your business with a factory social-audit check allows your business to mitigate the risk of destroying the good-will and reputation that your product or brand has built up through the years.  Businesses considering moving their manufacturing operations abroad need to consider how to manufacture overseas without risking the reputation of their brand.

Ethical businesses have the power to transform their organizations and supply chains into sustainable practices that people can trust. Rather than viewing suppliers as a network that they simply manage they are valued as partners in a powerful brand  that generates shareholder value and an long term goodwill. Ethical businesses value transparency,  long-term relationships and human rights. A reputable business ensures that products are produced in factories with technically skilled and legal workers that meet both domestic and international safety and work condition standards.

With operations dispersed around the globe, the modern business is a fundamentally different animal from its predecessors. The days of achieving profitability by any means necessary are over. Even as more  companies jump onto the social responsibility band-wagon there still remains a perpetuating stigma that businesses who manufacture their products overseas choose profits over values. Globally-minded companies that take an interest in manufacturing abroad should exercise prudence in selecting an over-seas partner that preserves product integrity and social values, in addition to affording clients the ability to capture the cost-savings opportunity out global outsourcing.

 

Michelle Scheblein is China Business Analyst at BaySource Global. She has a B.A. in international business from the University of South Florida and has resided in China from 2013-2014. She can be reached at Michelle.Scheblein@baysource.net

Will China Remain a Strategic Manufacturing Destination?

We continue to hear about the dynamics affecting China’s place as factory to the world. Increased labor costs, currency fluctuations, and shipping cost increases have affected decisions about whether or not offshoring strategy makes sense. Certainly there are products that simply aren’t feasible for contract manufacturing scenarios. Here are the top five reasons China is still an ultimate destination for products that are highly labor intense or are in the startup phase.

Labor vs Other Countries

Labor costs may be up to 30% lower in other countries like Viet Nam and India. However this is offset by superior supply chain advantages such as roadways and utilities. Skill levels are also higher thanks to Western training and a little osmosis over the past 15 years. This means China’s productivity continues to rise other countries in Asia are less efficient overall.

Flexibility

Because China’s manufacturing base tends to be cellular, meaning a production or assembly line can be producing one thing today and another tomorrow, China workers are frequently adaptable to ever changing tasks. Much of this can be attributed to the highly seasonal nature of Western retail needs such as Christmas lights or plush toys. China also presents many options for qualified suppliers whose initial minimum order quantities are less than traditional manufacturers. Often a China manufacturer will begin with molds having less cavitation than is generally required until volumes reach a critical mass. This all translates into less startup cost, quicker return on investment and greatly reduced risk.

Availability of Materials and Manufacturing

Because China now makes a fifth of the world’s manufactured goods, there is a ready source of supply for various components, parts and necessary materials. China is also home to thousands of industrial parks thanks to investment by not only the Chinese government but also foreign direct investment by Western firms. Shanghai and Guangzhou are known manufacturing hubs and have some of the heaviest investment and infrastructure along with some of the largest workforces in the country. Special Economic Zones created by the PRC have attractive tax incentives for FDI and are given more independence on international trade and economic activities.

China Innovation and Investment

Because as we mentioned China’s skill levels have vastly improved, China is now focusing more on innovation and creative manufacturing practices. Also, with labor increases have come increased capital investment in the form of automation—something that used to be last resort if a task or function could be completed manually. So what does this all mean?

Ideal Product Development

China continues to be an ideal partner for new product developers and innovators. While labor costs have increased over the past five years, China’s productivity has increased tenfold. China offers the flexibility required to take on a variety of new projects and with lower minimum order quantities. There is a steady supply chain for materials and different manufacturing services and China continues to invest in technology, facilities and innovation. While China may not be suitable for some manufacturing due to increasing freight costs and currency fluctuations, every project must be carefully weighed and evaluated on its own merit.

Are China and the U.S. Striking a Balance?

 Could we be striking a balance?

People fall into two schools of thought these days.  There are those that think China outsourcing has run its course.  They subscribe to the notion that the appreciation of China’s currency (RMB), labor shortages and cost increases and increased fuel prices mean cost savings opportunities have substantially diminished.  In contrast, the other side of the coin spells out what others have believed for years—startup costs and tooling are less in China, products with high labor content have to be outsourced and China will always be “Factory to the World.”  For several reasons, they are both correct.

Rising wages

In a December 15, 2011 Wall Street Journal article it was reported that China’s Ministry of Human Resources and Social Security, announced 21 provinces and municipalities had, on average, instituted annual minimum wage increases of 22% by October of last year. Officials in Shenzhen, in China’s southern manufacturing heartland, said in November that they would raise the city’s minimum wage by 15% in January, to attract more workers.  While wage hikes are nothing new, they have reached a point where factories are no longer able to absorb the increases meaning higher costs are passed on to consumers.  However, with last year’s economy taking a turn for the worse, demand dampened driving commodity costs down.  The result was China’s digging in its heels on allowing currency to rise against the dollar.

Since the mid-90s companies sought out the labor machine that China represents with its nearly 800 million strong workforce to remain competitive in Western markets.  China’s family planning practices in place since the 1970s translate into a tightening demographic of available workers.  This has also meant that China has moved more inland to expand its available workforce.  Even so, the average hourly wage earner still makes only around $70 per week on the low end and up to $80 at the high end.   While this is nearly double what it was around 2001, compared to the 2011 U.S. Federal minimum wage of $7.25 per hour/$290 per week the 275% premium speaks for itself.  Add to that mandatory unemployment taxes, healthcare benefits and other layers of overhead U.S. companies have to absorb and the costs begin to add up.

U.S. Manufacturing on the rise

According to a February 1, 2012 Bloomberg report in which she sums up the U.S. manufacturing landscape, Caroline Baum states that “manufacturing employment peaked at 19.5 million in 1979, when it represented almost 22 percent of the workforce. Last year, the 11.7 million manufacturing workers accounted for less than 9 percent of total employment, according to preliminary data from the Bureau of Labor Statistics. During that time, the value of U.S. manufacturing output kept increasing, thanks to strong productivity growth.”  So in other words, Advantage U.S. 

And she goes on. “Manufacturing employment has increased 334,000 since the low in December 2009. Southern, non-union states offer an increasingly hospitable environment for factories. NCR Corp. opened a new plant in Georgia to produce automated teller machines. Caterpillar Inc. plans to build a new construction- equipment factory in the U.S. Ford Motor Co. is bringing 2,000 jobs back from China and Mexico after reaching an agreement with the United Auto Workers union. Even a family-owned North Carolina furniture manufacturer decided to reopen a factory that has been shuttered for more than a decade.”

Advantage-U.S.

China’s Innovation

What comparative advantages China may be giving away in labor and productivity however is being bolstered by innovation which takes China to an entirely new level on the global playing field.  China has doubled the number of international patents created since 2005 and is launching products at a fraction of the time as its Western counterparts.  Mckinsey Quarterly’s February report cites their government’s emphasis on indigenous innovation, underlined in the latest five-year plan. Chinese authorities view innovation as critical both to the domestic economy’s long-term health and to the global competiveness of Chinese companies. China has already created the seeds of 22 Silicon Valley–like innovation hubs within the life sciences and biotech industries. In semiconductors, the government has been consolidating innovation clusters to create centers of manufacturing excellence.  And the report goes on to say that because of its large market, much of China’s innovation is staying there.

Advantage-China

Striking the balance-bringing it together

Because of the cross pollination of U.S. industry standards, quality processes and knowledge transfer, more and more firms are combining China’s vast low cost labor machine, ingenuity and speed to market to become multi-national in scope.  Solar power companies, the auto industry and a new medical initiative sponsored by the Chinese and U.S. governments are creating opportunities for both our countries to leverage their strengths.  Read the joint statement here.

China wins because they gain access to medical innovation and improved standards of healthcare.  The U.S. gains access to an untapped market for highly profitable products and services.  This bi-lateral agreement fosters long-term cooperation with China in the areas of research, training, regulation and the adoption of an environment that will increase accessibility to healthcare services in China. Participating U.S. companies initially include 3M, Abbott, Chindex, Cisco, General Electric, IBM, Intel, Johnson & Johnson, Medtronic, Microsoft, Motorola, and Pfizer. Supporting organizations include AdvaMed, the Alliance for Healthcare Competitiveness, the American Chamber of Commerce in China, and the American Chamber of Commerce in Shanghai, PhRMA and the U.S.-China Business Council.

As we continue to increase trust, enhance communication, and cooperate in developing life improving technologies and innovations, a new frontier of collaboration is emerging that will change the world as we know it.

 

David Alexander is the founder of Baysource Global and Executive Vice President of Direct Source China, a strategic sourcing and strategy firm with offices in Miami, Tampa and Shanghai.