Here Or There?
Your big competitors have been doing it for ages. Now the business next door is, too. Is it time for you to follow suit?
The question of whether or not to manufacture in another country is no longer a hypothetical one for entrepreneurs. "Small organizations that get it right are looking at both ends of the spectrum," says Paul Horowitz, the leader of PricewaterhouseCoopers' outsource advisory practice. "They are asking themselves: 'Where can I get the product made cheaper, faster, and for better quality?"' Plenty are finding the answer to that question lies abroad: Some 24% of small manufacturers said they had purchased goods or services from vendors outside the U.S. in the past three years, according to a 2004 study by the National Federation of Independent Business.
For the rest, the best place to manufacture is right at home, at least for now. The easy rapport with vendors, relatively short plane rides, and the quality of American-made goods keep these business owners and their customers perfectly happy. The difference is that manufacturing domestically is often no longer a reflexive choice, coming instead after thoughtful consideration of the costs and benefits of outsourcing and more than a little math. In the following pages, six entrepreneurs discuss their decisions.
HERE: CUSTOM CAGES
Adam Keller can't beat competitors who build birdcages in Asia. Instead, CagesByDesign.com, his Neenah (Wis.) company, creates custom cages that run from $300 to $2,000 for customers such as museums and amusement parks. "There are other products we could make, like the typical $39.95 birdcage you see at the pet store, but I won't even consider it," says Keller. His 10-employee, $3 million company designs cages ranging in size from one square foot to the size of a bathroom, then ships the parts to customers for assembly. Keller gets the materials he needs quickly and reliably by producing domestically. "Outsourcing overseas is a crapshoot," he says. "You have no idea what you are going to get." He recently experimented with Chinese manufacturers, asking them to make high-quantity smaller components. But with one of his orders trapped in customs indefinitely, manufacturing in the U.S. is looking pretty good.
THERE: I'LL FLY AWAY
Deciding to outsource was easy for Carol Frank, but finding a reliable manufacturer was tough. Frank started Avian Adventures in 1996, believing she had to make her Dallas company's birdcages overseas to be able to sell them at a competitive price. Her ornate steel birdcages sell for $275 to $2,000 in pet stores and online -- and she says they would be three to four times pricier if she had them made in the U.S.
Frank first tested 12 manufacturers in Mexico. She chose the only one that delivered the quality she wanted but soon found the pace of production horrendously slow. A deal with a Chinese manufacturer ended in disaster when the factory went belly-up. "We lost 50% of our sales volume in one month," she says. Finally, in 2005, with the help of a manufacturing agent, Frank found a Malaysian company.
Outsourcing is still difficult for the four-employee, $1.5 million company. Frank says her manufacturer doesn't understand yet that "it's not just a birdcage, it's a piece of furniture that people want to be proud of." With production 60% cheaper than it would be in the U.S., Frank can afford the occasional aspirin.
HERE: STAYING PUT
Brenda Lynn knows she could save money by having her Fairfield (Conn.) company's knitwear made in the Pacific Rim or South America. After all, most of her competitors do. But ever since Lynn sold her first hat to Barneys New York in 1991, she has stayed stateside. "Companies that outsource can offer retailers a similar product at a lower wholesale price, and that has hurt me at times," says Lynn. "But I retain a competitive advantage because of the desirability of my designs and our ability to maintain a higher level of quality." Using U.S. suppliers lets her get her products to stores faster, too. "We can turn a new design concept around quickly and get it to our customers in time to start or beat trends, which is a hallmark of our brand," she says. Partnering with U.S. suppliers, mostly in New York and New Jersey, allows her to closely oversee production. It can take a dozen or more iterations of a sample before Lynn accepts it. Her knits, known for such touches as crocheted trim and felt details, sell for $90 to $500 at Barneys, Saks Fifth Avenue, and specialty shops. The $750,000 company has six employees -- and Lynn isn't planning on sending any of them overseas anytime soon.
THERE: EYE FOR FASHION
Like most entrepreneurs, Derek Lam worries about quality. And it's his high standards that have sent him overseas, even though it's not saving him a dime. The New York-based clothing designer makes about 90% of his ready-to-wear line in Soncino, Italy. "Italy combines traditional craftsmanship with high-tech methods so that garments are made beautifully and quickly," says Lam. Dresses run from $950 to $6,000, and skirts start at about $1,000. "You cannot find [this] level of quality and craftsmanship in luxury clothing in the U.S. or in other places in the world," says Jan-Hendrik Schlottmann, co CEO of the $4.5 million, 15-employee Derek Lam. Only a few couture pieces -- those that are hand-embroidered, requiring close oversight -- are made in New York.
The arrangement isn't without headaches, including unpredictable currency fluctuations and cultural differences. Lam and Schlottmann travel to Italy at least once a month, generally for three or four days. And although Schlottmann is fluent in Italian, linguistic challenges abound. Says Schlottmann: "They don't really understand what 'late' means, exactly."
Eric Poses has a list of reasons his two-person company, All Things Equal, makes its board games in Wisconsin. The first is a matter of principle. "If there were more companies like mine keeping business in the U.S., we could certainly have a positive impact on American labor," he says. The rest are all business. The factory that produces such games as Loaded Questions and Talent Show is a short flight from his Venice (Calif.) offices and offers free warehousing of his inventory. He pays one-third down before production but says many foreign producers demand half. And Poses can "produce and ship as much product as I need in 3 to 4 weeks, vs. 8 to 12 weeks with overseas production." Of course, there is a downside: Poses estimates he could save 30% going abroad. But he has no complaints. "We sell our products at a very fair wholesale price, and everyone is happy." So it seems: He had $1.2 million in sales in 2005, up from $800,000 in 2004.
THERE: GAME THEORY
When Randall Horn started Zobmondo!! Entertainment in 1998, he had all its board games made in the U.S. But in 2003 he looked at the numbers and started to think about outsourcing. Horn's Los Angeles company now saves 25% to 40% working with a manufacturer in Yantian, China. Horn, who has two full-time and five part-time employees, says he was lucky to have been referred to a reliable manufacturer by a friend in his industry. "There are so many Chinese manufacturers that finding your way through the maze -- to someone who offers reliability and high quality -- is difficult," he says. He first ordered a test run of 5,000 games. Now his $2 million company makes 250,000 games a year, such as Zobmondo!! Would you Rather...? and The Ladybug Game, sold in specialty stores, Barnes & Noble, and Target.
Horn's Chinese connection comes with a long list of problems: the high cost of freight, congested U.S. ports, Homeland Security delays, communication difficulties, and quality hurdles caused by the differences in digital color matching in the U.S. and China. Horn also has to watch inventory carefully, because it takes about eight weeks longer to get his products into stores than it did when he manufactured domestically. But Zobmondo!!'s sales have doubled in each of the past three years. Horn says that's not only because of his competitive prices, but because the cheaper manufacturing costs leave him more money for promotion and marketing.
By Eve Tahmincioglu