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The Real Cost of Outsourcing Every Founder Should Pay Attention to

Do the solutions to your company's problems reside across the sea--or is that merely a siren song?

You'd think it would be obvious that sourcing your product, or major components of it, on the other side of the world would eventually lead to trouble. Yet a lot of businesses continue to rely on contract manufac­turers in far-flung lands to churn out and ship parts for many, if not all, of their products. Well, 2021 taught anyone who counted on the so-called global supply chain a lesson. 

Given the media coverage, you might think that supply chain issues are the biggest hazard of manufacturing overseas. That may be true for very large companies that adhere to the risky principles of "just-in-time manufacturing." But, in fact, relying on distant factories for your precious products poses other risks that have the potential to wreak even more havoc on your business, especially if it's just getting off the ground.

Quality Assurance? Forget About It

Here's an example of what I mean: A few years after I sold my fan company, news outlets reported the recall of residential ceiling fans that had been made abroad and sold through a Florida distributor at big-box stores nationwide. And not just a few fans, but nearly 200,000 of them. Yes, defects can happen to products everywhere, but your ability to ride herd on quality control diminishes with distance.

Unfortunately, not everyone takes my sermon to heart. Too many founders remain convinced that manufacturing overseas is the only way to go, as central to launching a business as all the other mistakes they've been told are part of the modern business model: landing a big valuation, spending gobs on Facebook advertising, selling on Amazon, and hiring an agency to build a brand.

The main appeal of all of these moves is that they appear to be easier than the alternatives. Founders assume their product and brand will be in the hands of people much more experienced than they are and that, by ceding control, they'll have less to worry about. Meanwhile, I argue that if something's easy, it's almost certainly not the right thing to do, and that if founders are not in control, they're being controlled.

Before we started working with them, several of our partner companies at Unorthodox Ventures had experienced major--but entirely predictable--problems with their Chinese manufacturers. They turned to us to help sort those out, and because they had otherwise good ideas and good products, we were happy to do so.

One had serious quality issues from the get-go, having outsourced the product design to a contract manufacturer. As soon as the product reached the market, customers discovered serious flaws, as quality control seemed nonexistent. Until we fixed the production processes, our on-staff engineers began every day by disassembling the newly ­received gadgets, testing them, repairing if needed, and reassembling.

You're Nobody Special

Another startup we worked with was left stranded because of a missing sensor that happened to be crucial for its consumer electronics device to work. By the time the overseas supplier came through, the contract manufacturer doing final assembly was on a two-week break for the Lunar New Year, which led to a domino effect of additional problems. People clamored for their overdue orders, but plants were not going to operate during the holiday.

I've heard all the arguments for outsourcing, but they really boil down to three words: cheaper labor costs. There's no denying that people in the Far East put in longer hours for far less pay than American workers, and if your goal is to make something as cheaply as possible, that can be hard to resist.

But, in the long term, outsourcing doesn't come cheap, and if your goal is to create a product and business you can be proud of, then long-term should be the only consideration. At my company, our focus was always on good, not cheap. We charged more for our product and found that our customers were always willing to pay more when they understood why.

And there's one more big problem with going overseas: If you're selling something that can be easily copied, the manufacturer will know exactly how many you're selling, how much it costs to make, and how to make it.

Keep in mind that, as a small business, your relationship with any manufacturer, anywhere, is bound to be lopsided: You're going to care a lot more about them than they about you and your intermittent orders. And, because you're not that important, there may be less incentive for them to do a good job.

Maybe you'll be advised to pick a partner that is as concerned about quality as you are before you sign a contract. But, seriously, how in the hell are you supposed to do that? Do you really think a foreign manufacturer who barely knows you is going to care about your product? I'm not saying there aren't some good contract manufacturers out there. But, even with a good one, there's always going to be a barrier when you interact: Not only is there a chance that you will not speak the same language, but there will also be cultural differences that may be impossible to fully overcome.

Kiss that IP Good-bye

And there's one more big problem with going overseas: If you're selling something that can be easily copied, a manufacturer will know exactly how many you're selling, how much it costs to make, and how to make it. Its employees have access to your intellectual property--they know your product even better than you--and there's no way to guarantee it won't launch a competing product at a lower price because it doesn't have the other expenses you do.

And let's not forget the geopolitical issues. Relations between the U.S. and China could hardly be called warm these days, which has led to tariffs and heightened concerns about tech security.

I'll admit it: I manufactured in Kentucky because I wanted better control. If a product was going to be sold with my company's name on it, I wanted the production lines close enough that I could be a constant presence and that there would be no delay in fixing a problem once it had been identified.

Proximity to our production lines and our suppliers was essential to maintaining quality control. The vast majority of our suppliers were within a six-hour drive, which meant we could jump in the car and look at their operations on a moment's notice. Being nearby allowed us to build the kind of relationships that are so crucial with vendors, one of the most rewarding aspects of doing business. You lose out on all that when you hire manufacturers overseas.

Ultimately, every entrepreneur will need to decide which road they're on: the cheap or the good. But I can almost guarantee that if you squeeze those pennies too tightly, eventually you'll come up empty-handed.

 

This article was written by Carey Smith from Inc. and was legally licensed through the Industry Dive Content Marketplace. Please direct all licensing questions to legal@industrydive.com.

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