Keep It Simple

1.Outsourcing allows you to do what you do best. Dewberry is an inventor, and what he does best is create new products for his target market. Outsourcing allows him to focus on new products, rather than spending most of his time hiring new workers, putting quality control systems in place, or worrying about the day's shipments.

2.When you outsource, you almost always have a lower margin. Businesses make a profit from every unit they sell-generally called margin. From that margin, they must subtract their administrative overhead and selling costs, also referred to as SGA (Selling, General and Administrative) expenses, to generate their EBIT (Earnings Before Interest and Taxes). Outsourcing usually leads to a lower margin, because your outsourced vendor makes a profit. But at the same time, you should have much lower SGA expenses, as you can probably run your business from home or a small office. So there's a good chance you'll have a similar EBIT whether you outsource or make the product yourself.

3.Keep your office expenses low. The benefit of outsourcing your production is that you don't need a big staff. But because you'll have a lower margin, you also need to keep your office expenses low, or those expenses might wipe out all your profits. The best situation is to set up an office at home if you can. If that doesn't work for you, be sure to go with low-rent office space.

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4.Keep your marketing and sales expenses low. Sales and marketing expenses can run 10 to 20 percent for many manufacturers. That's probably too much of a burden if you're outsourcing all your production, packaging and shipping. To keep costs down, focus on just a few customers and a few marketing activities. Trade shows are typically the most cost-effective marketing activity.

5. Patent protection is crucial. When you outsource production, you also give your vendors all the information they need to go into production and compete with you. You can minimize this problem by not letting your vendors know who your customers are. This can be done by handling the shipping yourself or by having the production and shipping done by different vendors. The best protection, though, is to obtain patents strong enough to protect you from the competition. Be sure to check with your patent attorney before proceeding with an outsourcing strategy. It's vital you are protected either by a patent or by a noncompete clause in the contracts with your vendor.

Don Debelak is author of Entrepreneur magazine's Start-Up Guide #1813, Bringing Your Product to Market. Send questions to dondebelak34@msn.com.

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