Do Rising Costs Point to Domestic Manufacturing?
Grow Your Business, Not Your Inbox
In an economy that looks gloomier by the day, a couple of important questions spring to mind: How, specifically, are entrepreneurs affected? What are the most important things to know as you move forward with your invention or product idea?
First, understand that it's not the easiest environment for a small inventor right now. On the other hand, it's not an impossible environment, either. By being aware of the current market conditions and understanding how they will affect your business, you can continue to make wise decisions that will protect your company and your investments in the long run.
Rising costs, in multiple areas, are the biggest factor inventors and entrepreneurs need to consider. It's imperative to understand how these costs (some less obvious than others) will ultimately affect your bottom line, and to factor in all the costs before moving forward. For example, while a large number of entrepreneurs formerly used Chinese manufacturing vs. U.S.-based production based on cost savings, today the price gap is shrinking due to a number of factors, including:
- The rise in the price of oil. If you're manufacturing in China, the most dramatic affects of skyrocketing oil prices will be on your shipping costs. After all, you pay to transport them much farther than you would if you manufactured domestically. In addition, rising oil prices also affect production costs, as petroleum is used to fuel manufacturing applications such as producing plastic goods.
- New standards for testing products. After incidents like last year's recall of Mattel toys produced in China, many retailers now require additional independent testing of goods produced there. And no matter where you produce your products, retailers also demand that manufacturers carry liability insurance. This can cost thousands of unanticipated dollars per year, adding significantly to your cost per unit. I've known inventors who paid for entire manufacturing runs, only to learn about the necessity of liability insurance after the fact (and at a point when their working capital all but ran out).
For more information on independent product testing. including requirements, visit intertek.com or bureauveritas.com . To learn more about liability insurance, check your local phone book for insurance brokers, who can direct you to appropriate individual insurers.
- Chinese manufacturers are less flexible. It's less common to find offers of smaller manufacturing runs and lines of credit from Chinese manufacturers. They temper their risks by enforcing stricter manufacturing and payment standards, even for trusted businesses with whom they have long-standing relationships. And that can put the squeeze on already cash-starved companies.
- The U.S. dollar is severely weakened. Simply put, $1 doesn't go nearly as far as it used to in foreign markets, meaning you need more money to pay for the same production run of goods you bought six months or a year ago.
- Price of labor and materials. No matter where your manufacturer is based, other costs are rising, including the cost of labor (even overseas) and materials.
- Retailers aren't cutting any slack. Even though it may be costing you a lot more to produce your goods, you've got very little wiggle room to increase your sale prices to retailers. That's because retailers won't budge much when it comes to raising their prices--their consumers expect bargains and value. And that means you take the brunt of the increased costs while your profit margins shrink.
So what can you do in this environment?
- Consider domestic manufacturing. When you add in all the newly increased costs of doing business with China and perform a careful cost comparison, your cost to manufacture domestically may be very similar. And you'll take out the hassles and complexities of dealing with an overseas manufacturer, including time differences, travel, language and culture differences, freight and customs issues, and more. Yet, don't rule out having a mold made overseas, shipping it back to the U.S., and doing your production run here at home.
- Use a profit-margin calculator to figure out your real costs from the outset. Taking a product to market is a business based on a product. Therefore, you need a business plan. Don't forget to include factors like freight, tooling costs, product liability insurance and product testing, all of which will affect your per-unit price. You don't want to price your products so low that your profits become insignificant or they disappear. You can access a calculator at mominventors.com . (Sign up for free Gold Membership to access it.)
- Take it slow. Ask lots of questions. Don't rush into any sudden decisions based on yesterday's market factors. Before buying that ticket to China, stop and examine other options.
- Know that this is simply a cycle. Eventually, this business cycle will turn around. Use the time to your advantage to grow conservatively and wisely. While large competitors are in downsizing mode, you can carefully and thoughtfully develop your product so that when things turn, you'll be ready to change with the conditions.