Manufacturing Trends That Affect Your Business When you add up all the extra costs, domestic manufacturing may be your best bet.
Opinions expressed by Entrepreneur contributors are their own.
During the past year, the economy has changed dramatically. As gas prices go up and the value of the dollar falls, your spending habits and decisions as a consumer and an entrepreneur change.
Among them is the decision of where to manufacture. While this decision has been relatively easy in recent years for many young or startup companies-- based on the low cost of producing goods overseas--the global economic changes in the past year have propelled many companies to reconsider manufacturing at home in the U.S.
China has been a popular choice for manufacturing in recent years, mainly because of the low cost of labor and materials. Even with greater shipping costs, the low labor costs still made it worthwhile and far more profitable for many companies to manufacture overseas.
While people are not likely to stop producing goods overseas, the cost gap is shrinking. With the rising cost of oil, freight and shipping costs have gone up dramatically. Production costs, as well, have risen, based on petroleum used in both raw materials and in the manufacturing process. While labor costs still remain significantly lower overseas, the rising cost of shipping from China is quickly eroding that advantage. And the falling dollar isn't helping matters, either.
If you're already producing goods overseas, you've undoubtedly felt the pinch in recent months (or the punch, as some entrepreneurs would contend). Prices you haven't necessarily projected are driving up the per-unit cost of your goods, and your retailers aren't necessarily sympathetic or ready to raise their prices to preserve your profit margins as their customers are looking to save money. The result is significantly lower profit margins that make business more challenging.
In response, some entrepreneurs are considering moving their current manufacturing operations to U.S. soil. In 2008, finding a manufacturer is not nearly as straightforward as it may have been just a few years ago.
Of course that's good news for U.S. manufacturers. While they still can't normally compete with overseas manufacturers in labor costs, they can offset those costs by providing companies with more manageable shipping and freight and no duty charges.
And there are other advantages to producing goods domestically. Without a language barrier and with minimal time zone challenges, working with an American company can reduce the frustration factor. In addition, delivery time frames are shorter, there is no involvement with customs and freight-forwarding, and order minimums can be lower. Plus it can be comforting for a young company to work with another party that is subject to the American legal system, with all the caution and understanding that goes with it.
If you are currently evaluating where to manufacture your product, it's worth considering the following factors:
1. What's your manufacturing run? Overseas manufacturers generally require larger runs. If you're producing a first run of your product--and you still need to alter your product or packaging in the future, or you are leery of purchasing--and storing--too much inventory--starting with a U.S. manufacturer makes sense. Once you begin to scale up manufacturing, you may want to re-evaluate cost per unit.
2. What is the nature of your product? Higher shipping costs will affect larger and heavier product shipments than they will lighter, high-volume shipments. For example, you will feel the pain of current freight costs much more acutely if you are importing, say, baseball bats than if you are importing baseball hats.
3. Is your product a juvenile or baby product? New dramatic safety restrictions have been implemented, making it much more expensive to produce these types of products. New consumer product laws have recently passed, creating more stringent standards. These standards require manufacturers and importers to subject toys and other nursery products to certify that they have passed strict mandatory safety standards before they hit store shelves. And that means companies must invest more in third party testing of parts or finished products. (For specific information on this new legislation and to learn if your product is affected, click here .
4. What is your comfort level? If you are a new business faced with countless unfamiliar challenges, you may simply feel more comfortable manufacturing in the U.S., especially now that there may be more price parity. This will save you the task of learning all the fundamentals of freight-forwarding, tariffs, and U.S. custom payments, among other issues.
The bottom line is that when you're choosing a factory to work with--either at home or abroad--you should use good shopping practices. In addition to closely evaluating all the costs involved in producing your product, look carefully at the factory's body of work, speak with references, and make sure that you understand and clearly agree on the expectations of the job and the terms. And also know that as your production needs change--or the economy changes even more--you may need to re-evaluate your decision yet again.