The Real Cost of Outsourcing Every Founder Should Look For

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A wise man once said, “It is better to divide your eggs into several baskets than to put them all in one” – or something along those lines. And that’s especially true if your only basket is 7,000 miles away in a country that could reasonably be described as a hardline.

You would think it would be obvious that purchasing your product, or important parts of it, in China would eventually lead to problems. Yet many companies continue to rely on contract manufacturers in distant lands to manufacture and ship parts for many, if not all, of their products. Well, 2021 has taught anyone who counted on the so-called global supply chain a lesson. As Aretha Franklin so wisely sang in “Chain of Fools,” “Every chain has a weak link…one of these mornings the chain is going to break.” Why are wise words so rarely listened to?

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

Quality assurance? Forget it

Here’s an example of what I mean: A few years after I sold Big Ass fans, news outlets reported the recall of residential ceiling fans made in China and sold through a distributor in Florida at major stores across the country. And not just a few fans, but almost 200,000 of them. According to the U.S. Consumer Product Safety Commission, the recall stemmed from the fact that “the blades can come loose during use of the fan, causing injury to the consumer,” in other words, a fan company’s worst nightmare. Yes, product defects can be everywhere, but your ability to drive herd to quality control diminishes with distance.

Unfortunately, not everyone takes my sermon to heart. Too many founders remain convinced that manufacturing abroad is the only way to go, as important in starting a business as all the other mistakes they’ve been told are part of the modern business model: getting a high rating, blobs spend on Facebook ads, sell on Amazon and hire an agency to build a brand.

The main appeal of all these moves is that they seem to be easier than the alternatives. Founders assume that their product and brand will be in the hands of people who are far more experienced than they are, and that relinquishing control will give them less to worry about. Meanwhile, I argue that if something is easy, it’s almost certainly not the right thing to do, and if founders don’t have control, they’re controlled.

Before we started working with them, several of our partner companies at Unorthodox Ventures had major – but completely predictable – problems with their Chinese manufacturers. They turned to us to solve it, and because they had other good ideas and good products, we were happy to do it.

One had serious quality problems from the start, because he had outsourced the product design to a contract manufacturer. As soon as the product hit the market, customers discovered serious defects because quality control did not exist. Until we solved the production processes, every day our technicians in the staff started disassembling the newly received gadgets, testing, repairing if necessary and reassembling it.

You are nobody special

Another startup we worked with ran aground due to a missing sensor critical to the operation of the consumer electronics device. By the time the foreign supplier came along, the contract manufacturer doing the final assembly was on a two-week break for the Lunar New Year, leading to a knock-on effect of additional problems. People were clamoring for their overdue orders, but the factories wouldn’t work during the holidays.

I’ve heard all the arguments for outsourcing, but they really come down to three words: cheaper labor costs. There’s no denying that people in the Far East work longer hours for much less pay than American workers, and if your goal is to make something as cheap as possible, that can be hard to resist. But in the long run, outsourcing isn’t cheap, and if your goal is to create a product and company you can be proud of, then the long term should be the only consideration. At Big Ass Fans, our focus has always been on good, not cheap. We charged more for our product and found that our customers were always willing to pay more if they understood why.

And there’s another big problem with going abroad: if you’re selling something that can be easily copied, the manufacturer knows exactly how much you’re selling, how much it costs to make, and how to make it.

Keep in mind that unless you’re a large company, your relationship with any manufacturer, anywhere, will undoubtedly be skewed: you’ll care about them much more than you and your recurring orders. And because you’re not that important, there’s less incentive for them to do a good job. Before you know it, fan blades are flying away.

You may be advised to choose a partner who is as committed to quality as you are before signing a contract. But seriously, how the hell are you supposed to do that? Do you really think that a foreign manufacturer who barely knows you care about your product? I’m not saying there aren’t good contract manufacturers. But even with a good one, there will always be a barrier when you interact: not only is there a chance that you won’t speak the same language, but there will also be cultural differences that may be impossible to completely overcome.

Kiss that IP goodbye

And there’s another big problem with going abroad: if you’re selling something that can be easily copied, a manufacturer knows exactly how much you’re selling, how much it costs to make, and how to make it. The employees have access to your intellectual property – they know your product even better than you do – and there’s no way to guarantee it won’t launch a competitive product at a lower price because it won’t have the other costs you incur.

One of our own partner companies woke up one morning to discover his electronic gadget for sale on Alibaba, with the same name and packaging. Yes, there is a long history of US retailers turning down a supplier’s product and undercutting that supplier. But at least you have access to US courts, like Sonos did when it got the upper hand over Google for breaching its IP for wireless speakers.

And let’s not forget the geopolitical issues. Relations between the US and China are barely warm these days, which has led to tariffs and heightened concerns about technical security.

I admit it: I made Big Ass Fans in Kentucky because I was and am a control freak. If a product was going to be sold with my company’s name on it, I wanted the production lines to be close enough that I could be constantly present and there would be no delay in resolving a problem once it was identified. Proximity to our production lines and our suppliers was essential for maintaining quality control. The vast majority of our suppliers were within six hours’ drive, meaning we could jump in the car and watch their operations in the blink of an eye. Being close has allowed us to build the kind of relationships that are so crucial with suppliers, one of the most rewarding aspects of doing business. You lose all that if you hire manufacturers abroad.

There is a well-known saying that cheap things are not good, but good things are not cheap. Again, how come we can recite proverbs from the wazoo but refuse to heed them? The star of the A-Team, Mr. T, famously said, “I pity the fool,” but perhaps he should pity the wise man—and woman—even more. No one seems to pay them any attention.

Ultimately, every entrepreneur will have to decide which path to take: cheap or good. But I can almost guarantee that if you squeeze those pennies too hard, you’ll end up empty-handed.

If that’s not a proverb, then it should be.

From the March/April 2022 issue of Inc. Magazine


This post The Real Cost of Outsourcing Every Founder Should Look For was original published at “https://www.inc.com/magazine/202203/carey-smith/supply-chain-international-foreign-manufacturing.html”

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