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Re After Decades of Chinese Imports, How to Revive American Manufacturing?
From: "Dave Farber" <dave () farber net>
Date: Sun, 12 Feb 2017 00:16:34 +0000
---------- Forwarded message --------- From: Jonathan S. Shapiro <jonathan.s.shapiro () gmail com> Date: Sat, Feb 11, 2017 at 7:10 PM Subject: Re: [IP] After Decades of Chinese Imports, How to Revive American Manufacturing? To: David Farber <dave () farber net> On Sat, Jan 7, 2017 at 2:42 PM, Dave Farber <farber () gmail com> wrote: After Decades of Chinese Imports, How to Revive American Manufacturing? I've been planning to respond to this for a month now, but I've been too busy *building* an American manufacturing business to have time to write about it. Manufacturing simply isn't the same business that it was 50 years ago. I don't believe we are going to "revive" American manufacturing, and I don't believe we want to. What we need to do is *reinvent *American manufacturing. I'm currently serving as the COO of Buttonsmith Inc, a small American manufacturer in the office products category. Our competitors sell cheaper, lower-quality, Chinese-made products at prices very close to our manufacturing costs. A few of them seem to implement the bulk of their R&D by stealing our designs. One by one, those competitors have exited the business or gone bankrupt. We have quadrupled our revenue over the last three years and we are on track to more than double revenue again in 2017. We sell a more expensive product through channels that do not allow the customer to touch the product before they buy. This shouldn't work. Yet here we are, stronger every day in an environment that is supposedly stacked against us by the China boogieman. When I was growing up, our family business was commercial baking. If you bake 35,000 units of cake a day and distribute that much again in third-party product, you're a manufacturing business. One of the things that strikes me daily is how *different* Buttonsmith is from my father's business. In my father's business, labor involved recurring arguments with unions. Ingredient costs were largely outside his control; they fluctuated according to US/Russian agricultural treaties. The business spent a lot of time adjusting formulas as the costs of different sweeteners fluctuated. He solved his packaging problem by setting up an in-kind exchange with a supplier who did higher national volume; they were careful to collect and re-use cardboard packaging whenever possible. He reduced his shipping costs by creating his own distribution network. My father cared passionately about the need for his employees to make a living that supported their homes and jobs, which is why he hated the Kabuki dishonesty of their union reps, but I don't know whether he viewed his floor employees as stakeholders in the business. Buttonsmith's challenges with our union are trivial, mainly about them not being ready for the ways we support, advance, and grow our staff. We are fortunate that our union places the interests of the union members ahead of the letter of an outdated labor contract. Last year, Buttonsmith granted our employees stock in the business at considerable expense to the company. Stock grants are taxed as income even when they are illiquid; we "topped off" their grants with cash bonuses to make sure they could still pay their rent if they accepted the grant. The idea that they would have to choose between rent and ownership under these conditions seems obscene to us, and we think it's an area of tax law that urgently needs revision. I think the union is still scratching their heads about why we did that. It's simple: our employees are stakeholders. Our union supports this idea of stakeholdership, but occasionally finds themselves playing catch-up when dealing with a management team that does something about it. One of my quiet long-term goals is to use our labor practices to force our union to re-examine what the union labor contract should look like, which will ultimately re-frame labor stakeholdership regionally. I'm pretty sure we're a pain in their ass, but they recognize that we challenge them in ways that are good for their members. We continuously improve our labor costs by paying constant attention to our processes and physical organization. We build our own manufacturing stations; everything is on casters. It sometimes seems like we re-arrange things every other month as new products get tested or we notice ways to improve things. We brought in a new manufacturing VP in mid-2016, and the labor component of our costs has dropped more than 50% through improvements in job planning and assembly efficiency. Constant improvement is definitely easier in light manufacturing processes, but we borrowed the approach from Boeing. We owe a lot to Wal-Mart for this: we had the pieces and the concepts, but preparing to supply Wal-Mart forced us to up our game and learn how to manage our processes more actively. It's part of why we chose to work with them when we did. Buttonsmith reduces component costs by committing in bulk and working with our distributors and suppliers to do phased deliveries whenever possible. We estimate our major logistics and supply items almost nine months out and revise as we go. The regular metronome of our bulk purchases in turn lets our *them* work in predictable higher quantity and extract higher margins out of their smaller sales on the same items. We ask not only how to make *our* prices lower, but how to do it in a way that makes *their* prices lower or their margins better. We view our supply chain as an ecosystem that needs to scale with us, and we work constantly to make our suppliers stronger. We bring our suppliers "inside" on our estimating process so that *they* can plan for their cash flow and manufacturing requirements in order to support us. If a step can be done better by a supplier than we can do it, we work with them to get it done in the best place. If we have to abandon a supplier because they can't keep up, I haven't done my job. A supplier who *won't* keep up is another matter; a few of those won't be seeing further business from us, and the remaining one will be gone as soon as I can get set up a contract with their replacement. We routinely ask our suppliers and contractors to stretch. It turns out people *like* challenges when they get to be part of a bigger process and see the outcome. Sometimes things go wrong. When that happens, we work with our suppliers as partners so that all of us recover. Planning ahead makes this possible. We *love* working with small- to mid-sized suppliers. They like having the business, and they generally like being challenged to up their game. We make them better at what they do, and they help us in return.
From an operational standpoint, our biggest challenge has been in the area
of shipping costs and fulfillment practices. Starting this week we'll be "upping our game" significantly (again) thanks to UPS. UPS is doing for us exactly what we do for our suppliers. Buttonsmith is a gnat compared to a company like UPS, yet they've just made an astonishing commitment to help us in the form of some pretty aggressive new rates. They are also working actively with us to help us understand how to approach our shipping needs more creatively. Some of our top selling items are sold as "Prime" items on Amazon but fulfilled directly by us. Until recently, those offerings have been limited to the Pacific Northwest because of our shipping costs. On Monday we'll be checking to confirm that the new rates are active on the Amazon end, and starting Tuesday we'll be able to offer those products nationally. That will increase our Prime-reachable customer base for directly fulfilled items by a factor of roughly five, and having the Prime badge will increase our sales in previously non-Prime areas by roughly a factor of three. Over the next several weeks, we will start launching new products that have been waiting in the wings until our shipping rates were low enough to enable them. Why is UPS betting on a nine person company this way? Partly because their traffic will grow with us and they can see that we are positioned to break out, but also because it increased their presence in an area that FedEx isn't serving well. The added flexibility in their local-area pickup schedules helps businesses in several surrounding townships, which in turn increases their business. The risk to them isn't that big; if we don't meet our shipping costs targets they'll simply cancel the new rates. We actually asked them to delay implementation to make sure we were ready to roll things out the same week our "clock" started on those shipping targets. We intend to make them buy a new truck this year. It's completely inadequate to say that the internet changes things. My father's sales were strictly regional; he distributed within the greater NYC area and then opened up that network as a distribution channel for others. Buttonsmith's sales have been national from the beginning, and we will probably open channels in Europe and Japan some time this year. We *aggressively* use online sales reporting as a learning tool for what works and what doesn't. We can launch and test a new design in modest initial quantity, see if it sells, and then ramp up the production on that design. We can do the same with a new product. That's how Burger King was able to claw their way into the hamburger market that McDonalds owned: they had a tighter feedback loop and a more flexible distribution system. In the 1970s a small manufacturer had no way to do that. We can and we do. We have a superb marketing and business development team that actively manages and drives our web business. My father's business was a wholesale and distribution business. It took decades to build and mature. Buttonsmith built its early business as an Amazon vendor, and we're shipping our first big-box retail order next month. It took us three years and a continuing series of investments in the business that were about preparing for and enabling that break out. In some ways, producing for big-box retail stores looks a lot like producing products that are fulfilled by Amazon. In both cases we are able to build in bulk and keep our distribution overheads low, and that let us build our systems and practices more efficiently from the beginning. We're only now looking at the wholesaling problem and at increasing our direct online sales. It turns out a lot of big-name online retailers add essentially no value. They present a product on their site, collect the sale, and have the original manufacturer drop-ship the product directly to the customer. I am coming to think of these as "Potemkin retailers". Supporting this type of retailer would require us to build a robust in-house fulfillment capability, because outsourced distribution is a business where honest operators are hard to find. The Potemkin retailers are often weak on product search ranking, so it's really not clear that we can move our product on those sites the way we can on Amazon. From a fulfillment standpoint, Potemkin retail will inevitably lose business to retailers who warehouse regionally, because so much of the fulfillment process is driven by ground transit times and costs. Buttonsmith currently offers more than 500 distinct SKUs. This is possible because of the way we distribute; we don't *attempt* to do that for one-off fulfillment at scale. We would have to significantly narrow the products we offer on Potemkin retail sites so that we could implement an efficient in-house pick-and-pack operation. We'd incur significant inventory risk for the privilege of doing so. I hesitate to commit us to this sort of effort and risk for retailers who, in my opinion, are executing structurally disadvantaged online business models. As I see it, the *real* opportunity for modern manufacturing lies in quick-turn customization. We are one of the few vendors in both the Amazon Custom program and the Amazon vendor-fulfilled Prime program. Software isn't on the traditional list of core manufacturing skills, but it's absolutely necessary to take advantage of this combination. *All four* of our senior team members came out of the software industry. My guess is that every reader of this email uses something one of us built nearly every day. We've made a significant investment in software to automate the customization process. A human is still in the design loop, but the tedious parts of the customization are automated. Those software systems have been co-designed with our manufacturing processes and our major equipment decisions. Today we exploit this in regionally limited ways. Barring IT complications those products go national on Tuesday, and in two weeks we will launch an aggressive foray into a completely new space with the first member of a product lineup that UPS has enabled us to offer. Here are some of the things I've learned over the last year: Manufacturing success is about systems, ecosystems, logistics, and execution. You can't do it standing alone, and you can't do it with just one arrow in your quiver. You need to build trust with your suppliers and your channels, and you need to look for win-win solutions across the board. A lot of people don't seem to know how to do those things. Market share has always been a defensible advantage. This is even more true on-line, *provided* you know how search engines work. If you don't, a competitor who does can use that knowledge against you successfully. Managing product placement successfully is not a passive process. Exit strategies for manufacturing investors are limited. Our margins are respectable, but it's very difficult to find an investor who views dividends as a way of obtaining an investment yield. The business became cash-flow positive in its first year, but for three years we put in more money than we took out as we built up our capabilities. That investment will start to really pay off this year. *This* is the place where American manufacturing really needs a boost. You have to have a diverse, experienced, and adaptable senior team. You aren't going to make enough money in the first three years to pay that kind of team what they cost, even if you execute perfectly. You're going to have to experiment and adapt. That's expensive too. Just because you build it doesn't mean they will come. Foreign manufacturers have no basic advantage against a *modern* domestic manufacturing business. Their labor is cheaper, but their shipping pipeline is slow, inflexible, and expensive. We can have final product in your hands faster than an overseas company can get it loaded into a shipping container. Our Tinker Reel(r) badge reels cost more, but they are tested to military drop standards, they have swappable tops that let you express your mood, and they come with a one year warranty. We get so few of them back that we're looking at going to a lifetime warranty some time this year. The foreign reels have a 50% failure rate in the first three to four weeks. Eventually they'll get better, but not today. They can't *afford* to offer a one year warranty. Strategic capital investment in modern technology allows you to do *very* flexible "build to order" manufacturing. That reduces risk and cost in lots of ways, and the opportunity for customization and close customer engagement leaves foreign competition sitting in the dust wondering where the customers went. It also means that design skills are a requirement for modern manufacturing. As with software skills, this usually isn't recognized as a "core team" skill requirement. So finally, about the China boogieman: There are a few things that China fundamentally does better than we do. Magnets come to mind. Outside of those areas, American manufacturing is stuck because we insist on thinking inside a box somebody built in the 1940s. The thing is: (a) it isn't 1940, and (b) there's no box. Buttonsmith products are proudly designed and manufactured in the United States by union labor right here in the Pacific Northwest. Jonathan Shapiro COO Buttonsmith Inc ------------------------------------------- Archives: https://www.listbox.com/member/archive/247/=now RSS Feed: https://www.listbox.com/member/archive/rss/247/18849915-ae8fa580 Modify Your Subscription: https://www.listbox.com/member/?member_id=18849915&id_secret=18849915-aa268125 Unsubscribe Now: https://www.listbox.com/unsubscribe/?member_id=18849915&id_secret=18849915-32545cb4&post_id=20170211191651:8B69699C-F0B8-11E6-9C94-8560E7B355EC Powered by Listbox: http://www.listbox.com
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