Re After Decades of Chinese Imports, How to Revive American Manufacturing?

["Dave Farber" <dave () farber net>]

---------- 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



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