In our four part series New Product Development and the Adaptation Curve dedicated to new product developers, innovators and inventors, we explore the 8 top considerations when developing a new product. Whether a seasoned marketing professional or first timer, these eight critical components include aspects related to product design, positioning, manufacturing, distribution and financing.
Beyond personal savings, innovators look to family and friends, explore small business loans and even tap into retirement accounts to raise money for their startup products. The initial outlay of inventory capital—that which could be tied up for months is often the greatest obstacle to overcome. Minimum order requirements (MOQs) by factories usually cause a lump in the throat for the first time product developer. Even if you have the greatest gadget in the world, how do you plan on financing that first big P.O.? You’ve likely invested significantly to develop your innovation—a figure that has hopefully been taken into consideration for ROI and overall budget. While established corporations have ample cash flow for typical starting inventories, this may be the greatest initial hurdle for those new to the process.
Inventory Financing / Purchase Order Funding / Factoring
There are a half dozen inventory financing groups (IFGs) in the U.S. who provide bridge capital, purchasing and taking title to inventory which goes to a third party distribution warehouse. You then pay the IFG as for the cost of goods plus any in and out fees required by the warehouse as you sell merchandise. Purchase order financing is a new twist on Factoring, an older practice in which small businesses sell invoices at a discount for faster recovery of cash, providing the factoring company with a substantial fee. The caveat is that the invoices must be to reputable clients, i.e. Wal Mart to be considered.
These can be good options that allow you to purchase greater quantities thus commanding volume discounts. Another benefit is that you don’t have to give up equity to outside investors. Many times the factories’ terms require money down at the time of placing the purchase order. IFGs make it possible to abide by these terms. These companies will want to know:
- Your sales and marketing strategy (refer to Part I of the series) and about your team
- The quality of the products produced
- Your margins
- Inventory turns
- Your credit worthiness and track record
Personal guarantees and background checks are almost always standard protocol which usually means demonstrating some form of net worth whether savings, retirement funds, property, creditworthiness and no criminal records. They may also not take a chance on a new client—one who has no real balance sheet to speak of. Another downside is that these lenders charge interest rates that can be as high as 40% annually. Lastly, there is always a time requirement (term) for making good on these loans which are usually around 60 days. If you are unsuccessful in meeting your sales plan, stiff penalties may be imposed.
In just the past few years companies like Kickstarter have created tech based forums which bring creative projects to life and are open to investment by the general public. To date, over five million people have pledged over $800 million and funded more than 50,000 projects to date on Kickstarter in categories such as films, music and the arts, video games and inventions.
Crowdfunding is catching on and becoming more accepted as a means of raising capital. Investors do so at their own risk and there is little to no governance or regulation meaning no reporting or other administrative overhead. Crowdfunding is really an eco-system for philanthropy and those playing in this space have an entrepreneurial spirit. Mostly, investors do not generally require any form of equity or preferred stock so your ownership is not diluted. On April 12, 2013 the JOBS (Jumpstart Our Business) Act, was signed into law and is designed to increase job creation and economic growth. The good news is that it eases fundraising regulations imposed by the SEC enabling more entrepreneurs to raise capital.
Because blocks of investments can be minimal—as low as $1,000 or less, investors may be less motivated to provide insight or contribute to the long term success of a project.
Seed Capital / Angel Investors
The difference between Seed Capital and Venture Capital is that Seed money comes from individuals vs. institutional investors. Most angel (seed) investors have a wider appetite for risk and a savvy track record for assisting startups with building their businesses. These professionals are also versed in providing feedback on pro-formas (financial targets for top line revenues and margins; cash flow models and debt. Generally seed investors are less hands on in the day to day running of the business once they have a sound idea of your business plan. Seed investments are less administratively complex with less formal corporate contracts and governance.
Seed capital usually comes at a cost—Equity. There is risk on both sides. The investor may never recover their investment or you may give away too much ownership. Usually the latter results because it is just so tempting for the inventor to commence their dream.
Educating the Masses
How will you announce the arrival of your new product to the world? Magazines? PR campaign? Put an ad in the paper? Direct Response Television (DRTV) is a great but often expensive form of advertising and one of the best ways to demonstrate a new application or use as well as building brand equity. It’s great to have a video on your web site but again, how will you drive viewers and a following?
David Alexander is Founder of Baysource Global, a contract manufacturing and project management group with offices in Tampa and Shanghai. Baysource focuses on product development, strategic sourcing, manufacturing, and China strategy. www.baysourceglobal.com
In our four part series New Product Development and the Adaptation Curve dedicated to new product developers, innovators and inventors, we explore the 8 top considerations when developing a new product. Whether a seasoned marketing professional or first timer, these eight critical components include aspects related to product design, positioning, manufacturing, and distribution.
Most inventors underestimate the cost for designing a manufacturing ready product. Tools and molds can easily run into the five to six figure range and can dwarf first year profits. Most any product requires both two dimensional (2D) and three dimensional (3D) engineering drawings that specify material requirements, accurate measurements and tolerances which are very minute, allowable thresholds or variances in gaps, thickness, or practical limits without significantly affecting function of a component. These are the physical requirements of a product. There are also electromechanical tolerances which measure allowable ranges of energy output or resistance.
2D & 3D drawings are computer generated or Computer Aided Designs (CAD) are then used for creating the tooling for parts whether metal, plastic or other materials, even cut and sew projects. The first commercial applications were in the automotive and aerospace industries. Through the use of some of the most common software such as Solidworks and AutoCAD, two of the more widely used platforms, designers create the physical properties of a product. Depending on the complexity of the part and the actual quantity of components this cost can range from the low to tens of thousands of dollars.
Some products are ideal for Big Box retail but unless you know how to navigate this space, most category managers are not going to take a chance with a single line item vendor. Determining how to sell your product comes down to the “4-P’s” or Product, Promotion, Price and Placement. Entire marketing strategies are built around this. How you position your product will dictate your brand strategy. From there it is necessary to determine price, sales tactics and a marketing campaign and budget.
Products are sold through single or multiple channels. Often and most overlooked by new product developers is the benefit of working through wholesale/distributor channels. These organizations have years of traction and relationships with retailers and can be the best avenues for introducing your product. They have sales teams in place and assumedly the category expertise for not only implementing your programs but also helping positioning and building your brand. Your distributor is your customer and investing the time to work with and support this resource will pay off tenfold.
Think about all the valued functions that are fulfilled by a strong distributor partner. They have the infrastructure in place that includes:
- Sales; category expertise and feedback
- Warehousing; the ability to handle large single shipments
- Customer service and support—Activity based interface with multiple customers
- Inventory reporting; purchasing and replenishment
- Shipping and logistics
Legend of Chinese New Year
The 2013 Chinese New year is Sunday, February 10th with celebrations lasting the following week. Also known as the Spring Festival, Chinese New Year is the most important social and economic holiday in China. With origins dating back centuries, the event marks the end of the winter season. According to legend, every spring a monster would destroy villages and anything that came in its way. One spring, the villagers hung red lanterns and threw burning bamboo when the monster arrived. The monster fled never to return again, thus spring festival was born.
This year is the year of the Black snake and begins on February 10th ending February 24 and is named for steady progress and attention to detail. It is said that great prosperity will come to those who are silent and observant, waiting for the perfect moment. However, bad fortune will fall upon those who make quick hasty decisions.
We continue to hear about the dynamics affecting China’s place as factory to the world. Increased labor costs, currency fluctuations, and shipping cost increases have affected decisions about whether or not offshoring strategy makes sense. Certainly there are products that simply aren't feasible for contract manufacturing scenarios. Here are the top five reasons China is still an ultimate destination for products that are highly labor intense or are in the startup phase.
Labor vs other countries
Labor costs may be up to 30% lower in other countries like Viet Nam and India. However this is offset by superior supply chain advantages such as roadways and utilities. Skill levels are also higher thanks to Western training and a little osmosis over the past 15 years. This means China’s productivity continues to rise other countries in Asia are less efficient overall.
Because China’s manufacturing base tends to be cellular, meaning a production or assembly line can be producing one thing today and another tomorrow, China workers are frequently adaptable to ever changing tasks. Much of this can be attributed to the highly seasonal nature of Western retail needs such as Christmas lights or plush toys. China also presents many options for qualified suppliers whose initial minimum order quantities are less than traditional manufacturers. Often a China manufacturer will begin with molds having less cavitation than is generally required until volumes reach a critical mass. This all translates into less startup cost, quicker return on investment and greatly reduced risk.
Availability of materials and manufacturing
Because China now makes a fifth of the world’s manufactured goods, there is a ready source of supply for various components, parts and necessary materials. China is also home to thousands of industrial parks thanks to investment by not only the Chinese government but also foreign direct investment by Western firms. Shanghai and Guangzhou are known manufacturing hubs and have some of the heaviest investment and infrastructure along with some of the largest workforces in the country. Special Economic Zones created by the PRC have attractive tax incentives for FDI and are given more independence on international trade and economic activities.
China Innovation and Investment
Because as we mentioned China’s skill levels have vastly improved, China is now focusing more on innovation and creative manufacturing practices. Also, with labor increases have come increased capital investment in the form of automation—something that used to be last resort if a task or function could be completed manually. So what does this all mean?
Ideal Product Development
China continues to be an ideal partner for new product developers and innovators. While labor costs have increased over the past five years, China’s productivity has increased tenfold. China offers the flexibility required to take on a variety of new projects and with lower minimum order quantities. There is a steady supply chain for materials and different manufacturing services and China continues to invest in technology, facilities and innovation. While China may not be suitable for some manufacturing due to increasing freight costs and currency fluctuations, every project must be carefully weighed and evaluated on its own merit.
I had a dear friend, Dr. Dick Bowers who played and coached basketball for the University of Tennessee Volunteers. He ultimately became athletic director at the University of South Florida and personally led the charge to bring the first football program to the school which in a meteoric fashion became members of the Big East and even jumped briefly to the #2 football team in the country—all within the first ten years of the program’s inception.
"We advance our customers goals in a fraction of the time compared to attempting to navigate China on their own."
When Dick passed away, dignitaries, business leaders, even the Mayor of Tampa were present at his service. He was the kind of man you loved and looked up to and made everyone feel important. Of all his sports accomplishments Dick used to say that he was most proud of the fact that while he was with the Tennessee basketball program they never lost a game. “We may have run out of time,” he would chuckle… and would continue, “but we never lost a game.”
Like so many things in life, our business success is measured within the framework of time broken down in eras, years, quarters, months, weeks and days and often tight one-hour deadlines. We look at financial results and measure our success by what we accomplish within the context of time. We can grow, stagnate or lose ground to the proverbial hourglass. For nearly a decade as we have continued to refine our message, the notion of what we best do has become clear. We don’t sell anything. We save our clients valuable time.
Your company is no different than a basketball team. You recruit and assemble the best players you can find, constantly plan and strategize and you play the game. Your financial results tell the story of whether you’ve won or lost and are determined by whether you’ve scored more points (profits) than what it costs to run your operation within a fiscal year.
In the new, flat global landscape low cost manufacturing hubs are found where labor is abundant in supply. China has continued to be forefront as factory to the world for products that require a high degree of labor. Productivity gains, improved quality processes, advances in distribution and know-how have kept China at the forefront of all low cost manufacturing countries. But with hundreds of thousands of factories, selecting the right manufacturer and executing on plans can be a daunting if not problematic and time consuming ordeal.
We have invested significantly in building a competent team of strategic thinkers, capable managers and dedicated partners who serve our clients in the areas of factory identification, manufacturing expertise and project management. We advance our customers’ goals in a fraction of the time compared to attempting to navigate China on their own. We do this all while meeting cost targets, providing on-time, accurate deliveries of products made to specification, of the correct materials, and of superior quality. Contract manufacturing is complex and challenging even when hiring third party factories in the U.S. let alone China. Without a prepared team that is coached and experienced, the game of doing business in China can be perilous.
We all have the same 24 hours a day to succeed. How we best allocate and use that time is our choice. Even if you play a little basketball yourself, would you be able compete with a well coached NCAA team?
People fall into two schools of thought these days. There are those that think China outsourcing has run its course. They subscribe to the notion that the appreciation of China’s currency (RMB), labor shortages and cost increases and increased fuel prices mean cost savings opportunities have substantially diminished. In contrast, the other side of the coin spells out what others have believed for years—startup costs and tooling are less in China, products with high labor content have to be outsourced and China will always be “Factory to the World.” For several reasons, they are both correct.
In a December 15, 2011 Wall Street Journal article it was reported that China's Ministry of Human Resources and Social Security, announced 21 provinces and municipalities had, on average, instituted annual minimum wage increases of 22% by October of last year. Officials in Shenzhen, in China's southern manufacturing heartland, said in November that they would raise the city's minimum wage by 15% in January, to attract more workers. While wage hikes are nothing new, they have reached a point where factories are no longer able to absorb the increases meaning higher costs are passed on to consumers. However, with last year’s economy taking a turn for the worse, demand dampened driving commodity costs down. The result was China’s digging in its heels on allowing currency to rise against the dollar.
Since the mid-90s companies sought out the labor machine that China represents with its nearly 800 million strong workforce to remain competitive in Western markets. China’s family planning practices in place since the 1970s translate into a tightening demographic of available workers. This has also meant that China has moved more inland to expand its available workforce. Even so, the average hourly wage earner still makes only around $70 per week on the low end and up to $80 at the high end. While this is nearly double what it was around 2001, compared to the 2011 U.S. Federal minimum wage of $7.25 per hour/$290 per week the 275% premium speaks for itself. Add to that mandatory unemployment taxes, healthcare benefits and other layers of overhead U.S. companies have to absorb and the costs begin to add up.
According to a February 1, 2012 Bloomberg report in which she sums up the U.S. manufacturing landscape, Caroline Baum states that “manufacturing employment peaked at 19.5 million in 1979, when it represented almost 22 percent of the workforce. Last year, the 11.7 million manufacturing workers accounted for less than 9 percent of total employment, according to preliminary data from the Bureau of Labor Statistics. During that time, the value of U.S. manufacturing output kept increasing, thanks to strong productivity growth.” So in other words, Advantage U.S.
And she goes on. “Manufacturing employment has increased 334,000 since the low in December 2009. Southern, non-union states offer an increasingly hospitable environment for factories. NCR Corp. opened a new plant in Georgia to produce automated teller machines. Caterpillar Inc. plans to build a new construction- equipment factory in the U.S. Ford Motor Co. is bringing 2,000 jobs back from China and Mexico after reaching an agreement with the United Auto Workers union. Even a family-owned North Carolina furniture manufacturer decided to reopen a factory that has been shuttered for more than a decade.”
What comparative advantages China may be giving away in labor and productivity however is being bolstered by innovation which takes China to an entirely new level on the global playing field. China has doubled the number of international patents created since 2005 and is launching products at a fraction of the time as its Western counterparts. Mckinsey Quarterly's February report cites their government’s emphasis on indigenous innovation, underlined in the latest five-year plan. Chinese authorities view innovation as critical both to the domestic economy’s long-term health and to the global competiveness of Chinese companies. China has already created the seeds of 22 Silicon Valley–like innovation hubs within the life sciences and biotech industries. In semiconductors, the government has been consolidating innovation clusters to create centers of manufacturing excellence. And the report goes on to say that because of its large market, much of China’s innovation is staying there.
Because of the cross pollination of U.S. industry standards, quality processes and knowledge transfer, more and more firms are combining China’s vast low cost labor machine, ingenuity and speed to market to become multi-national in scope. Solar power companies, the auto industry and a new medical initiative sponsored by the Chinese and U.S. governments are creating opportunities for both our countries to leverage their strengths. Read the joint statement here.
China wins because they gain access to medical innovation and improved standards of healthcare. The U.S. gains access to an untapped market for highly profitable products and services. This bi-lateral agreement fosters long-term cooperation with China in the areas of research, training, regulation and the adoption of an environment that will increase accessibility to healthcare services in China. Participating U.S. companies initially include 3M, Abbott, Chindex, Cisco, General Electric, IBM, Intel, Johnson & Johnson, Medtronic, Microsoft, Motorola, and Pfizer. Supporting organizations include AdvaMed, the Alliance for Healthcare Competitiveness, the American Chamber of Commerce in China, and the American Chamber of Commerce in Shanghai, PhRMA and the U.S.-China Business Council.
As we continue to increase trust, enhance communication, and cooperate in developing life improving technologies and innovations, a new frontier of collaboration is emerging that will change the world as we know it.
David Alexander is the founder of Baysource Global and Executive Vice President of Direct Source China, a strategic sourcing and strategy firm with offices in Miami, Tampa and Shanghai.
It's a simple question, but it does carry a lot of weight...
With the middle-class consumer demographic growing rapidly in China, companies who are not including China in their target audience could find themselves falling behind in the years to come. Here's more...