Today, companies producing physical assembled products such as Black & Decker (B&D) have outsourced production of nearly their entire product line-up to offshore facilities [1].  It has been argued that outsourcing, or the use of outside suppliers to provide services or products, frequently offers a cost competitive alternative to performing the required [...]]]> By Tucker J. Marion

Today, companies producing physical assembled products such as Black & Decker (B&D) have outsourced production of nearly their entire product line-up to offshore facilities [1].  It has been argued that outsourcing, or the use of outside suppliers to provide services or products, frequently offers a cost competitive alternative to performing the required activities in-house [2].  Predominantly, the overwhelming driver for offshoring and outsourcing were improved cost structures driven by much lower labor rates [3]. For example, in manufacturing U.S. workers making $20 per hour could be replaced by Chinese workers making less than a doller per hour (note references). According to Wu, et al. [4], outsourcing can be viewed as a strategically important activity that enables an enterprise to achieve both short- and long-term benefits.  These strategic benefits include focusing on core company strengths such as innovation and design in order to maintain competitive advantages.  Assigning tasks to an outside firm or to another group within the company may prove effective in accelerating the overall project [5].  This allows companies like Apple to continue to focus on developing the next iPod while not being burdened with direct manufacturing management [6].

The alternate argument is that in actuality, offshoring and outsourcing can increase total costs. A recent study by the Ventoro Institute notes that 36% of executives noted that offshoring strategies have failed [7]. Irrespective of what side of the argument one falls, one fact remains, offshoring and outsourcing has been pervasive and is accelerating. This trend has now shifted towards the sourcing of higher value-added jobs such as software development, pharmaceutical and drug research, and product design. As with manual labor, the ‘low hanging fruit’ are costs. An average software developer in India earns approximately $6,000 annually versus $63,000 in the U.S [8]. Now, research and development (R&D) is increasingly being performed in these countries on high-value projects. Historically innovation and design ownership were a key component in justifying the movement of jobs overseas: “with lower costs we can innovate more.” Now that these functions are moving as well, what will be left for U.S. employees? Will standards of living be further reduced as once high paying jobs are replaced those that are lower rage? Low-skilled works earn 20-40% less in their replacement jobs [3] – it is reasonable to expect similar figures for skilled employees.

In the U.S., we pin our future on innovation and entrepreneurship. These are critical to enhancing quality of life and standard of living not only in the U.S., but worldwide. The cornerstone of innovation and entrepreneurship are the development and commercialization of novel technologies and services through new firm genesis and sustained growth. If trends continue and more R&D is performed offshore, these countries will be given access to innovations that could foster development of new firms locally, rather than the U.S. What does this mean for the start-up? Well, outsourcing and offshoring can be invaluable to the new firm with scant resources. It allows you to focus on core strengths, while accessing expert partners. But, offshoring and outsourcing is no free lunch. There are communication and cultural barriers, potential quality issues, and intellectual property risks. As an entrepreneur, one needs to be diligent in sourcing decisions and look at the total picture of costs and sustainability. A recent example of a sourcing decision is at Tesla Motors, the electric vehicle manufacturer. After looking at total costs, they have decided to assemble battery packs for their vehicles here in the U.S., versus having them shipped from China. Another case is a Flashpoint Development client, where a partnership has been formed with an Ohio injection molder and the state to develop U.S. sourced injection molds at a fraction of the cost using a new nano material. At FlashPoint, we use outsources and offshore resources daily to great effect for our clients. However, blindly going right to an offshore supplier source is often the easy way out, and may not take the whole equation into account.

References

[1] T.J. Marion, H. Thevenot, and T.W. Simpson, “A Cost-based Methodology for Evaluating Product Platform Commonality Sourcing Decisions with Two Examples,” International Journal of Production Research, vol. 45, no. 22, pp 5285-5308, 2007.

[2] S.D. Eppinger and A.R. Chitkara, “The New Practice of Global Product Development,” MIT Sloan Management Review, 47(4) pp. 22-30, 2006.

[3] R.H.K. Vietnor, J.W. Rivkin, and J. Seminerio, “The Offshoring of America,” Harvard Business School Case Study, 9-708-030, 2008.

[4] F. Wu, H.Z. Li, L.K. Chu, D. Sculli, “An Outsourcing Decision Model  for Sustaining Long-term Performance,” International Journal of Production Research, 43(12), pp. 2513-2535,  2005.

[5] K.T. Ulrich and S.D. Eppinger, Product Design and Development, 3rd Edition. Irwin McGraw-Hill, New York, 2004.

[6] S. Levy “The Perfect Thing,” Wired Magazine, November, pp. 136, 2006.

[7] P.J. Hatch, “Offshore 2005 Research: Preliminary Findings and Conclusions,” Ventoro Institure, October 11, 2004, pp. 16-17.

[8] T. Hoffman and P. Thibodeau, “Exporting IT Jobs,” Computerworld, April 28, 2003, p. 42.

Unfortunately, the [...]]]> Many consumer product inventions involve plastic manufacturing.  Inventors are often shocked moving towards manufacturing when they realize the costs involved in actually manufacturing their goods.  This is one of the main reasons that inventors are looking to license so early, however there is a way to manufacture without investing a few hundred thousand dollars.

Unfortunately, the shock generally occurs when an inventor brings an invention prototype to one manufacturer.  Even if you go to all the plastic injection molding facilities within your area, you are often only seeing one part of a much larger equation.  The reality of molding is that there are different kinds that incur different types of costs.  Basically, a low production mold will cost up to 1/10 of a high production mold, but the costs per unit increase dramatically as well.  However, the major difference is in the way an inventor deals out the cash.  A high volume production mold is a lot of upfront money, and without prior sales this is a big risk.  A low volume mold will cost a lot less, but you won’t be making as much money per sale because of the unit costs.

What is the answer????

The answer is start small, make sales and look for investment for higher volume tooling.  Inventors are always looking for investment, often before a prototype is even built.  This type of investment is so risky that it is almost never done.  However, an investment to make more money on a promising (sales, retail expansion) although not easy, is a lot less rare.

I have a patent and trademark for a plastic trash bag clip. It is designed to be extruded in plastic, then cut by machine to size. I have spent about $10,000 on legal fees, and $8,000 traveling to Monterrey, [...]]]> Doing it alone is tempting.  I found this on an old Google Answers post the other day:

I have a patent and trademark for a plastic trash bag clip. It is designed to be extruded in plastic, then cut by machine to size. I have spent about $10,000 on legal fees, and $8,000 traveling to Monterrey, Mexico and paying for extrusion of prototypes, fabrication of die, etc. The samples were very disappointing.

I am disinclined to spend thousands more on better prototypes, and don’t trust “invention submission” scams. How can I license or market a patented product that is, I believe, very marketable?

My heart breaks when I hear or read stories similar to these.  The stories often talk about bad manufacturers (like above that make bad molds), prototype manufacturers who go out of business and lose design files, patent agents / attorneys that file worthless patents and it goes on and on.  These upset me because so much money is gone and essentially there is nothing to show for it.  In this case, the inventor has a “disappointing” trial production run, an essentially worthless 21 page patent and a valid fear of “invention submission” companies.

Manufacturing: First let me say that many times the first run of a production mold doesn’t come out quite right.  Most molds are very changeable for relatively less money.  Second this is a common issue, a first time inventor has found a great manufacturer but there is no history.  Without any past experience with the manufacturer (it is not just manufacturing but any outsourced product development task) the inventor cannot know if this is going to work out.  Thirdly, this is a clear cut case of not a lot of manufacturing knowledge.  The process should be a straight plastic injection mold.  Without a doubt this would have produced a better prototype.

Patents: This inventor (as many do) patented their idea very quickly.  It cost a lot and the inventor felt that it was worthwhile because now he has protection and owns the idea.  However, a quick look at the patents in the area of invention show that it wasn’t really protected.  Why, because a different inventor filed a year later and got a  patent (although design) on a very similar trash bag clip.

Invention Submission Companies:  A fear of these companies is very healthy, although I hope that we have shown that a fear of anyone who you haven’t had successful interactions with previously including manufacturers and patent agents / attorneys is also healthy.  Scam companies recently have been very publicly documented and even sued.  There are many places that can help you find out which ones are bad and which ones are good (yes there are good ones out there).   A few resources for weeding out the bad ones are: The National Inventor Fraud Center and the Rip Off Report,  I can speak for BIG as a good guy and I have heard good things about Pelham West Associates. Always do your research, get references, there is lots of information about there about evaluating these types of companies.

DIY: I personally have developed products alone, without outside help from a company like Flashpoint Development providing product development services.  The results were not great, like the inventor in this post I spent a lot on design, prototyping and intellectual property,  I spent several months and made progress, but I would not call it a success.  Eventually I ran out of time and money and the idea stalled out.  Having had this experience of not wanting to involve (pay) consultants, I completely understand this point of view.  Unfortunately, it generally turns into a learning experience similar to a semester of college in expenses.  When I hear about these stories I cringe because I get flashbacks.  Having seen the end result and hearing the stories, if I was to invent again for the first time (its hard to travel back in time) I would be more scared of DIY than getting product design & development help.

If you have a CAD file, you can post and within hours get bids from manufacturers worldwide. Very useful for finding suppliers and also cost modeling during the design phase.