It has been my experience that many start-up businesses view outsourcing their manufacturing to factories outside the U.S. as a way to save money. While it is true that cheap labor typically offers a lower unit cost and therefore, potentially higher profits for you and lower retail cost for your clients, there are some very real issues that a start-up must be aware of that could potentially cause great economic hardship for the start-up business.
The first issue is easy – rising fuel costs. Most of our current clients are now beginning to explore the costs of manufacturing their products in the U.S. or at the very least, bringing the manufacturing closer to home by looking at Mexico. It is more important than ever to do a cost analysis on whether having your products made in the overseas markets offsets the rising shipping costs.
The second issue to consider is control over the manufacturer . Ask yourself one simple, but important question – what recourse do you have if your product that is manufactured overseas turns out to be defective, once it arrives in the U.S. for distribution? If you think product liability or product recall insurance is going to cover this, you are wrong.
A true story - a past client put together a team of highly successful entrepreneurs to develop and sell an new toy and like most entrepeneurs they wanted to produce the product for the lowest possible cost so they could maximize their profits and as logic would have it, it was cheaper to have the product manufactured overseas.
Many thousands of dollars were invested. Many independent marketing tests were conducted and everybody, including myself, was excited that they were involved with the next big hit. The major problem was, when the toy arrived in the U.S., it was defective and dangerous to the user.
Apparently, some contamination leaked into the plastic during the molding process. Every product was deemed to be unsafe and had to be returned to the manufacturer for replacement. The principles knew they were screwed and essentially disbanded the company and went out of business because they knew that they could not force the manufacturer to replace the product or that the replacement could take years instead of weeks or months. Thousands of dollars and countless hours of work went down the drain.
The moral of this story – if the U.S. company had used a U.S. Manufacturer or a foreign manufacture closer to home, the company may have had more control of the situation. If the U.S. manufacturer did not respond and replace the product in a timely manner the company could have sought restitution through the courts and possibly recovered some if not all of their investment.
Oh yeah, the overseas manufacture decided rather than take the defective product back that they knew was potentially dangerous and destroy it, they decided sell the product to unsuspecting vendors at a discount and make money. How do we know this -we were contacted by two vendors looking for product liability insurance on the exact same product. Of course, we could not help them.