One thing that startup folks may not realize is that offshore manufacturing comes with a lot of of hidden costs. The frequent trips with the air fare and per diem of 2 or 3 weeks stay for multiple team members several times a year can add up quickly. The opportunity cost of having team members constantly travelling is huge. The time difference could mean longer turnaround times when resolving critical issues. Having $500,000 worth of inventory tied up for 6 weeks as it gets shipped to the US can present a significant cash flow management challenge. Adam suggests using the Reshoring Initiative Website to calculate the total cost of ownership of your manufacturing initiative – you will quickly realize COGs and tooling cost are only part of the equation.
Another issue with startups looking to manufacture their first products is a business model mismatch with their contract manufacturer (CM). The startup is looking to move very fast, experiment and fix issues quickly. They would want to produce in small lots and iterate as they go. The CM model, however, values stability of the product and works best with large runs of a mature, stable product. Due to this mismatch, CMs often find that they lose money on startup deals. Startups often don’t have a credible credit record, and are not good at making their production forecasts. Their volumes are lower, and their products are less proven, resulting in greater risk for low yield or catastrophic stop-ship events in the first year of production. The CM has a much easier time dealing with mature companies and products. When push comes to shove, the CM often end up prioritizing their big customers over their startup customers. They could become very non-responsive to the needs of the startups. While this is true of all CMs, this seems to happen much more in Asia, where more large scale manufacturing is going on. In the worst case scenario, the CM could decide that they are losing money and proceed to “fire” the startup from its customer base. Since most startups are single-sourced to their supply base, this could be a huge challenge. This has happened to several startups I know. It’s not pretty when it happens.
If you have a new product that you are looking to test in the market, and you have low volumes to begin with, it is better to start with manufacturing in the US. Keeping manufacturing close to the R&D team is invaluable. Once the market and the product has stabilized, you can always reassess your decision.