One of the entrepreneurs appearing on the January 27th episode of Shark Tank didn’t receive any investment offers from the Sharks based on the founder’s refusal to consider having his product manufactured outside the US in order to reduce costs. His product is a handy rack attachment for a pick-up truck that allows drivers to carry more stuff. It retails for around $300.
This morning on Fox & Friends, Donny McCall, founder of Invis-a-Rack, was interviewed about this growing controversy. Why would investors (aka sharks) “insist” he outsource his manufacturing in order to increase profits. Doesn’t it make more sense to keep the jobs in the US to help rebuild our stagnant economy?
Before I offer my analysis on this great outsourcing debate, I would like to tell you a little about my background in this area. My first full-time job was in the early 70’s as an engineer in a large manufacturing facility. For the next 11 years I watched good manufacturing jobs evaporate in the four different industries where I worked (technology, toys, textiles, and machinery). It seemed to me that management was enamored with the idea of saving direct labor cost (at any cost).
The politicians later got into the act with job destroying legislation like NAFTA. Unions resisted change. The middle class was starting to disappear and no one seemed too upset by this disaster. The train had clearly left the station.
in 1982 I co-founded a software company and I, just like Donny McCall, wanted all the jobs to be in the US. We were paying our engineers $80K-$100K a year and our competitors were paying their engineers about $7K a year in places like India. I was proud of what we were accomplishing. I would put any one of my engineers up against three of theirs, but eventually, after 28 years, my economic model broke down and the company was sold at the end of 2009. We did manage to create about 40+ jobs in the US over our 28 year history. All the jobs are now outside the US.
And now for the analysis. As the Snarky Shark, Kevin O’Leary puts it, “It’s all about the money baby”. Turns out the truck rack that retails for $300 costs about $250 to make in the US. This $50 gross margin will not support a sustainable business model. The cost would need to be around $100 to get investors interested. This would represent a respectable 67% gross margin.
And so, either the price needs to go higher or the unit needs to cost less. It is unlikely that the market would accept a higher price, and that leaves just one choice….major cost reduction. Offshoring or Outsourcing is a possible solution. The fact that Donny was inflexible is what really turned the Sharks off.
Investors (read Sharks) do not always insist on manufacturing outside the US. In fact, on this week’s episode, entrepreneur Travis Perry of Chord Buddy presented a product that retailed for $50 and cost $7 to make in the US. After a brief discussion about outsourcing, the Sharks concluded that there was a high enough gross margin for manufacturing to take place in the US.
“It’s all about the money”……Thanks to Mr. Wonderful for succinctly stating our “new” reality here in the US. You simply cannot let unsustainable job creation drive your business development process.