Product Sourcing: The 3 Constraints of Manufacturing
Product Sourcing: The 3 Constraints of Manufacturing
The laws of physics are well known to most of us. They are often unseen laws that dictate our everyday lives. Some of my personal favorite laws are: The Law of Thermodynamics, The Law of Gravity and the Law of Entropy. These basic laws dictate how the world works, most of the time we don’t even recognize them, they are unseen, but usually felt in ways that we inherently understand and we think of them more as just "the way things are”.
In the last 15 years of manufacturing and sales of product I have come to observe 3 laws of manufacturing. I’m not a scientist, I just play one on this blog ;). I have seen these 3 laws dictate the outcome of so many projects that I wanted to formalize them and share them in hopes that they provide clarity to anyone looking to make a physical product.
The 3 Constraints are:
These 3 constraints create a series of dependencies and prioritization that must be taken into account before proceeding with any product development process. These three constraints should be understood and prioritized in order to have a successful product launch. When you don’t understand that, these 3 constraints can work against each other. My advice to all people doing product development is:
“Pick 2, then put those 2 in order”.
What about the third constraint that didn’t make your top 2? It becomes subservient to the first 2. This doesn’t mean it’s not important, it means it’s just prioritized lower than the first two and will be dependent on the top 2 constraints.
When these 3 constraints aren’t clearly and explicitly prioritized, expectations become very hard to formalize and when there is a gap between expectations and reality, there is usually a high level of dissatisfaction. My goal is to help clearly articulate the need for understanding these three constraints and provide you with the ability to put them in an order that best aligns with your values, timelines and budget so you can have the best experience possible.
Constraint #1: Quality
To create a quality product you need to do your research, you need to be very selective in the type of material you use, you probably need to create a tech pack (a document that outlines every single item required), review and select every single component. You will also want to partner with factories that have experience in high-end products. A factory that shares Quality as a top tier value is critical. The easiest way to know if they share this value is to look at the types of projects they have done in the past. These types of factories usually require deposits or sample fees, because they know how much time they will be putting into this project.
When working with a product development team or outside firm, Quality should always be the #1 priority. For instance, when I work on product development projects for clients this is my #1 priority on 90%+ of the projects I work on. If I am going to spend my time and resources on helping develop a product, I am only willing to do this on projects that I can back up and guarantee will meet at least my own minimum level of quality that I expect.
When clients are new to the product game, this can often times be a point of frustration. Often times it comes from either a place of impatience or just a lack of clarity on all that goes into product development. Good quality takes time and revisions.
When Quality is #1 the order of the following 2 constraints is usually:
When you force speed as your #2 you often compromise quality as your top priority, so in essence you are stuck in no man's land of mediocre quality and not that fast of speed of manufacturing. Quality takes time. Quality takes iterations and thoughtfulness. It takes slowing down to test how it feels, how it wears, ways to make it better. All of these things can slow the process down, but in the end make the product better.
During the journey of creating a quality product you are usually looking at each component and communicating with the factory the different minimums required to source customized components. The more custom you go (color, shape, finish) the higher your minimums for components usually are. During the process of developing a quality product, it's important that you stay vigilant of all the micro price increases and minimum increases that can very quickly put it out of your budget. It may also require a minimum order bigger than you can afford to start with.
One note of caution on developing a quality product is: “Products can be special, but should never be precious”. Spend your time creating a unique and special product, but know that it will most likely never meet your own vision perfectly. Don’t be precious about every single detail or you will put your timeline so at risk that the project is more likely to fail.
Constraint #2: Price/Qty
To build any product at scale it is usually required that you partner with a factory that has the infrastructure, experience and ability to help make your dream a reality. Most modern factories have a Minimum Order Quantity (MOQ) they require. They do this to make the most out of their labor force, overhead and to be able to sustain their business over the long term.
MOQ’s usually come from a couple different internal constraints. Raw Material Procurement, Setup Fees, Opportunity costs and Admin overhead.
Raw Material Procurement:
When working in most markets, factories procure their raw materials (fabric, buttons, elastic, etc) from suppliers. When your product is based on standard colors from popular fabrics the factory can procure these materials in the open market. When you have custom colors, custom prints, or other custom requests, the factory has to work with mills that will make these colors custom. They have MOQ's of raw material they require in order to go through the process of creating the custom color or print. This custom raw material MOQ from the fabric mill goes back to the apparel factory and coincides with the finished product MOQ. There are ways around some MOQ requirements, but usually they require a relationship or an established ability to re-order. This can take time.
When you think of a factory setup you think of a line of people, each doing one job. This can take a lot of coordination to make it all happen. Lots of steps, lots of training. The factory can’t afford to do all this training and setup to reach the efficiencies they want without either a setup fee or some sort of MOQ requirement. In my experience, if you ask for a lower MOQ, your setup fee will usually be very close to the cost of the MOQ of the products they originally quoted you. So you may be getting around the MOQ, but your costs on a per unit basis are higher and what did you really gain?
For lower priced items, I usually notice a higher quantity requirement. This is usually due to a mix of the raw materials procurement, setup fees and the opportunity costs. Or in other words, if they turn down your order for a 100 pieces that costs them the same to setup and procure products for, they can now do the order of 10,000 and make much more money. The larger a factory the more likely you are to run into opportunity costs issues. They can be hard to diagnose when dealing with a factory. Many will not tell you this and I’ve never had a factory say “Sorry my opportunity costs are too high to do your small order”. This is however what usually happens when you are trying to ask a large factory to do a small project or if your project is just too small for them to want to do.
This is another hidden costs that most people don’t realize when trying to develop and source a product. You have administrative costs, I have administrative costs, the factory has administrative costs. Often times called “Overhead”.
Some orders are just too small that even at a high margin they just aren’t worth it to the factory. Often times factories are afraid to quote you the real costs of doing a smaller quantity job because they think it will scare you off (which it can). Let’s say it takes 1 admin worker 10 hours to process your job. Let’s say they make $10 and hour ($100). You want to order 100 cell phone cases for $2 each. The cost to process this order is $100, the cost of the product is $1.00 each. The factory did not make any money on this job. ($100 for overhead + $100 for raw materials and assembly = $200 = $0 in profit).
As the quantity you are able to order goes up, your price almost always goes down. You are able to help the factory offset their MOQ on raw materials, they are able to amortize (spread) their setup fees across more units, their opportunity costs and administrative costs goes down.
In my experience, factories love consistency. If they can keep their workers working for long periods of time with little to no additional training, setup or paperwork they become more profitable and you are able to take advantage of the economies of scale that creates to ask for a reduced price.
With all of this said about the power of quantity, I never advise clients to order more than they are comfortable with. Sometimes when you get started, it’s about proving the concept more than an absolute maximizing of your profit. Smaller orders, when possible, are great ways to test the market and get feedback.
When Price/QTY is your #1 the order of the following 2 constraints is usually:
Note: The more downward pressure you put on price, the lower quality of a product you will receive. There is a gentle and cooperative way to lower prices and there the other way. You will always get what you pay for in the long run.
Constraint # 3 Speed
Often times I have new clients come to me that have yet to learn about the journey of product development and want all three and they want it now. This is my biggest challenge. I have turned products around in under 4 weeks. I have created products from idea to arrival in 6 weeks. To be honest, I took some shortcuts. These were products I was doing for internal purposes. I sacrificed plenty of details in the process. This rough and dirty process is how a lot of fast fashion brands operate. Often times speed is more important than quality or price. Hitting the season is everything.
With that said, I don’t recommend you put speed as your #1 priority. If you have a timeline, let’s make it #2 (exceptions being fast fashion brands). Speed can be on your side for re-orders after you have worked through all the details and have a good relationship with the factory. If timing is not super critical, give time to the factory to do it right.
I can tell you from experience that when clients have made speed their #1 priority, the factory feels that pressure and almost always sacrifices quality. Speed forces quality to be the last constraint 9 times out of 10. Be wary of making speed your # 1 priority.
Just like I can’t bend the laws of gravity because I really want to dunk a basketball. I can’t keep ice from melting in the heat even though I just want a cold drink on a hot summers day. There are unseen forces all around us. They silently create constraints and are acting on us at all times of the day. Understanding these constraints is helpful to give proper expectations throughout the process of developing a product you will love. Be patient and stick to your values and in the end you will be the happiest.
Notes: I do want to address that there are many larger companies that push against these 3 constraints and try to put them all as equal. In most cases when I have seen this there is usually exploitation of some sort happening. Child workforce, poor paying jobs, overworking their employees with little to no benefit, working with governments that do not honor human life. In other words people usually pay the price for our desire to have quality, speed and price all at the same time. No product or profit margin is worth decreasing the value of another human. This is my #1 value.