Entrepreneurs and Risk
It’s often said that more than half of new businesses fail during the first year. According to the U.S. Bureau of Labor Statistics, this isn’t necessarily true, however the statistics are still not in favor of the little guy. Data from the BLS shows that approximately 20% of new businesses fail during the first two years of being open, 45% during the first five years, and 65% during the first 10 years. Only 25% of new businesses make it to 15 years or more.
Why is that the case? The word Entrepreneur coined by economist Richard Cantillon literally means “bearer of risk”. There is inherent risk that comes along with starting and running any business, but does that mean entrepreneurs are high risk takers? There is a common misconception that the most successful entrepreneurs are the ones that risked their life savings on starting their business. In his book Originals, Adam Grant points to a variety of studies that conclude that the most successful entrepreneurs are much more cautious and almost always have a backup plan in case their business doesn’t work out. In fact, Adam Grant’s research indicates that the most successful entrepreneurs that we all hear about are typically not risk takers at all, but instead risk mitigators.
Therefore, this blog is dedicated to areas of risk in your supply chain. You will learn and how you can mitigate risks at various stages of your product development and manufacturing in order to increase your chances of long-term success.
Risk 1: Your Product Design Documents
There is a huge difference between designing a product and designing a product for manufacturing. First of all, you will need a Tech Pack.
Unless you’re an advanced graphic designer or an engineer with knowledge of CAD programs, then you will need to hire a design partner to help you create a tech pack. Finding the right design partner can be the difference between success and failure.
A great design partner will:
- Work with you to understand your vision
- Create the specs
- Determine materials
- Design for manufacturing
- They will save you time, money, and your sanity
Working with a design partner may cost you precious dollars in the short term, but it will save you tenfold down the road.
Risk 2: Finding a Trustworthy Factory
Finding a trustworthy factory is the second major hurdle in your product journey and as hard and scary as it is, finding one is only half the battle – you need to know how to vet them too.
There are only two ways to find a factory – you can do it yourself or you can hire an outside party to do it for you. Both carry risks, but here are the two riskiest things you can do:
- Find a factory on Alibaba or similar websites – not all factories will be bad, but making sure that your product arrives on time and with a low defect rate can take up all of your time, which takes you away from establishing sales channels and marketing
- Hire a cheap sourcing agent on the gig economy – some work for as low as $5/hour. However, many are inexperienced or on a single factory’s payroll
The less risky options are hiring:
- An in-house sourcing manager
- A reputable company that specializes in supply chain management
These last two options are more expensive, but significantly safer and much more likely to lead to long-term success without wasting a ton of time and money.
Once you have found a group of reputable factories, you will need to obtain production quotes from them. Here are some tips when getting factory quotes:
- Develop a detailed request for quote document so that all factories respond on equal footing
- Always quote multiple factories
- When looking for a factory, try not to think like a consumer, searching for the cheapest option (something we are all trained to do). You don’t need to pick the most expensive option either, but instead of judging on price, make your decision based on the sampling process.
Part of the quoting process involves creating a sample of your product. With your professionally designed tech packs, the factories should not have a problem creating an accurate sample. Reference samples of materials or features used in conjunction with the tech pack is also a great tip for success. Here are some more factory vetting tips to consider:
- Validate factories with samples and timeliness – sampling usually takes between 5 and 15 days
- Sometimes your product may need multiple components made at several factories – be prepared to project manage all of them
- Consider the factory’s perspective – they want reliable and good customers that will place repeat orders, make sure you present yourself professionally
Risk 3: Manufacturing Your Product
You have found a factory, you’ve received quality samples, and now you are ready for production. For most entrepreneurs this is where things get really serious. For the first time you will have real money invested. Even if you’re an established brand launching a new product this is scary moment for you too since there are a ton of things that can go wrong at this stage.
Before you start you do anything else – you MUST sign a factory agreement. Not having a legally-binding factory agreement in the country that your factory is in puts your money at risk. Without this agreement, the factory is not liable for sending you defective product and you will have no legal recourse to get your money back.
Factory Terms / Agreements:
Here is what you need to include in your factory agreement:
- Production Schedule
- Quality Terms
- Penalties for missing dates/numbers/quality
- Delivery terms
- NNN (similar to an NDA, but for factories)
*Keep in mind that your factory agreement is separate to your IP protection.
Many factories have their own quality control teams but let me tell you from experience – they are not always reliable. Quality standards should be included in your factory agreement. However, one tip to avoid quality issues is to hire an outside QC team.
Risk 4: Shipping Your Product
While some factories will help you manage shipping your product, most will not. Be aware that shipping involves factory to port, port to port, and port to delivery (if your manufacturing overseas). To reduce risk when it comes to shipping your product, hire a reputable freight forwarder.
Freight forwarders will:
- Manage customs forms
- Understand tariffs
- Help you avoid shipping delays (which are more common than you think)
Not getting your product delivered on time obviously delays your speed to market, but for companies that accepted pre-orders on their website or through Kickstarter, it can be a much bigger problem.
Less Risk = Higher Chances of Success
If you are able to mitigate the areas of risk in your supply chain that we have discussed, you will be on your way to building a great brand. Additionally, your supply chain is a significant piece of the puzzle in unlocking multi-million-dollar growth.
Little Poppy Co is a great example of what happens when entrepreneurs recognize the risks within their business and make plans to solve them. The founders were brilliant marketers who knew the sales channel inside and out but they also recognized that they knew very little about creating and managing a great supply chain. Very few people point to their supply chain as the reason for their success, but in truth it’s 50% of the reason why they succeeded. In just 3 years, Little Poppy grew from a startup to a multi-million dollar brand. Read more about how they grew so fast in this Case Study.
Blacksmith International is a global supply chain management company. If you have questions about how you can reduce risk in your supply chain, then Contact Us anytime!