Long-time friend of MANA Bob Reiss has graciously allowed Agency Sales magazine to serialize his book Bootstrapping 101: Tips to Build Your Business with Limited Cash and Free Outside Help, available now on Amazon.com. The book looks at surprisingly effective low-cost and no-cost ways to acquire the resources you need to run your company. Whether your company is an existing enterprise or a start up, a manufacturers’ representative company or a manufacturer, this book will introduce you to innovative ways to cut your costs and drive more of your income into bottom line profits.

Outsourcing in recent years has gotten a bad name from some in the media and from politicians, looking to get votes.

Outsourcing is basically purchasing your product, components, or services from an outside party. This is in lieu of you performing those functions. The common view is that these products and services are purchased only from foreign suppliers. However, a significant amount is done by domestic suppliers who do not ship American jobs overseas — as many in the media profess.

The outspoken critics of outsourcing claim it takes away American jobs. Many go so far as to say it is unpatriotic for a business to outsource to foreign suppliers. Bah, humbug.

Outsourcing is not a new phenomenon. It has been in existence since businesses began. If it were outlawed, the country that adopted it would be plunged into a serious depression. Many businesses would fail, and consumers’ prices would skyrocket.

Outsourcing can be a fixed or variable cost. If the cost is based on volume or space used, it is a variable. If cost is set at a fixed amount, based on the function provided, it is fixed. In most cases outsourcing is variable.

Let’s look at the positives of outsourcing. Many products or services can be made by others at lower prices and higher quality. This could be the determining factor in survival for many companies. From my own experience, I had an idea for a novelty watch and decided to start a watch company. The watch industry was very mature and competitive. It would be impossible to even get started in the United States if you did not purchase your watches from overseas.

There is a high labor component in the manufacture of watches. If you choose to make them yourself, there is a huge capital investment. There are about four companies in the world that can make the movements. So, a new company like ours — by using outsourcing — got into the watch business with zero investment. Our only fixed cost was in the development of the watch. This cost us about $200 per watch style, using freelance artists who were not on our payroll.

The watches were made in China and were shipped to a public warehouse within a 45-minute drive from our office. This warehouse put the watches in our boxes, stored the watches, and shipped to our customers. They also did our computer work and in fact billed our customer as soon as the order was shipped with all invoice payments going to us. All of this was billed on a percentage of the value of the invoice (a variable expense).

Our sales were outsourced by using sales representatives. At least 50 percent of my time was spent in direct selling of our products.

We were successful and within four years, we had 15 employees. That’s 15 new jobs. The fact is most new job creation in the United States comes from small business.

Almost everything can be outsourced. We spoke of some functions like sales, manufacturing, and administration in our Variable Cost section. However, outsourcing eliminates the need and cost to perform these functions. Thus, less money you need to raise.

Outsourcing relieves the entrepreneur of his or her knowledge deficiencies by shifting this responsibility to the supplier.

Outsourcing is a key ingredient in our standard of living as reflected in lower prices of consumer products.

One of the criticisms of outsourcing is that you lose control by using it. This is true to a certain extent as your supplier is an independent company and does do work for other people. You can be sure that all companies using your supplier want their orders shipped first, but there are many ways to overcome this seeming negative:

First always pay your suppliers on time. You would be shocked at how much service and goodwill this gets you.

You need to establish a strong relationship with your key suppliers, both management and employees working on your account. There was a more in-depth exploration of suppliers earlier in this series.

My experiences have mostly been good with suppliers. In fact, I think the control issue is bogus in most cases, which I learned the hard way. When we were in the game business, we sold our small company to a stock exchange company who promptly built us a 70,000-sq.-ft. facility. Part of the plant was used to manufacture wood games, which were about 15 percent of our business but 98 percent of our headaches. We had OSHA laws to contend with and were completely at the mercy of our plant manager. I had no clue about the manufacturing of wood products. After some exploring, I turned to Taiwan, where we found a reliable supplier who could deliver the products at a cheaper price than we could make it, but most important, of a much better quality. This stopped all the customer complaints. Also, the outsourcing suppliers are in a very competitive situation. This taught me that my control in outsourcing is that if a supplier does not perform to our agreed to terms, I can switch suppliers at no significant cost. In my own manufacturing, I can switch plant managers but would have to endure a learning curve and still be dependent on one person. Every switch is expensive. Here’s an example of domestic outsourcing I experienced:

When the Rubik’s Cube puzzle took America by storm, it created an opportunity to produce a solution book for this most difficult puzzle. For some reason, Ideal — the company marketing the Rubik’s Cube — didn’t offer such a book. Quickly, two book companies created solution books that eventually reached the top of The New York Times best-seller list.

By this time, I already had experience as a partner in a toy/game company. I was shopping the game department in Macy’s and noticed a big display of Rubik’s Cube solution books adjacent to the cubes. Back then, and to some extent today, the idea of selling a book outside the book department was a radical idea.

However, the Macy’s book department was adjacent to the adult game department, and the buyer — whom I knew, and who was a very creative and entrepreneurial type — bought for both departments. As I surveyed the game department, I spotted the buyer and asked her how the solution books were selling. She told me the books were doing great. In fact, her impression was that for every three cubes that were sold, two books were sold.

I immediately bought the small paperback book, which retailed for $2. I then called the book publisher to inquire about buying the books in quantity to resell them into the toy field so that toy retailers could sell them adjacent to their cubes, a la Macy’s.

Book publishers sell books on a “guaranteed sale” basis, which means the retailer can return all unsold books for credit. To minimize their exposure in this potentially risky relationship, the publishers work on high margins and give retailers lower-than-average profit margins as compared to non-guaranteed sale products. Knowing this, I asked the publisher to sell me the book for 50 cents with the idea of reselling them to toy buyers at $1 — but on a non-guaranteed sale basis, which was the standard in the toy business at that time.

The publisher’s best price for this $2 book up to that point was about $1.10, and that price had been offered only to the largest book chains. You can imagine the publisher’s reaction when an unknown person from an unknown company (R&R) proposed to buy their products at less than half the price they extended to their best customers. They were prepared to reject my proposal out of hand — until I told them I would purchase all my books from them on a non-guaranteed basis.

Those were the magic words. After a brief back and forth, they agreed to my offer, which gave them a series of goodies. These included:

• A healthy profit at a 50-cent sales price because they had no marketing costs or commissions to pay as well as no returns.
• Access to new channels of distribution.
• Economies of scale. The cost of printing paper products like books decreases dramatically with volume. My volume, when added to their planned print runs, would reduce their cost per book and give them additional profits on all of their regular sales.

The book that they agreed to supply to me was identical in every way to the standard product, except that they printed our name (R&R) on the back cover instead of theirs. This was good for them because it clearly identified which books could not be returned. At the same time, it was good for us because it got our company name out there. Working with quality retailers like Toys “R” Us, J.C. Penney and Sears, we sold more than 600,000 copies of the book in a short period of time, and our name was on every copy.

We also kept looking for ways to reduce our risk. For example, we asked the publisher to ship large orders direct from their factory under our label. (“Large orders” were defined as anything over 1,000 books.) In those cases we never touched the books. We also entered into a relationship with a distributor who shipped small orders, many of which we turned over to them. Everybody involved — the publisher, distributor, and retailer — was paid well for their efforts, and it was a win-win solution all around.

This venture is a good example of bootstrapping because:

• There was zero development cost as the book was already completely developed. We just took an existing product to a new market.
• Our costs were 100 percent variable as we only bought a book after we sold it.
• We did not need a warehouse or shipping facility as all books were shipped from the publisher to our customers. The only charges we paid were the shipping charges, which we passed on to the customer.
• The bonus on this deal was that we had no risk since we never took the books into our inventory. Our only administrative tasks were the placing of the orders to the publisher, the billing to the customer, and the collections of invoices.

The bottom line is that outsourcing can be good and can be critical for many small companies’ growth and survival. It also is a major plus if you sell a product with a short life. You can discontinue the product with no loss in equipment or molds as none were bought because of outsourcing.

MANA welcomes your comments on this article. Write to us at [email protected].