Jeff Zamluk was just 14 when he started building skimboards in his dad's workshop and selling them. Over the next two years, he built 300 units, pretty much on his own. "This isn't the lifestyle I want," he decided.
Needing more space, manpower and technology, he researched building a factory. It would cost $150,000 — and who would lend him the money? So he flew to Thailand, where he found himself walking down back streets with people he'd met on the Internet, and struck a deal to manufacture his skimboards. "Being a young businessperson helped. This is what you do and this is how it works."
He soon moved much of his manufacturing to China. He officially launched Swell Source in 2008 and now he sells sporting products under four different brand names, most of which are manufactured overseas, that are sold here and all over the world.
His company — which he runs alone with the support of 20 subcontractors located all over the world — also helps 40 clients with quality control and supply chain management for their own offshore manufacturing.
For Mr. Zamluk, offshoring was a simple option, but for mature small businesses who already make products on Canadian (and U.S) soil, pondering whether to ship production across an ocean is a more nuanced decision. And one that requires looking at factors both obvious and less overt.
Mr. Zamluk says a company's primary practical consideration when pondering overseas relationships is volume. Most reputable factories have a bottom volume threshold (this varies depending on the product type). "I'm sure you could find someone willing to manufacture at really low volume, but they're not the kind of people you want to deal with," he says.
For Plum Clothing, a retailer and manufacturer based in Vancouver, making products for just eight B.C. and Alberta locations, plus an online store, means it often needs just a dozen of one garment. "It was impossible for us to do overseas," says co-owner Ed des Roches.
And barely squeaking past the minimum can, in some instances, mean your product might get bumped to the end of the line at a factory — delaying your shipment — in favour of larger orders from other companies.
Conversely, volume can also be a major benefit of offshoring. A growing company, or one who wants to run a test of a new product can rely on a large contracted factory with ample equipment to try something new, and with minimal investment for the small business. "There's less risk for you, it moves over to the factory," says Mr. Zamluk.
Jerome Thirion, a partner with KPMG Canada in its Montreal office, who specializes in supply chain managements, says consumer-facing companies may renew 35 per cent of their product line on an annual basis to stay competitive. "You need to be agile, the market demands it," he says. Switching up product lines is straightforward for many overseas factories used to working as subcontractors.
Meanwhile, you don't need to keep an offshore facility busy 24/7 the way you do running your own at home. Mr. Zamluk has skimboards made for just three months of the year — something he could never do at his own factory.
Most companies head offshore to take advantage of excellent labour rates. In offshore hubs such as China, however, that cost advantage is changing rapidly. Minimum wage went up by an average of 20 per cent recently in many regions in China, so many Canadian companies have moved on to seek cheaper rates.
But less-developed manufacturing regions mean more work, and worries, for business owners, says Mr. Thirion. Garment manufacturers testing out Cambodia have to liaise directly with the government for approvals and must watch the factory closely to make sure workers even show up every day. Meanwhile, Mr. Thirion recently worked with a client manufacturing in less pricey northern China and it took weeks to get products to the port because of a slow, intricate tax system and poor transportation links.
Thompson Rivers University assistant professor of international business Muhammed Mohiuddin, who has studied offshoring for small business, says manpower is just 20 per cent of manufacturing costs. Shipping and transportation costs are also considerable. (But they may also lead to a benefit: if you manufacture in China and want to sell to that increasingly wealthy nation, you'll save on shipping.)
Mr. Thirion says KPMG studies show just 40 per cent of manufacturing costs are easily visible for business owners. Hidden expenses include business travel (which entails being away from the business itself for the owner or a senior manager, as well as family), local or importing taxes and duties and hiring external help such as lawyers (both here and abroad) or consultants to help with things like finding a factory to work with and supply chain management.
Calculating ROI must also include less obvious expenses that can change, such as the Canadian dollar, which is currently making offshoring less affordable. When oil and gas prices soar, companies get hit with fuel surcharges from shippers (who are less keen to offer discounts when those prices drop, as they have of late).
Overseas and Canadian laws regarding taxes, duties and the like can change. For instance, up until fall 2013, Canada had 60 per cent duty on bicycles coming from China. The end of this anti-dumping duty actually led Mr. Zamluk's to launch a bicycle company with business partners to take advantage of the new opportunity.
Most Canadian small businesses put quality control as their number one concern with making products overseas. Mr. Mohiuddin says certain products, such as high-quality fashion, fare less successfully quality-wise. Most overseas factories excel at mass producing the same goods over and over again, things like furniture, toys, electronics and car parts.
In most industries, quality on the factory floor can be maintained, even at high volumes, but at a cost. "You can get into trouble. If you tell a factory in China that you want a flip flop for $2 and you don't tell them anything else, that's all they'll think about," says Mr. Zamluk. "These factories are capable of making anything. They make iPads. But they were taught to build iPads."
Detailed specs, constant monitoring of a factory and regular testing of products is the only way to ensure quality control. That means someone from your company, or paid by your company, must check in on the factory on a regular basis.
And quality can sometimes be improved with an offshore factory. Sites in mature markets have advanced expertise, great equipment and often more experience making similar products than small Canadian companies who have spent less time on the factory floor.
Mr. des Roches kept his manufacturing in the Vancouver area, using subcontracted garment factories, because it allows him agility to get products to market. While his retail competitors are still stocking winter items in January, he's able to get his spring line out — and he didn't have to design several months in advance and risk missing out on a trend.
There's debate on this topic. Mr. Zamluk says the factories he works with can create a product 60 days after getting a sample. However, Mr. Thirion says sectors with just-in-time delivery models may struggle to get overseas products to North American customers as requested.
For Mr. Mohiuddin, deciding where to manufacture should be not just about the details, but the larger, long-term plan you have for your company. Despite fluctuating costs and even evolving manufacturing locations, Mr. Mohiuddin's research showed that companies in it for the long haul, and with a smaller set of overseas manufacturing partners, did the best.
And, most critically, a company must determine what truly sets it apart, and let manufacturing evolve from that. Does marketing "Made in Canada" give you a true advantage? Or does your customer service, marketing, innovation or design define your company? "Designing a pair of shoes has more value than producing 10 pairs of shoes," he says. "Most of the value Canadian companies add in the process is in branding and marketing. These companies should not worry about manufacturing themselves."