Manufacture In House Or Out Of House?

Will:
All right, everybody. We are back with another episode of Safety Stock. I am blessed to have Dan Magida with me. I am Will Davis and Dan, it is good to see your face. How are you doing, sir?

Dan:
Doing great. How are you doing today?

Will:
I’m good. Once again, it’s hot outside. The sun’s shining. Kids are at camp. What can I complain about?

Dan:
Are they at the same camp or different camps?

Will:
They’re at different camps. One is at more of like there’s a lake and boats and archery. The other one is with a bunch of other pre-K kids running around on a playground

Dan:
Name and games, make sure that they’re tired when they get home from camp.

Will:
Absolutely. 100%. Well, Dan, speaking of people that get tired, if you’re on an exercise bike, hopefully you get a good workout in, right. I

Dan:
Great, great place. Good workout. Yeah.

Will:
And one of those popular exercise bikes happen to be Peloton. And we’re gonna use that as our springboard into today’s episode Peloton has recently been in the news for a lot of different things, whether it be job cuts that they have had. And recently they have now announced that they are moving their manufacturing from not under their own ownership, but they are moving it into a contracted situation. Dan, you used to work at Peloton. So some of the things we’re gonna cover today is, you know, what makes sense to bring your manufacturing in house or have it out of house. And what are some of those economic factors that you’re evaluating when you decide which way you should go?

Dan:
Yeah, no, exactly. And brief experience at Peloton, but not gonna dive as much into it, but the main thing that in order, if you wanna get your own manufacturing plant and as either star one up or acquire somebody out there first, you need to have the cash to go with it. It’s

Will:
Expensive,

Dan:
But it’s not, it’s not cheap. But on top of that, you have, I mean, a, you need know what your demand’s gonna be for the foreseeable future. If you can get a somewhat accurate read there, but also in terms of that ity, what the output and efficiency is going to be at those facilities. So you can figure out a what your unit economics are and what your accounts could be as well. Cause besides your, your day workers, you still have to have your maintenance crew and everybody else on top of that. So it’s in terms of headcount, there’s a lot of cap X, that’s gonna go into this too. So really need to be plugged in financially sound of what your business is. If you have to raise money or get debt to facilitate this as well. But it’s a tough thing where there’s a lot of different verticals. You can go where you can build your own factor, which we’ve seen companies successfully do acquire factories, where at least you’re getting the skilled laborers to go with it. Or maybe you can finance finance. I don’t know. How will you pronounce it from your days in school into those, those facilities where you have dedicated lines that we’ve like, I have experience in facilitating the past as well. It definitely depends.

Will:
It depends on who I’m talking to. If I say finance or finance if I’m

Dan:
Planning on saying finance sometimes.

Will:
Yeah, for sure. You need to either have a monocle or have some type of uncle that looks like the monopoly guy,

Dan:
Like a business school teacher.

Will:
Right? Exactly. So really simple, you know, for people, if they’re like, man, what goes into needing to own your own factory for a decent high speed line, say, you’re, you’re averaging around 80 to, you know, a hundred pieces a minute. You know, that’s giving you roughly depending how, you know you’re doing for efficiency perspective, like 400, 450,000 pieces a month. Thinking about that just in general. That’s for like one line

Dan:
What industry though, or just, well, if

Will:
You, yeah, if you’re in a personal care, like if you’re a personal care, right. You’re you’re personal care. And you know, from a capacity perspective, you know, you’re getting, that’s what you’re getting out. What you need to take in what really you need to take into account is okay, that’s, that’s one line, you know, how many SKUs do you have? Are you gonna have multiple lines that are dictating that amount as you start thinking? And are you always going to have that amount? Are you always going to be at a point to where there is a minimum amount of units that are coming through your facility based on what you need planned to support that facility, you know, ebbs and flows happen. So if the ebb gets to the point to where you’re truly struggling from a cost perspective may not make sense.

Dan:
Yeah, I think it, it, the, the, obviously the industry matters too. So if, to like, as the personal care, if, if, you know, Hey, you’re always gonna try to acquire new customers, but the key here is just the retention on existing customers and what their average order size is. So you can cause you can get a pretty baseline, like predictor into the health of your business. And then, then if it warrants it as well. So just measuring those costs, obviously we won’t promote nearshoring as Mo much as possible. I think there’s definitely an emphasis on that recently. And especially I would say the us government is trying to shore up with some incentives for nearshoring. So we can lower dependency on China especially in the personal care space, but also it’s cheaper. It should be cheaper, longer term to nearshore than it is to export.

Dan:
But with the part that’s true in terms of a unit economics per unit, but the part that is still hard to gauge is the labor side. I don’t know offhand how many people it takes to use your Petton example to manufacture a bike domestically versus what it would be with their partners in Taiwan. I all know what it would cost for personal care. If you’re making a plastic VI state side versus China, if you bringing that in, there’s a lot of cost factors as well. And put it in one way, shit always happens somewhere. There’s always gonna be something that comes up when you’re setting these factories up. If it’s on know permits, license insurances but also just, just the state of, of manufacturing that there’s certain things you can’t control. You need. I know a lot of government approvals just to build in certain areas, getting those workers could take time. So there’s a lot of, a lot of work to do that sets up. And it’s not when those immediate like snap the finger go as you have with established facilities that exist today.

Will:
Yeah. And, and a good example would be, you know, when I was at L’Oreal I was part of the time where, you know, there was a manufacturing facility in, so Ohio that I supported that did very similar things to what a production facility in Florence Kentucky did. And so when I was there because of the similarities between the two and the lines that they had as they could support them, they ended up closing down the Soland Ohio facility and moving most of the production to that Florence, Kentucky facility. The reason for that was because a, they could get ity efficiencies there, they could get capacity. And there was enough nuanced items that the Soland facility couldn’t run that dictated it, needing to be run out of house. So the units that Solan had available to run to them, wasn’t enough to justify that facility being there.

Will:
Yeah. And those things happen to an established brand all the time. You make those decisions, you know, whether it be labor or unionization. And so, you know, the interesting thing about the Peloton piece is that for, for, as they haven’t been in existence for that long, but at some point they made the decision that they were going to produce this and try to get the unit economics. They, it seems like they bet that this was going to be here for a while. And now as they’re seeing their numbers go down and as people are coming out of the pandemic, they’re shifting some of those costs into another place so that they’re not taking that overhead hit.

Dan:
Yeah. I, I don’t know for them the norm, cuz they obviously acquire that factory in Taiwan. Then they’re gonna build a facility in Ohio and now they’re just gonna subcontract everything out on the, on the bike side. So I mean it’s obviously a way to decrease costs, but I guess, well, do you have any interest to own your own manufacturing plan ever? Is that something that ever like sparked?

Will:
Yeah, it’s definitely peaked the interest for sure. Cuz I think we, we see a lot of places. It’s definitely a lot of work. The short answer is yes Dan, for sure. But you know, it’s one of those things like where I know I wouldn’t be like the sole person like be like, oh yeah, here, let me go do this. Like I would want to go in it with a couple people. You know, if any of you listening out there have had some interesting successes with running through your own facilities or if you’re like, Hey, we’ve had some interesting units to come through, let us know and you can reach us at hello@anvyl.com. That’s A-N-V-Y-L.com. Or if you want to tell Dan what new products Peloton should make, let ’em know. Maybe he have some old contact. You can cycle that through.

Dan:
I see what you did there with this cycle. We’re all done. Well done.

Will:
Thank well. We look forward to the next episode and we’ll speak to you soon.