Manufacturing guy-at-large.

Strategy, sacrifices, and the margins your business needs

Added on by Spencer Wright.

In an interview last week on The Amp Hour podcast, I put forth a provocative opinion: That it's okay to take a margin hit for strategic reasons.

Note: The full interview, which is too wide-ranging and generally entertaining to properly recap, is here.

Since I said the words below, I've been thinking more and more about the interchange and what my thoughts on margins are exactly. Here's a partial transcript (edited for legibility) of the relevant section, which begins at around 48:00:

SW: "I think there are a bunch of things that have to happen to make [stateside production of consumer electronics] feasible, and honestly one of them is that you have to change your expectation of your own standard of living, and you have to change your expectation for what your margin is going to be. Which is really, really tough. It's something that I [personally] feel deeply ambivalent about - like on the one hand I know I'm motivated by money, but also: Would my life actually be better taking a 40% margin, and then I'm able to see the person who's making my thing every couple months? Is that tradeoff worth it? I think in a lot of cases it actually is...
"I think that engineers and product companies jump to outsourcing stuff *way* too early, and there's a lot of units [of your product] that you could [personally] touch that would improve your ability to ship product and it would improve your customer experience in a lot of ways and it would just make your [social/professional] ecosystem a lot more healthy."
CG: "So when you say give up margins, do you mean give up margin at the beginning or give it up generally?"
SW: "I mean, both."
CG: "But it sounds like you're saying to give some of it up, and work out some of the wrinkles, and then eventually start to cost optimize and move to other facilities."
SW: "If that makes sense then sure. But I can say that the labor rates that we pay are way, way higher than we would pay going to China, and maybe that's okay. You know, you don't *need* your 60% [margins]. You can do things differently than the rest of the industry does... It's easy to read someone's blog post from some venture capital backed company talking about how they did it and think 'Okay, I'm gonna do it that way.' And thinking through those things critically is a good idea in general."

To start with, I should have added that sustainable (in the "financially sustainable" sense) businesses are *cool*, and I'm not recommending that anyone should put themselves in a position that'll eventually be untenable. I also recognize that when you've got a lot on your plate (as any entrepreneur does), there are a lot of things that end up being decided based on whatever the default is (i.e. whatever someone else has said publicly that they did).

That said: As David Ogilvy famously proclaimed, β€œThe essence of strategy is sacrifice.” And just like you might give up a little extra money for your product to be higher quality, or for your customer to be a little happier, or for more efficient capital allocation, I think it's eminently reasonable to give up money for a more responsive supply chain, or one that isn't subject to big swings in international trade costs, or one that's easier for a resource-constrained team to manage.

As I said on the podcast (and as I've written here and on The Prepared extensively), I *like* doing business with people from other countries and cultures - and am particularly enchanted with China's culture and ability to execute all manner of undertakings in the physical world. But I'm a bit put off by the hardware scene's predisposition towards manufacturing *all* of our consumer electronics in the Pearl River Delta, and I would encourage anyone out there reading this to really consider the potential costs (both direct and indirect) of doing so.