Wednesday, April 1, 2015

The business of small batch building

A recent thread on VS has encouraged me to write down some notes on my experience with small batch manufacturing as a business model and how it differs from one off custom building.  The question distilled down: it a viable business plan to build factory spec frames in batches and how can one best market/partner with shops to create a streamlined product line without the intensive time involved in one-off building.

I learned in what I would consider a small batch production facility that also did custom work in limited numbers. The basic structure I will share is what provided a successful business that supported 4-5 families for many years. The key, like any successful business, is having a well thought out plan with known COGS, production capability, and defined marketing plan.

In short, here are the key elements:

Your production frames need to have defined geometries and sizing that land solidly into the physiologic standards accepted by the industry but have your personal vision/interpretation of performance characteristics. Your perspective on how a bike should "feel" and handle should transfer through the experience to the rider. We found a 4 product size range to meet 95% of our needs...beyond that, it became time intensive helping define the fit for the customer.

The frame design and the tubing/components used need to be readily available or stocked in ample supply to maintain a consistent work pace. Using component design, such as dropouts, gussets, etc..., that allow for use across the entire size range is imperative as it eases fabrication and increases efficiency in both manufacturing and cost. These items should also speak to your identity, creating an aesthetic that differentiates you from other brands on the floor.

The majority of your capital investment will be in creating dedicated fixtures for each model to expedite the fabrication process. Time spent fiddlefucking around with machine set up is money lost. Invest in being prepared for efficient/repeatable work flow.

Standard finishes that are distinctive and easily created need to be determined. If you will not be doing your own finish work, you MUST identify multiple vendors who can work with your timelines to create repeatable finishes so that there is no differentiation in final product. Define expectations and keep custom finishes for custom need known qualities and costs for this endeavour.

Set a finished price for each frame that positions your product competitively AND meets your business plan profit goals. These can afford to be cheaper than custom one off work as you are batch building, but that does not mean you are self depreciating the value or quality. Set a defined profit that allows prosperity. If you are looking to undercut existing product lines, you are doing this for the wrong reasons. Predictable margins and productivity are your goals, this should be a daily bread product.

Network with shops that wish to represent or carry your brand and have dealer agreements ready to be signed that clearly communicate minimum orders, cost, terms, and parameters of product representation through the build. Folks have stated various opinions on if you should provide a discount/wholesale pricing model. We operated on a 20% margin, offering shops the frame at our set price based on the previously mentioned business plan targets. If a frame was sold direct, it was at that same retail number, preserving equity in the retail market. This gave the shop an easy bump for stocking a frame, but allowed them the opportunity for greater profit if they built a complete bike.

It has been mentioned that you should only sell complete bikes as it maximizes your profit potential. For a small manufacturer, it is not as easy as it sounds. It does take an inordinate amount of time to spec and order OEM complete builds, assemble, and then pack for delivery. We found that although we could make more money on the build, it did not offset the time required for so few hands...the time was better spent making OUR product. I would suggest creating component spec standards for each model that maintains consistency for your bikes. Upgrades are encouraged, but diluting your vision can not be accepted. Allow the shop to build the bikes, the margin on the components and labor is another share of the pie that benefits them and puts some skin into the relationship. Their advantage is that customers cans see/feel/compare the bike at hand and have it NOW vs. ordering directly from you and waiting for shipping. Prices should be equitable, so that does not factor into the decision making process for the customer.

If you can sell a complete bike direct, do it. However, as a small manufacturer, understand that you can quickly turn inventory over in frame only sales. Your business is maximized by inventory rotation and recouping investment dollars so that you have greater liquid assets on hand. Many customers enjoy the process of completing the build own their own, don't negate your product from consideration by only selling complete in this small production plan.

Ensure warranty standards are clearly defined and begin at the point of sale. Handle them swiftly and accommodate a line item into your COGS for future warranty work. Not every product will require it, but every product sold should share the potential cost.

Support the customer's desire to rep your brand with accessory soft goods...have tees, stickers, hats etc available for stocking shops and direct ordering. You are creating a brand and want to encourage loyalty. Happy customers will be your best salesmen.

Remember, this is a totally different plan than being a "custom" builder and should be approached differently. Although the two can operate synchronously, they are exclusive in operation.