When a new product hits the radar, consider whether to invest in the tools to embellish it or find an outsource partner. (Image courtesy Sierra Pacific).

If you’re like most decorated-apparel business owners, a corner of the shop holds what was once the “key to the future.” You know—that latest and greatest technology that would revolutionize your business. But after the investment of money, time and frustration was made, the equipment was relegated to a dusty corner for seldom use and, what’s worse, a net loss. 

At the time, we’re all convinced the product is at fault. But in reality, it is sometimes the case that you released a less-than-market-ready product when your clientele simply weren’t ready for it. These errors in judgment provide the opportunity to learn from past mistakes and pose a simple but often overlooked consideration: When to build versus when to buy.

When a new product enters our radar—whether it be digitally-printed apparel, sublimated goods, embroidered caps, or high-volume screen-printed goods—the first point to consider should be whether to invest in the tools to produce or embellish it (build) or to find an outsource partner to produce it (buy). We all bring preconceived ideas and historical perspectives to these decisions—sometimes these lead us to err on one side of the equation or the other, even if it’s not in our best interest. So in addition to personal biases and perspectives, we need to look at each decision independently and judge them against a standard list of category considerations that create a framework for the decision. These considerations include market size, frequency of use, quality, cost of goods sold, return on investment and skill level.

After determining projected volume, estimate the frequency with which you will sell the product. (Image courtesy Source Substrates)

Size matters

First take a critical look at the market your business serves and project the demand for the product in question within it. While we all hope that new products will expand our market, more often than not, they simply add just one more product to sell to existing clients. Do simple market testing to determine what the volume of the new product in question will add. Talk to clients and show them samples. Find out what they’d be willing to pay for the product and how much use they’d have for it. Your clients will always provide the best information so don’t be shy about asking. Even offer an incentive such as a discount on their next order in exchange for their feedback. The bonus is this can also lead to orders that otherwise wouldn’t have been placed. Rule of thumb: If the product will be less than 10 percent of your sales, outsource.

Frequent flyers?

With the projected volume determined, the next step is to estimate the frequency with which you will sell the product you are thinking of adding. Every day? Every week? Every month? The frequency will be a great indication of the relative skill that will be developed in production—if a machine is used to produce an every-day kind of item, the more skilled its operator will become in using the equipment than if the equipment were only used to produce an item once a month. Seasonality also comes into play here. If the product, say sublimated swimwear for example, will only have a seasonal role in your shop, outsourcing becomes a better option. You simply can’t develop the skill required for efficient quality production if you don’t sell the product on a consistent basis. Bottom line: If you’ll sell the product less than every week, outsource.

Good, better or best

Another important consideration is the quality that can be output verses that which can be provided by an outsource partner. Wipe away any personal pride here and make a true, informed decision on the output quality in either case. Look at the capabilities of the products and tools you can afford to purchase versus those of an outsource partner. Sometimes the quality-level is even, but not always. The tools in your budget may be a scaled-down version of those of an outsource partner. You don’t want to be in the position of buying equipment to produce a lower-quality product than what could have been outsourced. Deal breaker: If quality isn’t as high as that which an outsource partner can provide, it’s not the right time to invest.

First, take a critical look at the market your business serves and project demand for the product in question within it.  (Image courtesy Condé Systems)

All things considered

I often hear people say that they simply couldn’t afford to outsource and had to buy the equipment to produce in-house. More often than not, this statement is usually made without taking all of their cost into consideration. Remember to consider hourly rates, training time, investment cost, production time, error rates, cost of capital, overhead and opportunity cost. Very rarely will the true cost of production be as low as we originally estimate. In general, make an estimate of costs in all of the categories above, then add 30 percent to be safe. While some might feel 30 percent is excessive, it is actually very fair as an average. There will even be cases when this still isn’t enough—projects take longer than expected, cost more and have greater fallout than anticipated. Thus, if the estimated production cost isn’t less than half of what you can outsource it for, don’t bring it in-house.  

Time for payback

Let’s say an investment of $5,000 is needed to bring production in-house. You believe this will provide a $5 per garment gross margin, thus estimate return on investment (ROI) will be 1,000 units. In reality, the margin difference between outsourcing production and producing it in-house should be compared to determine the true payback. 

In this example we’ll estimate the direct cost per garment (material and time) will be $1 while the cost to outsource is $2. In this case, the ROI is actually 5,000 units, not 1,000. (Using the equation: Investment ÷ Buy Cost - Build Cost.) This number represents the number of units that must be produced to cover your investment cost and to save over outsourcing. Remember that we’re talking about break-even here, not profit. At 10,000 units you’ll have made $5,000 more than what you would have with outsourcing the same volume. So the real question becomes whether the additional time and effort to produce in-house is worth the additional $5,000 margin. Outsourcing is the better option if the volume required to reach full investment payback is greater than one year’s worth of sales.

Aptitude test

One often overlooked risk when considering taking production in-house is the level of skill required by the operator to perform the new process. When significant skill is required, it is very important to have multiple individuals trained on the equipment. Otherwise there is a great risk of production issues due to illness, vacations, or the loss of an employee. These issues often arise unexpectedly and without time to plan. 

The higher the level of skill required, the more we need to replicate the process to minimize risk. The internal production volume will at times justify multiple production lines in-house, but it may be the case that the level of volume won’t be there, especially in the early stages. Deciding factor: For highly skilled processes, if your sales level won’t justify multiple production lines, outsource.

If the estimated production cost isn't less than half of what you can outsource it for, don't bring it in-house. (Image courtesy Aprons Etc.)

An act of stoicism 

One of the most important of all considerations, it is imperative to make sure all decisions are based on facts or at least the most accurate assumptions and estimates we can make. Although we all like to think we make fact-based business decisions 100 percent of the time, our emotions impact many choices… more than we’d like to admit. One of the best ways to assess whether a decision is based on fact or emotion is to run it by a trusted advisor. Whether business associate, friend, family or other, an individual who provides direct and honest feedback is one of the biggest advantages your business can have. Use them as a sounding board for a different perspective on issues and decisions in your business.

As a general rule, each business has production models that should be brought in-house and others that should be outsourced. One of the safest things we can do for our businesses is to diversify the roles we play. For some lines, it makes sense to both sell and produce—those that meet the aforementioned scenarios. And in a few of these processes it can even make sense to be an outsource partner for others who sell. But with the wide range of processes and technologies readily available in this industry, it’s often difficult to determine the right role to play in each situation.

Too often, business owners contemplate decisions through a “pride of ownership” lens that can cloud big decisions. The simple awareness of this fact can lead to a full evaluation of each decision to discover the best role for any business in the production process.

While each decision is unique, the variables we critique in order to make the right one should be consistent. The considerations presented here are meant to provide the necessary consistent framework for evaluating build versus buy decisions. In some instances, you’ll choose to invest in the production processes and tools while others will be outsourced. But either can be a confident decision when it is well thought out and in the best interest of your business.