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Subcontracting: The Make or Buy Decision

(July 2000) posted on Sun Aug 13, 2000

Goodridge discusses the pros and cons of subcontracting print orders.


By Mark Goodridge

Sooner or later, you'll consider using subcontractors. Perhaps that day will come when a customer orders $6000 worth of T-shirts and wants embroidered baseball caps to match...and you don't own an embroidery machine. Perhaps it will happen when a customer asks you to print a product, and you're a little gun shy because the last time you tried that kind of job, the result was many hours of overtime, several thousand dollars in sunken costs, and a lost customer. I became a fan of subcontracting after some expensive mistakes. When I started my business, I never said "no" to a customer. Whatever they wanted, I would print. The result was countless long days, expensive delays, and unhappy customers. Finally, I realized that I wasn't Super Screenprinter Man and became wary of letting my lips promise what my squeegee couldn't print. I tried to focus my business on a limited number of product lines. But I hate to lose a sale, so often I found myself driving back to the office with an order for something I'd never printed before. That's when I decided it might be more practical to find subcontractors for the jobs that fell beyond my specialties. When to subcontract Anytime a customer asked me to quote on a new product, I asked myself some questions. First, I wanted to know how much money it would cost me to produce this product. Next I wanted to know if I needed expensive equipment, unusual screens or emulsions, or special ink. Were there any special production techniques to master? If the answer was yes to any of these questions, my next question was where can I find a subcontractor who will sell me the finished product, ready for resale? Why did I look for a subcontractor? Because I wanted to make a profit on every job I printed, and I learned from hard, expensive experience that it's almost impossible to make a profit on the first production run of any unfamiliar product. Suppose I've just taken my first order for printing on nylon jackets. With a little research, I discover that nylon jackets are expensive and easy to ruin during printing and curing. I also find out that I will need a jacket hold-down and a flash-curing unit. Additionally, I learn that I need a special ink additive and that I will have to learn to use a different printing procedure. All of these changes are doable. So assuming that I have the money to buy the equipment and a book or a video that clearly outlines the process, why don't I just go ahead and print the job? The answer is that the risk of failure (ruined jackets) is high, and the cost of failure is also high (nylon jackets aren't cheap). Why spend money and time acquiring new equipment and new skills if I can buy the product I need from someone who is already an expert at printing on nylon jackets and can produce them much faster and cheaper than me? If I start selling a lot of nylon jackets, I can then bring production in-house. On the other hand, if my orders for nylon jackets remain infrequent, I can keep on subcontracting them. Obviously, making an intelligent decision about subcontracting takes more thought than I've outlined here. So let's look at other factors to consider when facing a make-or-buy decision. The advantages of subcontracting In many situations, subcontracting offers several advantages over in-house production. These advantages include the following: Subcontracting can reduce your production expenses. Let's assume that you subcontract a job because you question your own ability to produce the job right the first time. You use a printer experienced at that type of job. Now consider the efficiency and minimal reject rates the printer can manage and weigh these against the material waste and time you'll need to match this printer's performance. The math is simple--sometimes it's simply cheaper to subcontract a job than it is to produce it in-house. The trick is to know when. Subcontracting can lock in a profit. When you print a job in-house, do you really know what it costs you? Are you positive you made a profit on the job? If you're like most garment printers, you just hope the price you charge your customer covers your production costs and overhead and leaves you with a little profit. When you subcontract a job, however, you know before you accept the order what the subcontractor will charge you and what you will charge your customer. From the difference between those two figures, subtract a modest sum for shipping, handling, and your overhead. The remainder is your profit. Subcontracting means never having to say no to a customer. Subcontracting will allow you to expand your product lines without spending money on new equipment, spoiled substrate, and wasted ink, or spending a lot of late evenings and long weekends trying to print the unfamiliar products. Any item you can't produce yourself, you can likely get through a subcontractor. Subcontracting allows you to build up sales for a product before you invest in new equipment. A never ending argument in our industry is whether you buy the equipment, then find the customers, or find the customers, then buy the equipment and start producing the product. Subcontracting allows you to find out how much sales you can develop for particular products before you buy the equipment and materials to produce them. Disadvantages of subcontracting Subcontracting can have its drawback, too. Here are a couple to consider: Subcontracting may cost you customers. The big concern that scares many shops away from subcontracting is the fear that the subcontractor will steal the customer. While the possibility exists, I can't remember it ever happening to me. On the other hand, I lost more customers than I care to admit because I tried to print jobs in-house that I should have subcontracted. I believe in digging a well before you get thirsty. I tried to be on good terms, as far as possible, with the offset printers, sign painters, and other screen printers in my area. If someone needed a gallon of ultramarine blue ink or a sheet of capillary film on short notice, and I had it, I'd help them out. Little favors can lead to larger favors and larger favors can lead to the kind of trust you need when you are looking for a local subcontractor. You can avoid worrying about stolen customers by dealing with subcontractors that are out of your market area. However, this adds to delivery times and shipping costs. I always subcontracted to the closest printer who could deliver a quality product on time at a reasonable price. At the time I placed the order, I discussed with the subcontractor what I did and did not expect them to do, including not contacting my customers directly. I tried to be careful when I selected subcontractors, and, as far as I knew, I never got burned. Subcontracting can put your production schedule in disarray. A much more realistic concern if you intend to subcontract work is that you will lose control of your production schedule. If the customer suddenly needs the product a week sooner than initially ordered, it's unlikely that you can meet the requirement. Similarly, if for any reason your subcontractor can't deliver on time, you can do little to rescue the situation. I regularly printed process-color designs for a customer who gave no advance notice of the job and worked on a delivery schedule measured in days rather than weeks. Subcontracting was not an option for this customer's orders, so I upgraded my equipment, trained until I could print acceptable process-color work, and then brought the work in-house and charged accordingly. Finding reliable subcontractors I never had trouble finding subcontractors. I had working arrangements with local sign painters, offset printers, and even screen printers. We swapped jobs and agreed to keep our sticky mitts off each other's customers. Another prime source for subcontractors is the ads in trade magazines, such as those in the classified section of Screen Printing. I'm a big believer in clipping any ad that looks even remotely interesting. Someday you may need to find someone who can screen print Frisbees. You never know. Sooner or later, you'll also deal with the huge network of ad specialty manufacturers, but that's another article. It's very worthwhile to be on good terms with the local ad-specialty dealers, even if you lose an order to them from time to time. I swapped favors with them, and it paid off well over the years. The only advice I can give you is that when you play in their playground with their ball, you play by their rules. Check points for subcontracting When deciding whether or not to subcontract, it is important to determine whether or not the job is appropriate for this option. I have found that the jobs I subcontracted fell into three categories: New products Initially we subcontracted flags, silk scarves, towels, and mouse pads. As sales increased, we started printing towels and mouse pads in-house, the rest we always subcontracted. New techniques We always subcontracted complex multi-color designs on nylon jackets and until we built up a demand, we subcontracted process-color designs. New equipment How many athletic teams must you print for regularly before it makes sense to by your own numbering press? Wouldn't it be logical to subcontract your embroidery orders until you build up enough embroidery business to warrant buying an embroidery machine. While you're subcontracting such orders, you are also learning the terminology and how to price these unfamiliar jobs. Finally, before you decide whether or not to subcontract any job, consider the following issues: Can you buy it cheaper than you can make it? Before you answer this question, do a reality check. I don't mean cheaper than you can make it if every step in production works out as planned, I mean cheaper than you can make it assuming that you screw up the job as often as you normally do. Don't let the fog of optimism obscure your view of reality. Can you find subcontractors who are honest, reliable, and provide products of good quality on time? When you accept an order that you know you will subcontract, get a substantial deposit up front. When you place the order with the subcontractor you are committed. Your customer may back out, but usually you can't. How do you price products you are subcontracting? Your first option is to ask the manufacturers. They should know what a job with your specifications would sell for. I have used markups that range from 30-100%. If you can't get at least a 30% markup, the job usually isn't worth doing. I have talked to screen printers who feel that since they didn't produce the product themselves, they should use a lower markup, often 10% or less. At that rate, it's highly unlikely that they're covering their own costs. Conclusion I can't tell you what the right decision about subcontracting is for your business, but I found that subcontracted orders were a profitable sideline for mine. After all, ad-specialty people make a very good living and they subcontract everything they sell.


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