Small manufacturers in the United States are thriving. Today, 98 percent of U.S. Manufacturers employ less than 500 people and 75 percent have fewer than 20. This gives these manufacturers the flexibility to set up shop almost anywhere; and doesn’t require they be in close proximity to a major metropolitan area with a large population to find the workers they need.
The Challenges Faced by Many Small Manufacturers
That doesn’t mean these small manufacturers don’t face some challenges.
Like many small business owners, small manufacturers still have to find the right employees, the best location to profitably do business, capital fuel growth, as well as manage operations. They additionally need to manage their supply chain and inventory of parts and raw materials to produce their manufactured goods—sometimes from out-of-the-way locations. Fortunately, the logistics of keeping their shelves stocked is much easier today than it would have been 50 years ago.
One of our small business borrowers, RT Custer, the owner and co-founder of Vortic Watch Company, a small engineering and manufacturing firm based in Fort Collins Colorado, describes it this way:
“To keep my cost of goods at a manageable level, I need to order hundreds of parts. I’m then restoring hundreds of components of the watches, which is very, very slow. The lead times for all my components are very long. Managing my whole supply chain is complicated and the root cause of my cash flow challenges.”
Custer suggests some of the lead times for parts can extend up to six months, making it important to make sure his processes are efficient and inventory management is a consideration when launching a new product.
Taking a Lesson From the Play Books of Large Manufacturers
We’ve come to expect the next model year of automobiles to be in design and development concurrently with the production of the current model year. In other words, they are selling Version #1 while Version #2 is in development. In the same way, Custer not only continues to evolve his product line this way, it also helps him keep his supply chain under control.
“We’ve had so many ideas on how to make the process and products better that sometimes when that new idea gets implemented, and you start making money from it, it’s almost 6-9 months later,” said Custer. “We sold ‘Version1’ of our product for almost 18 months, even though we started developing ‘Version 2’ within our first 6 months. It took us over a year to develop.”
While this is a very common practice for manufacturing, creating a culture of innovation helps prepare for the inevitable need to start developing new products while the current product is in production. Automakers often incorporate parts from previous versions into current and future models to make the manufacturing process easier. This also keeps the cost of introducing new products lower and enables them to take advantage of buying parts or raw materials in larger quantities. Small manufacturers can use the same techniques for cost savings when developing new products.
Without Capital, Manufacturing Grinds to a Halt
Like many small manufacturers, Vortic has acquired capital from several different sources. Custer has raised some equity capital and uses financing to keep production going. He’s also experimented with having customers pre-pay up to 50 percent on orders. “It’s a great idea in concept,” says Custer, “but you must have an amazing sales team to make the strategy work.”
“Access to capital is the difference between me sleeping and not sleeping,” says Custer. “I could run my business off simply cash flow, but not without serious planning and perfect timing. Without banks the world would be ok, it would just be really stressful. If I don’t have a funding source, because I’m constantly aware of my inventory levels and running out of inventory, that’s when I don’t sleep.”
Manufacturing is one of those areas where it takes money invested in inventory and materials to make money. “As a business owner, you must think about your economies of scale—with cash flow you can only get to one level, but with financing you can get to an entirely new place. This increases your margins, and your cash flow, and ultimately your revenue and profit for your business,” Custer says.
He adds, “That’s why companies like OnDeck are so important – they help you build your business credit while removing stressful ups and downs in cash flow which is really helpful for businesses like mine.”
Successful inventory management isn’t just a priority for small manufacturers though, other businesses like restaurants, merchants, and even service businesses have inventory needs to keep those businesses running efficiently and profitably. Please share some of the secrets you’ve found that help you stay on top of your inventory needs in the comments below.
You can learn more about inventory financing by checking out, Inventory Loans: What You Need to Know in our Small Business Resource Center.