Timbuk2: Outsourcing, Offshoring and Mass Customization

Introduction:

Timbuk2 was founded in 1989 by Rob Honeycutt, a San Francisco bike

messenger. Honeycutt wanted to develop a messenger bag that was rugged
enough for everyday wear and tear, but chic enough to set a fashion trend. The
company founded its success based on its lean manufacturing and mass
customization principles. With many of the American companies now
outsourcing their manufacturing processes to China, it became hard for
Timbuk2 executives to ignore the labor cost benefits that Chinese
manufacturing would provide. Dealing with different channels
(wholesale/retailers, e-commerce, etc), Timbuk2 also had to find a way to
improve their mass customization processes and determine if it was feasible for
them to offer their clients more choices (colors, sizes, patterns, etc). In this
case, Timbuk2 has two very distinct problems. The first problem is concerned
with Mass Customization of their products. Should the company offer its clients
more variety of choices when customizing their very own bags? The second
problem is concerned with whether or not Timbuk2 outsource its manufacturing
production to China due to its significantly low labor costs?

Analysis:

Mass Customization:

Timbuk2 sells its products through different channels, such as the traditional
domestic wholesaler and retailers, e-commerce, corporate and international
channels. The most profitable channel for the company is the e-commerce
channel, with an average of $96.75 per bag. Their least profitable channel is
the international channel with an average sale of $29.74 per bag.The ecommerce channel has proven to be their strongest channel with sales of
almost $1.6 million a year. Timbuk2 is now faced with the challenge of
determining if they should offer more color palettes, different designs, and
different logos placements to their customers. Although, offering more variety
to their customers will have definite benefits, it will also have several
disadvantages. According to the case, the labor costs for mass customization is
about 10% higher than labor costs for large batches or traditional
manufacturing. In order for mass customization to work, Timbuk2 will need to
determine how many color palettes, design patterns and the types of logos to
offer their customers. Overall their challenge for mass customization is to
determine whether or not their machines and workforce is capable of

manufacturing the design the customer specified. Mass customization and

variety can also lead to higher potential for errors. Errors in manufacturing can
lead to higher labor cost; the time and money it would take to correct the order
is a potential threat to their profitability.

One of the benefits of mass customization is that Timbuk2 will provide its
customers with perceived value-added to their products. The customer can
design his/her own bag according to his/her preference, which adds the value
of uniqueness to the product. Considering the mass customization option, one
needs to consider the inventory in stock. With customization, Timbuk2s
manufacturing department can actually work with less finished good inventory,
since the inventory is sent off as soon as its finished. They will have less
finished goods inventory in stock, which will in turn allow them to offer certain,
stocked products at a reduced price. Due to its mass customization practices
already in place, it shows that if Timbuk2 were to offer the right number of
options to its customers without increasing its labor costs too significantly, it
could be potentially bring greater profits. However, the question becomes how
many different choices to offer its customers without increases costs too
significantly? One must consider the different possible combinations for their
products that a customer can choose from and determine whether or not they
should add more options. Given the fact that Timbuk2 already offers different
types of bags (laptops, messengers, totes, backpacks, or accessories) ,
different sizes (small, medium and large), different colors, patterns (almost 60
different ones) and different design panels (left, right,and main) [1], one could
easily conclude that a customer has more than a million different customization
options they can choose from. Although added variety will lead to added-value
proposition for its customers, it can also hinder quality of the product and may
cause errors within the manufacturing process leading to higher labor costs.

Outsourcing to China:

Table 4 of the case shows the revenue, variable production and shipment cost
per bag by location (see Appendix A). Appendix B shows the cost differentials
between San Francisco and Chinese manufacturing. These calculations clearly
show that manufacturing in China will provide a profit margin of $26.92 ($45.08
{table 1 from case} - $18.16 {from calculations}), whereas, the San Francisco
manufacturing will provide a profit margin of only $17.29 ($45.08 - $27.71) due
to its higher labor costs. Since the orders made in China will have a longer
delivery expectation date, the factory in China will more than likely make the
orders made far in advance to the placement of orders. This will cause a high
finished goods inventory and will require the company to develop more
advanced forecasting tools to avoid excess inventory and potential lost sales.
The company could come up with a possible break even point that they would
need to stay below of in order to keep the labor cost savings that the Chinese

manufacturing provides. For example, the total labor cost savings from China is
$9.55 and the total profit margin from China is $26.92. The company would
need to provide sales and demand forecasts accurately so they can keep their
excess inventory or potential sale losses below 35.5% ($9.55/$26.92).

Recommendations:

In order for the company to offer more options to their customers, the
executives should consider how their current factory is laid out. They might
need to cross-train their workforce in different manufacturing procedures and
they need to set up their factory in a manner where the handoff process is
easier and efficient. The company needs to take special considerations for
orders that require the workforce to pay attention to the sequence in which the
bag is made. It is also my recommendation the Timbuk2 executives take a look
at their products and which products they could eliminate from their lines in
order to lower their production costs.

For outsourcing, it is my recommendation that it is essential for Timbuk2 to

start offshoring its manufacturing to China. The labor cost efficiencies the
Chinese manufacturing provides is hard to ignore or not take advantage of in
this growing competitive market of lower prices and high quality products.
Timbuk2 should start off by outsourcing some of its international, domestic and
corporate channel demands, while keeping its e-commerce demands based
solely in San Francisco. Since e-commerce customers demand a delivery of the
products within a few days of order placement, it doesnt seem economically
feasible for Timbuk2 to outsource these orders to China. However, since
corporate and domestic orders are allotted a longer delivery period, it is
definitely feasible for the company to outsource these orders. I do believe that
some of the domestic orders should stay in San Francisco in order to maximize
the utilization of the factory.

Timbuk2 will also need to develop accurate forecast and demand models in
order to see the labor cost savings. They also need to consider the training and
development they will need to provide their new employees, along with
different distribution channels they have to establish in order to make this a
feasible possibility. They will also need to find a reasonable way to smooth out
the workflow between San Francisco and China. Finally, Timbuk2 must consider
their brand and the implications of outsourcing to China to their customers.
Although customers might be disheartened that Timbuk2 will no longer a true
domestic manufacturer, I hardly believe that loyal customers will stop buying
the product because its made in China. If that is the case, perhaps it is an
attractive reason for Timbuk2 to offer its clients more variety after restructuring

its manufacturing processes and updating its machines. Timbuk2 must

continue to provide its customers with value and quality in order to keep them.
Appendix A: Table 4 from Case

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Appendix B: Cost Differentials between San Francisco and Chinese
Manufacturing

|San Francisco |China |Difference | |Hourly Wage |$12.50 |$1.25 |$11.25 | |

Direct Labor Content |35 minutes = 0.5833 min/hr |45 minutes = 0.75 min/hr |10 mins = -0.1667 min/hr | |Direct Labor Cost (per unit) |$7.29 |$0.94 |-$1.88 | |
Manufacturing OH (%) |40% of DL |40% of DL | | |Manufacturing OH Cost |$2.92
|$0.38 |$2.54 | |Materials |$13 |$13 |$0 | |Other Manufacturing Expenses |$1.50
|$0.75 |$0.75 | |Shipment from China to SF |$0 |$0.10 |-$0.10 | |Shipment from
SF to customers |$3 |$3 |$0 | |Total |$27.71 |$18.16 |$9.55 | |
----------------------[1] www.timbuk2.com