Episode 010: Contract Packaging or Co-Packer 3rd party time?

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Hey, welcome back to the Find Your Source podcast. This is episode 10 and my
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name is Steven Peterson and I'm here to talk to you about manufacturing.
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A couple angles that I specialize in, finding sources, finding companies that
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will make products for you, specifically in the U.S. I've had somebody reach
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out to me and they wanted me to help them with China and I politely said,
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no, I'm going to help on the U.S. side.
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And it's not that I can't with China or even India or any of those,
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but it's just that I really want to specialize in the US because I think right
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now the opportunity is to do anything you can.
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If you're going to start, if you could figure it out in the US using automation,
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getting your costs down, it makes sense.
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Then again, if you're looking for cheap, China's the way. I mean, it's crazy.
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I was watching a show on Sri Lanka and the average wage is $150 a month for 45 hours of work a week.
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That is very tough to compete against. I agree.
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I mean, when I calculated the
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300 employees they had, it would equal about eight employees in the US.
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Think about that, 300 people, plus they had all the machinery,
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but just say it, 300 people making these, I guess they were bicycles.
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And in the US, the same pay would be about eight people.
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How do you compete against that? You just can't.
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I talk about that. I like to find companies in the U.S. that can help fill in
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part of the supply chain. And even the U.S.
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Company that, in that example, the bikes, they couldn't get a lot of their stuff
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made in the U.S. Almost all of it came from Japan and Italy.
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And even the Japanese company was buying stuff in China to make their products.
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So, you know, it's a made around the world kind of thing, but I'm specializing in U.S.
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And so how to talk to them, how to find that vendor, how to make,
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you know, make a deal, that kind of thing, and then how to develop that relationship
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over time. And this has kind of been a series I'm working on.
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And, or again, if you're a manufacturer and you have customers,
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if you know the value of your customer, do you know how profitable each customer is?
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And, you know, you might have your whole business tied up because you're doing
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so much work for somebody and you might not be making any money.
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I recently looked at a company and they were not making money on some of the
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stuff. They didn't know it.
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And it's hard to get that figured out, but it's doable. It's all doable,
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especially with AI coming and it's going to be even better than my silly accounting degree.
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But this week, I want to talk about contract packaging. Again,
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it's co-packing where you're basically outsourcing part of that responsibility.
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So for example, I'm looking at my desk of a product here. It's a coffee mug, gift from my wife.
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Well, in retail, you'll see sometimes those coffee mugs sitting on a shelf, right?
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They didn't get there loose like that.
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They were packaged in some kind of case pack, right?
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So many units in a pack that was structurally put together to hold that,
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to survive the shipping.
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We all know how tough it could be with UPS and FedEx if you get to that level.
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But think about a truckload coming in and then, you know, forklift guys bumping into it.
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Then the pallet guy's moving it. Then the guy's putting those boxes on the shelves
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and then they're pulling them out of the shelves and they're putting them up there.
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All that, you know, packaging and stuff is done by somebody.
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And so you could do it in-house, but there are companies that will do that for
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you. So that's the example I'm going to use in this case.
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Company who made the mugs might not offer that service. They don't have that
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service. So therefore, you have to get a third party or do it yourself in-house.
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And when you're starting up or you're adding a new product line you're not certain
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of, you shouldn't invest that capital in that. It's not worth it.
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You don't know that the market's there. Let the market prove it.
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Let it push you to a point where it makes sense for you to maybe bring it in-house
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and or outsource to other companies, have plural,
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especially if you can do it on the West Coast and the East Coast,
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if you're selling online or what have you, that can make a lot of sense.
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Working with a company, they have two locations, one East Coast, one Southwest.
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And that is an efficiency that we can move inventory between the two.
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It's a very efficient system. So if you can find something like that.
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So in a lot of the co-packers and shippers today, they have multiple warehouses
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around the country because so much of the world has moved online.
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So that is actually easy to find. It's not cheap, okay?
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And I always say this, you know, because I've had a lot of people say,
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well, we could do it cheaper. Yes, you could.
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But what does it come at the cost of? Is it going to come at the cost of market?
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If you're a good marketer, which I'm not, but if you are, don't spend your time
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worried about this nonsense. You just want to sell, sell, sell.
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What does it come as a cost of if you have to put out a bunch of cash on that,
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you know, to buy that machine to do it?
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Yes, it's cheaper, but in the long run, even with the tax breaks that you're
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getting right now, you're tying up cash.
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That's the issue is you're tying up your money in this case
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we haven't proven the product that hasn't gotten big enough to be an
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issue let it become an issue so you use an outside company okay so sometimes
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they'll take i know somebody who was selling a product that was food product
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and they had a coat packer which was a commercial kitchen because it had special
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licensing they would open the bag of whatever the food was and maybe it was
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you know i guess it was a toad of.
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I'll make it up sugar. And then they would package it down into smaller packages.
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Well, first off, you have to have a licensed facility for that.
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Well, he had to go to a co-packer who had those licenses and he had to prove it.
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Or if you're doing some chemicals, you would have to use an EPA-rated facility, registered.
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First off, they have to be EPA registered, and then they have to be able to
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process it and they have to document
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it because you have to prove all that stuff, where it went, right?
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There's always that chain of custody they want to see.
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So lots of times it makes sense. The other thing is warehousing.
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You know, I came from the Amazon world where lots of people didn't have a warehouse.
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We were fortunate we did, but lots of people didn't. So they didn't have to
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worry about the guys not showing up on Tuesday or the fire alarms going up or
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somebody breaking in the warehouse and all that junk.
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All that stuff costs and all the taping machines and the computers,
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it's more than you can think.
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So that's one of the reasons you'd want to do it. Plus cost wise,
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once you know your cost per unit, right? If you have a model,
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you built off your model, you say, hey, if I can sell this for $29.99,
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I've got to get my cost of goods down to this number. We already talked about
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that in a previous episode.
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Now, all of a sudden, I got to get that packaging cost in there. What's that going to be?
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So you really want to get that and you should include that in your cost of goods,
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but that's how you can get that price right.
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So once you know that, now you know what your gross profit is, right?
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Now you know where you have money to spend for marketing or not, right? Right.
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Now, you know, you want to protect your OPEX. You want to have some margin in there.
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You got to do all those things. So this is really a big deal.
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And finding a company that can do that for you is, is hard, right?
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It really is hard because what I'm, my experience, this is Steve's experience.
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Everybody I talked to, they're like, oh, we can do it all. And I'm like,
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hmm, well, you know, we had a product that was heavy product that was bagged
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and everybody's like, oh yeah, we could just do that.
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No, no, no, no, no. And then all of a sudden it was like, well,
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we had to rework, we had to do, then unhappiness comes around.
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Everybody says they can do it until they have to do it. And so,
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you know, my experience is that that's not a way to do it. You really want to find a specialist.
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Speaking of that product, I met a company that's packaged something identical to it.
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And they had a built a custom box maker to do it.
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The box is filled. It was amazing. And I'm like, that's the company that we
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should have found. And I found him after the fact.
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But the key is not, you've really got to find the right partner.
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You've really got to expect, you've got to go through the details.
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You've got to get that bill of material so you know exactly what the cost is.
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You want to get that hourly rate when they're standing there waiting, right?
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Your shipments wait, your stuff didn't get there, right? They have it on their
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production schedule and your stuff didn't get there. Well, guess what?
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A good company is going to charge you. They had that staff there ready to process,
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ready to unload that container, ready to unload that truck, and you weren't ready.
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Well, somebody's paying for that, right? You'll see those truckers have those
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detainment fees or delayed fees.
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When they get there, after a certain period of time, you're getting charged.
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Well, a good warehouse is going to do the same thing to you,
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or a good packaging company. and you can't get mad at them because if you did
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that in-house and your machine was down, your whole staff is standing around.
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You're still paying them. So why is it okay for you and not for them?
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That's when you're unfair. So you really have to be really fair about this.
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And a good packaging company will give you a little bit of leeway.
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They'll build in some fluff, but they also remember they're going to make a margin on this.
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This is not going to be profitable for you. it's profitable for them.
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Your goal is to make it a reasonable profit for them.
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Don't make it all on my back is what I used to say.
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So that's what it is. That's why you'd want to use it, right?
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Again, scalability, you want to get bigger.
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Well, you can't handle it. You don't want to buy that equipment or the equipment's
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not ready. Try to get it some machine manufactured right now.
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You know how long it will take? That's what they're talking about,
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bringing all this manufacturing to the US.
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Yeah, good luck. It's going to take years to get these machines built than to
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get all this stuff in place. But you need it now.
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The idea is hot now and you want to get in on it. Well, you're going to have to give up something.
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And so this is an easy one to give up as long as you're clear.
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So the way this works is a very, very clear contract of expectations.
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Who's going to do what. Okay. So back to my mug example.
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All right. So we're going to bring you mugs and they're going to come in case packs of 12 to a box.
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Okay. They're going to come in palletized to your location. Your job is to open
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those boxes, pull them out, put them in these new boxes, single box,
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maybe bubble wrap them, maybe put something in the inside, something to make
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sure they make it through.
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A lot of mugs, for example, you'll see them use those preformed cardboard,
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that pressed cardboard kind of thing.
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And you got to get all that worked out, which is another issue.
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Lots of these companies though, this is their expertise.
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This is harder than you think designing packaging. Cause I remember we went
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through this and we, the learning curve is a lot harder than you think.
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There's so many things you have to know. You know, what's the weight basis for the cardboard?
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What's this, you know, what color inks, how many, you know, blah,
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blah, blah, blah, blah. What's the run.
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And then, you know, is it inside dimension, outside dimension?
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And then, you know, once you get that, that you test it, you drop it a certain,
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you know, if you were selling on Amazon, you had to drop it.
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I think it was like a four foot test or something like that.
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And then it would break, you know, or it's got to get through the postal system,
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whatever that takes. You got to have somebody who knows what they're doing.
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Most of the time, these packaging companies have done it.
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That's what you get. So you're paying for that. They won't charge you.
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Generally, they don't charge you.
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But what it is, is understand you're paying for them doing their,
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was it 10,000 hours to know how to do that. there's value in that.
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Don't, don't not value that. Don't think that, you know, Hey,
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they're just charging me.
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No, they are spending a lot of money making sure you stay in compliance and you don't even see that.
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It's not very part of the sexy part of the business, but it's super important part of the business.
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So that's a, that's a big piece of it. Okay. So, so think about that.
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So back to that mug, they're going to put that together. They're going to put it in a box.
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The box has printing on it or whatever. They're going to seal it a certain way.
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And they're going to put it in another case pack if they're going to ship it
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for you to distributors or whatever.
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And then they're going to put it in a pallet. They're going to shrink wrap the
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pallet and have it ready to go.
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So that's one step. Now they could take, you could find them to be able to do the shipping.
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They could do fulfillment for you, meaning they could ship single units.
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You're selling on TikTok or Shopify or Facebook.
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You could be selling products and they can be shipping the individuals.
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So when you see, I think about all those people who bought Alex Hermosi's book,
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right? That one, his new book, I bought it.
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It's like everybody else sold a hundred million of them, $100 million money models.
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He used a third party. Actually, he did a video on it. He showed it and he said,
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man, I hope you're going to have enough there. And they, oh,
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we can handle it. Well, no way they could handle it.
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But I got my book within a few days. I'm impressed because it's just so much,
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you know, it was such a big, big order.
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But they had the right packaging. The package it came in was fantastic.
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Clearly the company that did this with him knew what they were doing.
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The cool part there is he trusted them to do that.
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He checked up on them at the old Ronald Reagan thing, trust, but verify.
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He went and verified. He was getting nervous. He wanted to see it so he could,
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you know, with a straight face say, hey, here's what's going to happen.
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You know, we're going to do this for your book, blah, blah, blah, blah, blah.
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And you know what? He delivered on it. And so therefore that packaging company
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he did a great job and I applaud them.
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Not easy, but they fulfilled the individual book to me. Plus they were sending
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pallets of books to other people who bought thousands or whatever.
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So that's a good example.
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So what you want to do though, is you want to really think about all those costs.
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You want to go through it. When I used to go to a company, I would say to them,
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okay, here's what I need is I need this coffee mug in a box.
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On a pallet, in a case pack, ready to go.
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So, you know, me on the other side who is building this out for cost,
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I'm immediately saying, okay, I'm going to have to receive Steve's products,
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right? So there's going to be a charge for unloading that truck because it doesn't
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magically unload, right?
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You got to take in, even if it's just a couple pallets, believe it or not,
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it was, you know, maybe a gross 144 mugs on a thing.
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Somebody has to, you know, open the door, meet the driver, unload it,
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bring it over there. Then there's going to be a cost to unpackage it, right?
00:12:59.975 --> 00:13:02.775
And they'll do time studies, really good companies will do time studies,
00:13:02.795 --> 00:13:04.375
or they'll have an average of what it is.
00:13:04.435 --> 00:13:06.655
They have something they do similar, they'll use that as an estimate.
00:13:06.695 --> 00:13:11.155
But somebody at one point took the time to see how long it takes to unbox that box.
00:13:11.915 --> 00:13:14.575
Not only do they unbox it, then they're going to have some that are broken.
00:13:14.975 --> 00:13:17.795
So you got to know that, you know, there's going to be a percentage that are
00:13:17.795 --> 00:13:20.615
going to be broken already or by them.
00:13:20.915 --> 00:13:23.855
So you want to say, hey, I need you to inspect the.
00:13:26.453 --> 00:13:30.953
What do you want me to inspect? Well, these 10 points, you might give them a checklist to check off.
00:13:31.293 --> 00:13:34.453
Well, guess what? There's a cost to that. Okay. Again, it's time.
00:13:35.033 --> 00:13:38.253
And what if it doesn't, it fails.
00:13:38.833 --> 00:13:41.673
Now, all of a sudden they've got a shift in there. They're ready to process
00:13:41.673 --> 00:13:44.593
your stuff and they call you and they say, Hey, Steve, your stuff isn't good.
00:13:44.773 --> 00:13:48.433
You said you wanted this. It's the logo's backwards, right? Or my wife ordered
00:13:48.433 --> 00:13:51.853
a mug for me once and one side was printed. The other side wasn't.
00:13:52.173 --> 00:13:55.373
And it's like, oh, you know, so they got to stop.
00:13:55.593 --> 00:13:58.633
Well, guess what? there's going to be a charge for that. That's not an unreasonable
00:13:58.633 --> 00:14:02.293
charge. They won't charge you usually the full shift, but you're going to pay
00:14:02.293 --> 00:14:03.453
for something because there's a delay.
00:14:03.613 --> 00:14:06.833
We're back into that delay phase. So again, have those communications up front.
00:14:06.833 --> 00:14:09.813
So when it does happen, because it will happen, things will go wrong.
00:14:10.473 --> 00:14:14.773
You're not, you know, that expectations you're managing, you know what you're going to get hit with.
00:14:14.953 --> 00:14:18.313
And for me, I always had to manage up because, you know, telling bad news,
00:14:18.513 --> 00:14:21.453
you know, is never easy and nobody liked it.
00:14:21.573 --> 00:14:24.433
So, you know, I would always have an answer beforehand because,
00:14:24.633 --> 00:14:26.713
you know, you don't want to give them just the bad news and you want to give
00:14:26.713 --> 00:14:28.373
them a solution and here's what it's going to be.
00:14:28.453 --> 00:14:31.093
Here's what's likely going to cost, all that stuff, because those are reasonable
00:14:31.093 --> 00:14:33.073
things that any boss is going to ask of you.
00:14:33.653 --> 00:14:36.513
But back to it. So that bill of materials, so you're going to want to think
00:14:36.513 --> 00:14:40.773
about, they're going to do all those steps. Now they're going to open each of these boxes.
00:14:41.353 --> 00:14:45.013
They're going to pull them out and they're going to put them into whatever system.
00:14:45.113 --> 00:14:47.333
Let's say they put it on their line and now they go down the line.
00:14:47.613 --> 00:14:49.873
Well, somebody else has to pick up those boxes.
00:14:50.333 --> 00:14:54.833
They have to cut those boxes down, fold them, put them into their baler,
00:14:55.293 --> 00:14:57.453
right? And then they got to get rid of them. Well, guess what?
00:14:58.053 --> 00:15:00.933
Unless you do enough cardboard, you pay to get rid of it.
00:15:01.733 --> 00:15:05.713
Even if they got paid to have it picked up, which you used to,
00:15:05.793 --> 00:15:07.753
it's very difficult now, it doesn't go to China anymore.
00:15:08.033 --> 00:15:10.953
You still have to pay somebody to put it in the baler.
00:15:11.073 --> 00:15:14.173
And then if you ever used a baler, then you have to put that wire around it.
00:15:14.313 --> 00:15:16.333
It's labor. Again, this is all cost.
00:15:16.673 --> 00:15:20.633
And you should be expecting to pay for this. And a lot of times they'll just
00:15:20.633 --> 00:15:23.433
call in an overhead charge, but these costs are built into it.
00:15:23.513 --> 00:15:26.313
So you want to be real clear who's going to handle it. Does it include getting
00:15:26.313 --> 00:15:27.413
rid of the extra packaging?
00:15:28.033 --> 00:15:30.293
Okay. Now, since it came in on a pallet.
00:15:30.963 --> 00:15:33.363
If they can reuse the pallet, I would ask that question, wait,
00:15:33.443 --> 00:15:34.403
it's coming in on a pallet.
00:15:34.703 --> 00:15:37.423
Why are you charging me for a pallet? It's normal for them to charge you for
00:15:37.423 --> 00:15:39.463
a pallet and pallet costs 12 bucks.
00:15:40.003 --> 00:15:42.463
They're not going to use used pallets. They're not going to tell you they use
00:15:42.463 --> 00:15:43.743
used pallets, even though a lot of them do.
00:15:44.103 --> 00:15:46.343
They're going to say they buy them. And you'll see those companies,
00:15:46.503 --> 00:15:49.343
those pallet companies that send giant truckloads of brand new pallets.
00:15:49.663 --> 00:15:53.483
That's what most companies get. In these world, they would. They'd bring it
00:15:53.483 --> 00:15:56.723
in and you would pay for it, 12 bucks, what we used to pay for a pallet.
00:15:57.103 --> 00:15:59.863
But what if I'm bringing in pallets and I'm having them go out the same way?
00:15:59.863 --> 00:16:00.963
You can ask that question.
00:16:01.123 --> 00:16:05.383
That is not an unreasonable question. But remember, it's 12 over 144 units.
00:16:05.483 --> 00:16:08.503
So you want to be really careful where you're going to split hairs because you
00:16:08.503 --> 00:16:10.623
want to make it win-win, right? This has to be win-win.
00:16:10.803 --> 00:16:14.083
So $12 on 144, it's worth saving.
00:16:14.643 --> 00:16:18.963
But if you can only get 50% of the pallets, I mean, and depending on how it's shipped.
00:16:19.343 --> 00:16:23.003
Okay. So anyway, back to it. So now all of a sudden they're going to take and
00:16:23.003 --> 00:16:25.463
open it up, put it on the line. Now they're going to use the packaging.
00:16:25.663 --> 00:16:27.323
You are going to pay for that packaging.
00:16:27.743 --> 00:16:29.683
Now here's the good news and the bad news.
00:16:30.123 --> 00:16:33.923
If it's standard packaging and they do package other mugs for other people,
00:16:34.103 --> 00:16:36.363
you should be able to take advantage of their pricing.
00:16:36.563 --> 00:16:40.323
They're buying it, you know, the standard packaging to protect mugs for,
00:16:40.443 --> 00:16:43.063
you know, 10 other customers and they're buying it by the millions,
00:16:43.223 --> 00:16:45.443
man, you can get in on that. That is a huge opportunity.
00:16:45.803 --> 00:16:48.323
That's a, you could, you know, a lot of times, believe it or not,
00:16:48.383 --> 00:16:51.883
you can actually save some of their costs, almost all their costs sometimes
00:16:51.883 --> 00:16:54.743
because they're, you know, you might've been paying three bucks to box that.
00:16:54.903 --> 00:16:57.243
They might be paying 70 cents.
00:16:57.503 --> 00:17:02.083
It could be that different. It's not hard to get different when you're buying
00:17:02.083 --> 00:17:03.483
so much material, right?
00:17:04.183 --> 00:17:07.583
But if not, you're paying for it, right? And so you want to be clear, who's paying for it?
00:17:07.923 --> 00:17:10.283
Where are they getting it? How much are they paying for it? That's what the
00:17:10.283 --> 00:17:11.223
bill of materials is for.
00:17:11.303 --> 00:17:15.983
Because if you know they're paying 75 cents for that piece of pressed board,
00:17:15.983 --> 00:17:16.943
where's the price break?
00:17:17.043 --> 00:17:19.823
And these are the conversations, again, I would be having with that manufacturer
00:17:19.823 --> 00:17:21.943
say, hey, when do you get a price break?
00:17:22.383 --> 00:17:28.143
Well, we buy these by the thousand, but their next level is 10,000. Well, what's it go down?
00:17:28.543 --> 00:17:32.443
Oh, it goes from 70 cents down to 65 cents. Oh, okay, great.
00:17:32.803 --> 00:17:36.503
And then you can kind of plan that out because you want to build your model
00:17:36.503 --> 00:17:38.603
to have optimization if it takes off.
00:17:38.943 --> 00:17:42.283
If it doesn't take off, you're probably going to be looking at that line and
00:17:42.283 --> 00:17:45.003
say, hey, like I said, my old company used to be, it's going to be a million
00:17:45.003 --> 00:17:47.903
dollars, Steve, or we're just not going to do it. It's just not worth it for us.
00:17:48.223 --> 00:17:51.523
And so you want to be thinking that way. But getting into these conversations
00:17:51.523 --> 00:17:55.723
and really being honest with that company, you're not trying to nickel and dominate.
00:17:55.823 --> 00:17:57.363
You're not trying to say, hey, give it to me cheaper.
00:17:57.503 --> 00:18:00.923
You're just saying, hey, if we can get to this level, you're going to get a
00:18:00.923 --> 00:18:02.963
price break. I want that price break.
00:18:03.323 --> 00:18:07.343
And I would ask for the whole nickel because they're marking up your product anyway.
00:18:08.223 --> 00:18:13.163
They're marking that 70 cents up by their margin. Well, now they can mark 65
00:18:13.163 --> 00:18:15.443
cents up by that margin. So they're still making money.
00:18:16.290 --> 00:18:19.850
And I just, I don't want them to make, I want that nickel.
00:18:20.090 --> 00:18:22.310
You know, that's a game of nickels. But, you know, if you could save a nickel
00:18:22.310 --> 00:18:25.450
here, a nickel there on something that's only a couple of bucks, it adds up.
00:18:25.730 --> 00:18:29.650
So in that scenario, you know, who's paying for that interior package?
00:18:29.790 --> 00:18:30.930
Who's paying for the boxes?
00:18:31.370 --> 00:18:35.710
Boxes are a big deal. Boxes are a lot harder to get quality boxes.
00:18:36.110 --> 00:18:40.430
Printed quality boxes are so expensive unless you're buying volume.
00:18:41.030 --> 00:18:45.090
And volume is relative. The printers have gotten smaller. There are machines.
00:18:45.250 --> 00:18:47.290
I was watching a company. they had a machine they had rolled,
00:18:47.430 --> 00:18:50.870
cardboard would go in the end, and it would cut it based on the product.
00:18:51.370 --> 00:18:54.650
And it would make a unique box for each item. And it was pretty quick.
00:18:54.930 --> 00:18:58.510
And then it would print on the side. So they didn't buy printed boxes because
00:18:58.510 --> 00:18:59.910
they used barcoders now.
00:19:00.170 --> 00:19:03.610
And these new printers that'll print on these boxes are amazing.
00:19:03.850 --> 00:19:08.750
You might be able to get away with boxes that aren't printed and then have something
00:19:08.750 --> 00:19:11.030
printed right on the side. It's not that expensive.
00:19:11.310 --> 00:19:15.190
You do have to say where it was made. So if it's made in the US in this scenario, that's easy.
00:19:15.590 --> 00:19:18.830
If it's coming from overseas, it's already going to say made in China or India or wherever.
00:19:19.330 --> 00:19:24.670
But that's another place you can save money because blank boxes are way cheaper than printed boxes.
00:19:24.930 --> 00:19:28.330
The next thing to think about too is, again, you got what gauge box,
00:19:28.430 --> 00:19:29.330
what's going to support that?
00:19:29.410 --> 00:19:32.550
What's going to keep that to make it to that customer in perfect condition,
00:19:32.670 --> 00:19:33.790
right? They're going to help you with that.
00:19:34.410 --> 00:19:37.470
Those costs will vary. And then the size of the box matters.
00:19:37.650 --> 00:19:42.350
Back to my frying pan, they have taken and really squeezed out every square
00:19:42.350 --> 00:19:45.290
inch that they could. They've got it down to as small as possible.
00:19:45.510 --> 00:19:47.930
And the way they had the handle, and it was brilliant. I mean,
00:19:47.990 --> 00:19:51.430
it was really well done. I mean, just super impressive. And I saved it because
00:19:51.430 --> 00:19:52.750
I just thought it was so impressive.
00:19:52.930 --> 00:19:55.050
When you see something like somebody realized they could save,
00:19:55.170 --> 00:19:56.770
hey, I could shave another, you know.
00:19:57.376 --> 00:20:01.356
20% off the cost of this. If we do this, great, let's do it.
00:20:01.996 --> 00:20:05.616
So back to that, that cost of goods, that bill of materials,
00:20:05.896 --> 00:20:07.716
who's paying for the boxes, right?
00:20:07.956 --> 00:20:10.456
Then you got to start thinking about, okay, then you got a case pack.
00:20:10.636 --> 00:20:11.896
Who's paying for that case pack?
00:20:12.416 --> 00:20:16.736
Super important. Again, it's the interior size. Ask me how I know because I've
00:20:16.736 --> 00:20:17.816
ordered the wrong boxes before.
00:20:18.096 --> 00:20:20.996
But again, a good company is going to help you know all that stuff.
00:20:21.236 --> 00:20:24.076
And then you also have to, so if you were selling on Amazon,
00:20:24.296 --> 00:20:27.036
the box size matters, weights matter, all that stuff matters.
00:20:27.376 --> 00:20:31.276
If you're selling, if you're shipping, the shipping size really can matter.
00:20:31.396 --> 00:20:33.936
If you're selling, you're sending directly to clients, that will matter.
00:20:34.176 --> 00:20:39.076
It doesn't have to be the same box that goes to a client, an individual buying
00:20:39.076 --> 00:20:43.516
a coffee mug, as opposed to the ones that's going on Hallmark shelves,
00:20:43.716 --> 00:20:44.736
if Hallmark's still in business.
00:20:45.176 --> 00:20:47.876
You still want a nice box, but it's way different, okay?
00:20:48.016 --> 00:20:51.416
But knowing that, whatever you're going to do, that all gets broken out in your
00:20:51.416 --> 00:20:56.476
bill of materials and having that all outlined and who's paying for what, being real clear.
00:20:56.976 --> 00:21:00.056
And then you're going to pay for labor, okay? And the thing that you're going
00:21:00.056 --> 00:21:02.416
to understand about labor is there's going to be a markup, right?
00:21:02.516 --> 00:21:05.856
So it's not, I always tell everybody, it's about 25% more than the hourly rate
00:21:05.856 --> 00:21:07.396
you're paying somebody, okay?
00:21:07.416 --> 00:21:11.496
So if you're paying somebody, you know, $20 an hour, you've got to figure it's
00:21:11.496 --> 00:21:14.996
$25 an hour, okay? Because you've got benefits. Well, what are their benefits?
00:21:15.176 --> 00:21:17.736
Well, you know, you got to pay Social Security and they got to pay Medicare,
00:21:17.736 --> 00:21:19.776
but they also have to pay workman's comp.
00:21:19.996 --> 00:21:24.396
They also have to give them vacation. They also have to, you know,
00:21:24.736 --> 00:21:28.196
bring them lunch on Fridays because, you know, we want to keep morale high or
00:21:28.196 --> 00:21:31.996
whatever that's cost and you want them to be happy and you want them to enjoy
00:21:31.996 --> 00:21:32.896
your, you're going to pay it.
00:21:33.056 --> 00:21:38.196
So just understand it. So usually 25% more before margins, and then you're going
00:21:38.196 --> 00:21:40.816
to roll all that up and then they're going to put their margin in there.
00:21:40.896 --> 00:21:44.856
And usually it's a percentage of that total expense, you know,
00:21:45.136 --> 00:21:48.956
what you want to shoot for what's reasonable, you know, how much do you want
00:21:48.956 --> 00:21:50.256
to make in your business? Net income.
00:21:51.696 --> 00:21:55.836
We used to say, we'd love to get to 15%. Okay. So if they're going to mark it
00:21:55.836 --> 00:22:01.596
up at 15% on the tail end of it, and they got everything loaded in there, you can't complain.
00:22:01.716 --> 00:22:03.896
That's a pretty good rate. You're not going to see that.
00:22:04.296 --> 00:22:08.076
You're going to see 25 to 50%. You watch. That's what you're going to see.
00:22:08.296 --> 00:22:11.376
And that's a starting point. But that's the thing, again, you can negotiate
00:22:11.376 --> 00:22:14.356
that to say, hey, when we get to certain levels, where are those price breaks?
00:22:14.496 --> 00:22:17.656
Because for them, setup and cleanup costs.
00:22:17.916 --> 00:22:20.596
So they're going to build that all in, all that setup and cleanup costs.
00:22:20.596 --> 00:22:27.156
Well, setup and cleanup, if you're doing 100 versus 1,000, might be the same cost, right?
00:22:27.296 --> 00:22:30.316
It might just be throwing away some extra boxes, but we've already accounted for that.
00:22:30.496 --> 00:22:33.276
But the setup was still the same. Okay, cool.
00:22:33.716 --> 00:22:37.256
You're filling water jugs and you're putting, everything's a gallon jug.
00:22:37.756 --> 00:22:43.056
And 100 jugs, you got to still put the right amount of weight or liquid in there.
00:22:43.196 --> 00:22:46.376
Usually it's by weight, but they have to get that in that jug.
00:22:46.656 --> 00:22:49.036
The viscosity will tell them. And then they're going to set it up.
00:22:49.036 --> 00:22:51.716
Well, they can just bang out a thousand on them. That's just a machine that's
00:22:51.716 --> 00:22:53.136
cranking X number per hour.
00:22:53.276 --> 00:22:56.636
You know, it's an extra two hours as opposed to that setup fee.
00:22:57.076 --> 00:22:59.996
So it's super reasonable to understand all that stuff.
00:23:00.496 --> 00:23:04.476
And when you're having those discussions, again, I talked about this on the
00:23:04.476 --> 00:23:08.216
last episode, you really want to have, you know, that future discussion.
00:23:08.396 --> 00:23:12.236
Hey, okay, this is the cost for now. What are ways we can get that cost down?
00:23:12.996 --> 00:23:16.096
Well, if you got big enough, we could do this, Steve. Okay, great.
00:23:16.656 --> 00:23:20.716
I store that, I write it down. And then what I do is communicate to say,
00:23:20.836 --> 00:23:23.996
hey, when I'm watching sales, you know, when I see sales going up to certain
00:23:23.996 --> 00:23:26.996
levels, those are like strike points or trigger points.
00:23:27.676 --> 00:23:31.836
Hey, if we order, you know, an extra thousand of these this year at the same
00:23:31.836 --> 00:23:34.056
time, or we had one we were making, it was seasonal.
00:23:34.436 --> 00:23:36.676
And they were like, hey, if you can get this made in December,
00:23:36.936 --> 00:23:40.316
our guys are slow, you know, blah, blah, blah. And it's like, oh, Oh, okay.
00:23:40.516 --> 00:23:44.616
Well, let's do that because we can get that in and we didn't have to pay a premium
00:23:44.616 --> 00:23:48.316
for those services and we didn't have to compete against other companies that
00:23:48.316 --> 00:23:49.716
were in their manufacturing line.
00:23:49.836 --> 00:23:52.956
That's another big thing to think about, okay? Because they're packaging for
00:23:52.956 --> 00:23:56.236
other people. You're not the only customer because you're using a contract packager, right?
00:23:56.916 --> 00:24:00.896
So think about that as you're walking through, have that conversation and then
00:24:00.896 --> 00:24:02.396
anticipate where you can save.
00:24:03.219 --> 00:24:06.519
Be real clear. Look, I want to squeeze this cost down. I want you to make your
00:24:06.519 --> 00:24:09.719
money, but I want to squeeze this cost down so we can remain competitive.
00:24:10.279 --> 00:24:13.119
Think about my Sri Lanka story. You can use it. Honest to God,
00:24:13.199 --> 00:24:18.639
$150 per employee per month, or, you know, and they had 300 employees.
00:24:18.839 --> 00:24:22.899
It would be the same as eight U.S. employees, the whole year pay. Eight.
00:24:23.479 --> 00:24:26.599
So you think about that. How are you going to compete against that? Well, it's automation.
00:24:26.919 --> 00:24:29.279
It's, you know, packaging. It's all the different things, the freight coming
00:24:29.279 --> 00:24:32.019
over and all that junk. But still, you've got to figure that out.
00:24:33.379 --> 00:24:36.139
Scalability is another place you're going to save once you get to a certain
00:24:36.139 --> 00:24:38.919
size and then specialized services again i talked about
00:24:38.919 --> 00:24:43.299
that with you know if it was an epa facility so pharmaceutical pesticides
00:24:43.299 --> 00:24:46.119
certain chemicals lots of chemicals most chemicals are
00:24:46.119 --> 00:24:49.159
going to be they usually have to if they have to be registered with
00:24:49.159 --> 00:24:55.019
epa then you have to be really careful and use an epa rated facility okay they're
00:24:55.019 --> 00:24:58.639
special and then your insurance is going to be because you have epa products
00:24:58.639 --> 00:25:02.199
you got to be really careful with that so anything you can get rid of and get
00:25:02.199 --> 00:25:04.859
it out there and you can have the compliance done by a third party,
00:25:04.959 --> 00:25:06.139
your insurance company is going to like that.
00:25:06.239 --> 00:25:09.479
That's going to be helpful because that's less dangerous machines you have in
00:25:09.479 --> 00:25:10.859
bikes, you know, all that kind of stuff.
00:25:11.499 --> 00:25:15.399
So lastly, then I wanted to talk about, oh, two more things.
00:25:15.539 --> 00:25:18.059
So prepping and all that kind of jazz, storage.
00:25:18.819 --> 00:25:22.619
Who's going to store it? If you can negotiate in free storage for a certain
00:25:22.619 --> 00:25:25.439
period of time, you know, most of these places have warehouses,
00:25:25.719 --> 00:25:27.439
but a lot of them don't have a lot of space.
00:25:27.759 --> 00:25:30.739
So they'll say, hey, we'll give you, you can have it here. It's going to take
00:25:30.739 --> 00:25:36.099
us, you know, 60 days to process and we can, you got to have it out of there 30 days after.
00:25:36.319 --> 00:25:39.239
Okay. So you've got to, you know, figure out in your supply chain,
00:25:39.399 --> 00:25:42.119
how much, you know, build in all that, that, that schedule.
00:25:42.319 --> 00:25:45.539
But if you can get that extra month, you can negotiate. That's a place you can
00:25:45.539 --> 00:25:48.379
negotiate. Hey, what would it take for you to hold it for another 30 days?
00:25:48.839 --> 00:25:51.119
That's a place to negotiate. You don't need to get a better price,
00:25:51.259 --> 00:25:52.999
but you don't have to get it all out.
00:25:53.239 --> 00:25:56.659
And therefore you are saving. So you are getting a better price because they're
00:25:56.659 --> 00:25:57.719
going to charge you for storage.
00:25:58.279 --> 00:26:02.459
So think about that. That's a place you can save money. You're not dipping into their pocket.
00:26:02.759 --> 00:26:06.599
If they have empty space, that's great, but just don't expect that.
00:26:06.719 --> 00:26:08.079
You should pay for that space.
00:26:08.279 --> 00:26:13.119
And I'm seeing, I think as low as I've seen is like $15 a pallet per month is
00:26:13.119 --> 00:26:15.899
not an unusual cost. I've seen, that's at scale.
00:26:16.159 --> 00:26:19.519
I've seen, well, actually I did see $6 a pallet and that was somebody who had
00:26:19.519 --> 00:26:25.419
just one of those old ridiculous factories in Detroit, but $25 for those things.
00:26:25.599 --> 00:26:29.499
So, you know, if you can save and you're doing, you know, was 24 pallets on
00:26:29.499 --> 00:26:31.679
a truck, you know, that's a lot of money each time.
00:26:32.459 --> 00:26:36.499
And the last thing I want to talk about here is the cost plus model,
00:26:36.939 --> 00:26:41.019
which I a hundred percent recommend, which is basically give me that bill of
00:26:41.019 --> 00:26:43.139
materials and that plus is their profit.
00:26:43.259 --> 00:26:46.339
So we know exactly what it is, because if I can save money on this box,
00:26:46.499 --> 00:26:50.279
you're going to supply boxes and you're paying a dollar, if I can get them for
00:26:50.279 --> 00:26:53.859
50 cents, I want to use my boxes, but I want to save or I want that dollar out.
00:26:55.009 --> 00:26:57.569
The good news is it's the dollar plus the margin on that dollar,
00:26:57.689 --> 00:26:59.249
but that's Steve's negotiation.
00:26:59.729 --> 00:27:03.429
Or do you want to pay a flat fee? So a lot of companies will charge you,
00:27:03.809 --> 00:27:05.449
hey, it's going to cost you $6 a unit.
00:27:05.869 --> 00:27:08.889
Okay. When you're starting out and you're only going to do a couple hundred
00:27:08.889 --> 00:27:12.529
units, that's probably the easiest way to do it because you want to use the
00:27:12.529 --> 00:27:14.949
most generic boxes you can when you get started, right?
00:27:15.029 --> 00:27:19.089
Unless it's part of the retail, you know, part of the experience like an Apple,
00:27:19.309 --> 00:27:21.549
you know, you open up one of those Apple boxes and they are incredible.
00:27:22.489 --> 00:27:26.709
Most things, though, that I get anymore almost all come in a plain brown box
00:27:26.709 --> 00:27:27.689
and they have a name on it.
00:27:27.949 --> 00:27:31.429
It's expected. So, you know, just think that through. Unless you're doing high-end
00:27:31.429 --> 00:27:34.209
products, this is a place to start. You're just trying to ship it.
00:27:34.369 --> 00:27:37.749
Seth Godin used to say that. Just ship it, right? Just get that out so you can
00:27:37.749 --> 00:27:39.249
test the market to see if it's there.
00:27:39.489 --> 00:27:42.809
So paying per unit is probably the best way. So, you know, your cost of goods
00:27:42.809 --> 00:27:45.929
is, you know, raw materials was, you know, three bucks.
00:27:46.109 --> 00:27:50.089
And now you got $6 in packaging, you know, processing ready to go.
00:27:50.449 --> 00:27:53.649
Then plus freight, there's your landed cost of goods.
00:27:54.049 --> 00:27:57.029
Now you can build in your marketing cost. You can build in your margin and see
00:27:57.029 --> 00:27:58.069
if you can make money at it.
00:27:58.169 --> 00:28:01.069
And then you've got to see what your retail price. This is the best way to do
00:28:01.069 --> 00:28:03.349
it. It's the easiest way to do it. How much per unit?
00:28:04.255 --> 00:28:06.815
Sometimes they'll also charge you by the job. Hey, it's, you know,
00:28:06.895 --> 00:28:10.215
for me to run my crew in here, it's going to be, you know, 500 bucks a day plus
00:28:10.215 --> 00:28:12.235
cost of materials. Ooh, okay.
00:28:12.655 --> 00:28:15.675
Well, now how much can you process? Right? So you can do that math and you can
00:28:15.675 --> 00:28:21.095
say, well, you know, $500 a day doesn't sound unreasonable if you can process 50,000 units.
00:28:21.375 --> 00:28:24.575
I mean, sounds like a great deal. What if they can only process 20 units a day?
00:28:24.715 --> 00:28:27.475
Well, that's a problem, you know? So knowing all those things,
00:28:27.575 --> 00:28:31.435
but again, my, the, the real one you want to get to is cost plus model,
00:28:31.675 --> 00:28:34.215
but don't be surprised up front that you do a flat fee.
00:28:34.475 --> 00:28:37.955
It's easier for you. It's easier for them. They're going to go through and look
00:28:37.955 --> 00:28:40.855
at what their real time it took versus what they estimated.
00:28:41.095 --> 00:28:44.535
If they're a decent company, which there's so many great companies out there,
00:28:44.675 --> 00:28:45.915
they have all this modeled out.
00:28:46.195 --> 00:28:49.295
They'll compare what they thought it would take versus what it is taking.
00:28:50.055 --> 00:28:54.295
And if they're honest with you, they'll tell you. Most of the time they won't.
00:28:54.415 --> 00:28:57.035
But if you can figure it out, you can then say, hey, wait a second.
00:28:57.075 --> 00:29:00.455
You said it's going to take you two hours to do this. You're getting it done in 20 minutes.
00:29:00.895 --> 00:29:05.035
Hey, you know, let's talk about saving some, you know, when we get to that cost
00:29:05.035 --> 00:29:07.075
plus model, let's get that cost down.
00:29:07.615 --> 00:29:12.655
So lots of words, lots of different things to think about, but this is an important one.
00:29:12.895 --> 00:29:16.415
And if you're starting something, move it out. Don't bring it in-house.
00:29:16.695 --> 00:29:19.435
Pay the extra fee. Let somebody else worry about those headaches.
00:29:19.555 --> 00:29:20.755
You've got all these other headaches.
00:29:21.115 --> 00:29:28.835
Hold them to a standard. Get this agreement up front, be real clear on who's expected to do what.
00:29:29.275 --> 00:29:33.775
Really clear on what your role and what their role is going to be.
00:29:34.115 --> 00:29:38.155
Again, I would always say I want it in a box, on a pallet, shrink-wrapped,
00:29:38.255 --> 00:29:41.055
ready for my shipper to come and pick it up. We'll pay for shipping.
00:29:41.235 --> 00:29:43.695
That was always the way we did it because then it was clean.
00:29:43.915 --> 00:29:47.495
It was just easy to know, all right, there's our full cost. We know exactly
00:29:47.495 --> 00:29:49.735
what it is. On a pallet, ready to go.
00:29:50.315 --> 00:29:52.995
Labels or whatever. So again, all that stuff would be included.
00:29:53.415 --> 00:29:54.975
So hopefully that's helpful to you.
00:29:55.195 --> 00:29:57.715
You know, reach out to me if you have questions or if you have a specific example
00:29:57.715 --> 00:29:59.375
you need help with, I'd love to help you.
00:29:59.755 --> 00:30:05.215
It is just so easy to let this stuff go and then say, Hey, it's on them.
00:30:05.395 --> 00:30:07.755
No, no, no. This is your product. It's on you.
00:30:08.215 --> 00:30:12.155
And you really, really want to pay attention to this stuff, but the right partner,
00:30:12.375 --> 00:30:15.555
man, this could be such a great piece of your business when you know it's handled.
00:30:15.675 --> 00:30:20.715
Back to the Alex Ramosi book, that book came perfectly packaged on time and
00:30:20.715 --> 00:30:22.195
he didn't have to sweat the details.
00:30:22.435 --> 00:30:27.595
He had to sell the book and he, he, man, he sold the book, but that's what it's a good example.
00:30:27.915 --> 00:30:34.235
So Steven Peterson, you can reach me at Steven at find your source.pro Steven
00:30:34.235 --> 00:30:37.795
at find your source.pro ask a question or leave a message in any of the places
00:30:37.795 --> 00:30:39.475
where all the podcast is put out there.
00:30:40.075 --> 00:30:42.675
Can't wait for the next lesson. It's going to be exciting.