Domestic Exports
Contract manufacturer Lou-Rich, Inc. takes a unique approach to exporting opportunities.
BY DOUG OLSON
Doug Olson, business development manager at Lou-Rich, Inc.
As with any contract manufacturer, our strength is our ability to meet the needs of a variety of different customers. We make products for the agriculture, medical and food services markets, from MRI and X-ray equipment to single level components, to custom meat processing equipment to commercial ice machines.
On first impression, contract manufacturing and exporting seemed to me like oil and water. They just didn’t seem to mix. When I first attended ExporTech’s threeday seminar last fall, my initial goal was to accommodate a request from a major customer. They had come to us and said that they wanted us to start shipping products directly to their Russian facility. So going into ExporTech, which focuses on developing a plan for international growth, my goal was simply to learn how to ship product to Russia.
Over the course of the ExporTech training, my view of exporting shifted entirely. I decided there must be a way for a contract manufacturer like Lou-Rich to profit from exports. So we began mapping a strategy that would work for us.
The Strategy
We first looked at what our customers’ strategies are when they’re going to move their work to a low-cost country. Some of our customers source their work overseas, bring it back to the U.S., assemble their product, and sell it domestically. A second strategy gaining popularity among our customer base is manufacturing in a low-cost country region for distribution in that region. This is often referred to as point-of-use manufacturing.
Our strategy focuses on the second approach and in many ways is a reversal of the typical exporting strategy. Instead of taking the same approach as our customers, our goal is to manufacture foreign OEM products and distribute them to domestic demands—to look for a business outside of the U.S. that wants to sell in the U.S. market. We will take their product, manufacture it for them, and then distribute it throughout the United States to their dealers, becoming in essence their manufacturing hub in the U.S.
To do this, we first had to determine what foreign businesses might consider the U.S. a low-cost country. We started with a list of the top 10 countries in terms of GDP: Brazil, China, France, Germany, India, Italy, Japan, Russia, the United Kingdom and the U.S. First, we eliminated the United States because it is not a foreign country. Next, we eliminated the countries that are considered low-cost in the U.S.: China and India. Though they have products that we could potentially manufacture, they are already major competitors of ours. Then we looked at which of the remaining countries have high exports. Brazil is one of the biggest growing countries as far as their economy, but they aren’t exporting at the same rate as the others, so we crossed Brazil off the list. Finally, we researched the types of products these remaining countries export. Japan and Russia are growing but they don’t export the products that meet our core competencies, so we took them off the list.
In the end, Germany, the United Kingdom, France and Italy made our final list. The weak dollar adds to our concentration on these European countries, because it makes the U.S. look like a low-cost country in their eyes.
Defining the Customer
After deciding which countries to target, the next logical step was to define our ideal customer. First, they must have an established U.S. market, because we don’t want to be the one to introduce a product in the United States. Instead, our target customer already sells products in the United States and might even have a distribution system here, but has no U.S. manufacturing.
The customer’s products should be either commercial or low-volume consumer, because it’s cheaper to go to India and China to get high-volume consumer products made than to go to the U.S.
Our desired product profile is electrical mechanical top-level assemblies. In other words, we want to make the final product that gets sold. We don’t want to manufacture individual components, because then they have to go somewhere else, and if they go somewhere else within the U.S., that usually means they already have a supply base for all of their products. We also don’t think it’s a good fit if we have to ship them back, because we can’t show the cost justification for manufacturing components here and then shipping them back to Europe.
In addition to specific product types, one way for us to secure contracts with foreign OEMs is to pursue projects that require a certain amount of U.S. content. A few years ago, for example, we manufactured components for a bus company in Canada. One of the main reasons they chose us as a supplier was because we added to the U.S. content of the finished product. This allowed them to meet requirements to land U.S. government contracts for urban bussing.
Finally, we decided that each company that we consider must have a growth potential of $3 million in sales in five years. We don’t want to go down the road in establishing a product for a customer if they don’t have the potential to grow.
The Sell
To find these customers without traveling the globe, we decided we need to attend U.S. trade shows in a variety of different markets. Our logic is that if someone from Europe has a display at one of these shows, they want to sell in the United States. So the trade shows will allow us to identify specific companies that fit our desired customer profile.
After narrowing down our search to specific companies, we will research to confirm that they are the right companies to pursue. If they do not have U.S. manufacturers in place, and if they are importing all their products from Europe, we will try to target them.
In convincing a foreign OEM to consider Lou-Rich to manufacture their products for U.S. distribution, there are a few advantages that we highlight. The first advantage is our labor cost. Lou-Rich labor costs are higher than China or India, but less than Europe because of the weak dollar.
The second advantage for customers is reduced inventory. When a ship with a container of finished products is sent across the ocean, all of the money is tied up in those unsold products. But if we manufacture products for the American market here, we can now turn the company’s orders around more quickly because the manufacturing is closer to the customer’s customer. This also reduces lead-times. In short, will be able to react to the customer’s orders more quickly than they could, without having to carry a lot of inventory.
The third advantage is overall flexibility. For most of the products that we manufacture, the time between receiving an order and shipping ranges between four and six weeks. If the customer has changes to its product design, we can implement them in that time frame and introduce the updated version to their U.S. dealerships immediately. But if they have containers coming across the Atlantic Ocean, introduction of those changes will take a lot longer and will be a lot more costly.
Hurdles
Though we are optimistic about our strategy with international customers, we do expect to encounter a few obstacles. One of the biggest selling points for our current customer base, which is largely in the Midwest, is our ability to travel to them to resolve any issues within four to six hours. We lose that advantage when working with customers in Europe.
Another obstacle is the language. Many of these products have been made and sourced over in Europe for a long time, so the prints and much of the technical data are in foreign languages, and now we have to convert them correctly. Many of the parts we manufacture require very tight specifications, and any misinterpretation of that could cause a major failure in the final product.
On a similar topic, everything that comes from Europe is measured on the metric scale. A lot of parts and products in the United States use metric, but most of them are converted from English sizes. For example, I can easily find suppliers for quarter inch thick steel sheets, but I may only find one or two that supply 8 mm steel sheets. In many cases, the customer won’t allow us to convert to the next closest English size. This could be costly if your raw material supply base is limited.
Finally, regulations must remain a top concern, especially when we start distributing the final product to the customer’s U.S. dealers. Product regulations differ from country to country, so we have to be extremely cautious in making sure to cover our bases in following all United States regulations.
Seeing Success
Our European strategy was loosely based on our success with a Canadian company called Jamestown Pellet Stove. We manufacture the company’s stoves complete for them, and we recently established a warehousing system in Albert Lea for all of their products. Upon product completion, we will deliver the finished product to the customer’s distributors and dealers throughout the United States. From there, they will be shipped out to the end customers.
On the flip side, we will also be supplying to Jamestown Pellet Stove in Canada, so we are exporting to them as well. We also handle all of their service part demands through warehousing parts and shipping them daily to all of their dealers and service representatives.
Part of Jamestown Pellet Stove’s marketing strategy is to publicize the fact that its products are 100 percent North American made. Right now, their competitors use Chinese components which have a higher rate of failure. By pushing the message that every component is made in North America, Jamestown Pellet Stove is giving its customers confidence in the quality of its products, which is a huge selling point for them.
I would consider this a case of accidental exporting, because it is an expansion of the work that we were already doing for a customer. But it serves as a model of what we’d like to do with other customers. We would like to establish this same “American Made” marketing strategy with European customers, to give them an edge on their competitors who might also be sourcing components in China.
Last year, Lou-Rich had about $60 million in sales. Over the next three to four years, our goal is to grow our exporting-related sales to about $2.5 million of that total. While it’s not a huge part of our business due to a continuous pool of opportunities with customers here in the United States, we acknowledge that it could turn into a significant percentage of our sales if the dollar continues to be weak. By the same token, we realize that a strengthening of the dollar might make it difficult to realize our strategy. Only time will tell, but you miss 100 percent of the chances you don’t take.
Doug Olson is the business development manager at Lou-Rich, Inc. Doug started working as a mechanical designer on custom equipment at Lou-Rich in 1988. From 1994 to 1999 he worked in the contract manufacturing side of the business as a project engineer. In 1999, Doug was named the engineering manager responsible for all the engineering functions at Lou-Rich, and in 2002 he became the business development manager, adding sales and marketing to his responsibilities. Lou-Rich is a contract manufacturer with more than 300 employee owners (ESOP) and supplies products to several Fortune 500 companies. Doug is on the Albert Lea/Freeborn County Chamber of Commerce Board of Directors and is the current Lead Chair.
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