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Outsourced All the Way

June 21, 2005
By MATT RICHTEL

SAN FRANCISCO, June 20 - Philip Chigos and Mary Domenico are busy building a children's pajama business. They are refining patterns, picking fabrics and turning the basement of their two-bedroom apartment into an office.
Then there is the critical step of finding the right seamstresses in China.
Instead of looking for garment workers in this city, they plan to have their wares manufactured by low-cost workers overseas. In doing so, they've become micro-outsourcers, adopting a tactic of major American corporations, which are increasingly sending production work abroad.
A growing number of mom-and-pop operations, outsourcing experts say, are braving a host of potential complications and turning to places like Sri Lanka, China, Mexico and Eastern Europe to make clothes, jewelry, trinkets and even software programs.
"We'd love it to say 'made in the U.S.A.' and use American textiles and production," Mr. Chigos said of his product. But, he said, the cost of that would be 4 to 10 times what was planned. "We didn't want to sell our pajamas for $120."
The ability of Mr. Chigos, 26, and Ms. Domenico, 25, to reach across borders has as much to do with technology as it does with the globalization of the labor market.
Computers, the Internet and modern telecommunications already make it possible for start-ups to market their goods to customers anywhere in the country. That infrastructure also enables even the smallest entrepreneurs to find workers tens of thousands of miles away in countries they will never visit and in factories they will never inspect.
They can communicate with those factories cheaply via e-mail and phone, transmit images and design specifications and track inventory.
"It's easier to find people out there on the other side, to monitor them and keep in touch with them," said Ashok Deo Bardhan, an economist at the Haas School of Business at the University of California, Berkeley, whose field is outsourcing.
One result of easy access to cheap manufacturing, he said, is that more American entrepreneurs may be able to turn an idea into a product. The situation "vastly increases the scope of inventors and designers in the West," Mr. Bardhan said.
Just how much work American companies, big and small, send offshore is difficult to measure, and experts have differing views of the effect of outsourcing on economic growth and job loss.
But even as that debate simmers, many of the smallest entrepreneurs are quickly turning to low-cost labor abroad to get their businesses off the ground. Thousands of Web sites have sprung up recently hawking factories in places like Bursa, Turkey, to potential customers like Mr. Chigos.
Outsourcing is "happening at every level, from manufacturing of steel to make cars to software to computer chips to a little lady who make scarves," said Ally Young, who researches outsourcing trends for Gartner, a market research firm. Any job can be sent overseas, she added, "if it can be digitized and you don't need face-to-face interaction, like a haircut."
Even that constraint may be disappearing. Ben Trowbridge, a Dallas consultant to major American companies that hire offshore labor, said that he recently received a request from a psychologist who wanted to hire counselors in India to make follow-up phone calls to his patients.
Offshoring for small entrepreneurs, however, can be rough. Taking advantage of cheap labor means having to navigate language and time-zone differences, complex import regulations and shipping fees and unanticipated problems like the Asian bird flu. And, of course, there are always nagging worries about workmanship and anxiety among some entrepreneurs that the factory they engaged may be a brutal sweatshop.
Beverly A. Lengquist, a real estate agent in Santa Cruz, Calif., ran into many of those problems when she hired a factory in Sri Lanka in 2004 to sew 8,000 decorative cloth covers for water bottles.
After encouragement from friends who liked her cute designs, Ms. Lengquist, 42, turned to the Internet to find a manufacturer.
She searched on Google for terms like "overseas fulfillment" and "manufacturing" and quickly found many prospective partners in Indonesia, Bali and Sri Lanka. She settled on a Sri Lankan company, she said, because it worked with big American textile firms and came highly recommended by an acquaintance with manufacturing experience.
She initially negotiated with the factory owner by e-mail and then met him when he was visiting New York; he promised that he could fill the order quickly. Ms. Lengquist, a horse owner, needed to have the 8,000 bottle holders (which she calls "Bcozies") to sell at the Kentucky Derby in May 2004.
But unexpected problems quickly arose. For instance, the holders were decorated with marabou feathers. But United States customs would not allow feathers originating in Asia to be imported because of the Avian flu. So Ms. Lengquist had to buy the feathers in the United States and ship them to Sri Lanka.
To pay her Sri Lankan manufacturer, she wired the company $13,000, an amount she thought covered shipping costs as well as manufacturing. Then the shipper demanded $4,000 more, which she ultimately paid, but that was not the only problem. When she opened the shipment of holders on her kitchen floor, she found that half of them were too small to fit around water bottles.
Frustrated by the problems, Ms. Lengquist has since decided to use a manufacturing company in Ohio instead. The Sri Lankan company could not be reached for comment.
"The problem had to do with language and culture," Ms. Lengquist said. The manufacturer, she said, did try hard to accommodate her requests, but "just didn't understand the water bottle concept."
She has sold nearly all the holders, which are priced from $10 to $20, through her Web site, bcozy.com, or through retailers. Demand remains strong. She said she recently received an order for 150,000, but she said she could not fulfill an order of that size and the purchaser - whom she declined to name - could not agree on a price.
For some small entrepreneurs like Todd J. Collins, 32, the operator of Irealtymanager.com, a Web site that focuses on property management, outsourcing has been relatively easy. In 2001, Mr. Collins, who is based in Washington, came up with an idea to sell software that would help apartment owners manage their properties.
He turned to Macrotech, a company in Bridgeport, Conn., that hires computer scientists and engineers in Bucharest, Romania, and in Pune, India, a city near Mumbai.
The head of the Bucharest office, Alex Anitei, 27, said that for three years he had worked for many entrepreneurs like Mr. Collins, doing piecemeal software work, including projects as small as building online address books.
E-mail, instant messaging and Internet-based phone services, Mr. Anitei said, allow him to stay in constant contact with clients on other continents. He said he and his staff of six programmers, who work in a three-room apartment in Bucharest, charge hourly rates of $15 to $25 - one-third to one-15th the cost of American software counterparts.
Still, Manish Chowdhary, the president of Macrotech, said the use of offshore labor was not always efficient for the smallest businesses. The big cost savings from outsourcing, he said, are realized over time and by placing large manufacturing orders; if the project is very small, the time and expense of finding an overseas contractor and setting up communications simply may not be justifiable.
Mr. Chigos and Ms. Domenico, though, see foreign workers as crucial to their nascent enterprise. Without them, they said, they would not be able to sell their pajamas for less than $50.
Mr. Chigos, a former commercial real estate agent, found information on the Internet about a trade show for overseas manufacturers that took place in Las Vegas in February. At that conference, he found eight prospective manufacturers, seven in China and one in Mexico, that could make the pajamas designed by Ms. Domenico, a 2001 graduate of the Rhode Island School of Design.
He and Ms. Domenico have sent designs to six of the companies, including the Suqian Pajama Clothes-making Company and the China Worldbest Group Company, and are waiting to receive samples and final price quotes.
Ms. Domenico said she was not sure of the location of Suqian City, which is in Jiangsu Province. "I feel like I'm supposed to know that," she said, laughing.
Once the business is up and running, they hope to hire a freight management company in Richmond, Calif., to receive the shipments, check the merchandise's quality, then send it along to customers. Their business is a virtual one; they have no manufacturing, storefront or warehouse. They plan to market the clothes on the Internet and through boutique retailers.
"With the technology available today, we'll never touch the product," Mr. Chigos said.
Both, however, are concerned about the pitfalls of dealing with a far-flung manufacturer. In her youth, Ms. Domenico did volunteer work for Amnesty International, and she worries that the couple may wind up working with a sweatshop. "It's my biggest fear," she said.
"People in the U.S. won't work for 50 cents an hour," Mr. Chigos countered. "We also recognize that there are people around the world who are happy to work for 50 cents."

posted by Henry @ 10:57 AM