'You start to ponder': when startling thoughts hit the board, winners and losers hang in the balance.

AuthorSutton, Gary
PositionSUTTON'S LAWS

LET'S MOVE HEADQUARTERS out of the United States," I told the other directors. "It's the patriotic thing to do."

Those strange comments made more sense after I explained.

The business is an optical instrument company in the Los Angeles area. Five years ago we stopped making the stuff here and switched to Chinese manufacturing. Three things happened:

  1. Costs dropped 14%. No surprise there. Usually it's more, but many of the components were already Asian.

  2. Quality improved dramatically. Ooh. That was interesting.

  3. Turnaround time from order to delivery dropped by half. Wow.

Reducing warranty problems, getting more competitive in pricing, and never being out of stock helped us double sales the following year. Before that, we'd struggled to grow 10% to 20% annually. We doubled again the year after and again the year after that. Stronger cash flow and bigger margins let us hire more engineers and the product just got better and better.

We kept engineering and final inspection in southern California.

But when oil hit $150 a barrel, you start thinking sharper. In our case, airfreight started to get painfully expensive and cargo ships looked smarter. (This fuel cost shifted back recently, but the long-term trend is obvious.) There's just one problem with those boats. They're slow. And this puts too much inventory on the water, waiting a couple weeks before inspection approves the batches. That can be costly. Too much bad product can be built before a problem is caught.

Obviously, final inspection needed to move to Hong Kong. Build instruments in mainland China and check them the same day in Hong Kong. Catch problems fast.

As an added benefit, nearly half our orders come from Europe and the Mideast. So, loading product on a ship headed up the Suez Canal makes deliveries happen faster for those key customers than they do now by air. And freight costs drop.

This is straightforward.

But we're a young company. We incurred losses in our early years. Governor Schwarzenegger just rescinded the net operating loss carry-forward, so we're getting taxed higher for the sin of being innovative in California.

You start to ponder. You look at the...

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