Section 22 Dependence on outsiders

February 7th, 2013 Leave a comment Go to comments
WINNERS = Products which can be made totally from scratch from several types of materials, in your own facility, and which are not required to fit into existing products, holes, or spaces.

Almost all products depend on outside suppliers for something. They depend on:

  1. The existence or sales of other complementary products. (IE: a cassette deck and an audio cassette).
  2. A supply of critical material, parts, or components.
  3. Outside vendors who supply critical parts or components.
  4. Other companies who provide labor, technical, or professional services.
  5. Ownership of intellectual property, patents, trademarks, licenses etc.
  6. Dimensional and or weight restrictions and criteria when the products have to fit into other products or spaces.

Riordan’s law states: “dependence on outsiders = lack of control of your future”.

Believe me, dependence on outsiders is one of the most vital factors to consider.  In order to properly evaluate the impact of this factor, the evaluator must:

  1. Evaluate the trend of demand of the presently available products upon which the sales of your product will depend. (see trend of demand section).  For example, if you are going to manufacture an audio tape cassette, you will want to evaluate the present demand for audio cassette players.   If demand has peaked and is declining, look out.  You may get your product on the market just in time to watch the demand fizzle out for the product upon which yours depends.
  2. Evaluate the trend of demand of each critical material, part or component you plan to use in the product, before finalizing production drawings and specs.  I have personally witnessed production lines grind to a halt, over the lack of a single component, many times.   Several times at Fortune Five Hundred companies.  The worst possible situation is to have a lot of money invested in inventory, have the entire production run almost ready to go, and then find you are lacking one part and you are unable to ship the product to your customers. You can then kiss your cash flow goodbye.
  3. Look out if the sales of a material or component are slacking off in other markets.  Here’s a sample horror story:Company A produces a custom electronic widget which you plan to use in your product. Company A sells the widget mainly to company B, company C, and you. When you ask company A how many widgets they produce,(in order to be sure they are selling enough of them to assure you that they will be made in sufficient quantities to keep the production line going and the costs down), company A assures you that they produce “100,000 widgets per year, which are delivered all over the U.S.”. Company A further states that they can “ramp up” to meet your needs. What company A doesn’t tell you is that 90,000 widgets go to a single buyer: Company B. And that company B’s facilities throughout the U.S. are the largest users and his only other customer for the product is company C which buys under 10,000 widgets per year.Seeking to expand their market, company “A” gives you good quantity pricing on the otherwise very expensive widgets. They promise to meet all your delivery dates.

    Three months into your production, when you are ready for your next “just-in-time” shipment of assemblies, you get THE CALL from company A. “Sorry, but company B cancelled all orders for the widget, and we can no longer afford to continue making them. Therefore we will have to cancel your shipment.

    Your assembly line stops.

    The same company which today treats you like a king, because you are developing a sunrise market for what they know is a sunset product, can tomorrow give you the kiss of death by discontinuing the critical component once you are the sole customer and when you are depending on it the most. Beware of buying custom components from companies with few customers and few or no other products. Better to take the time to check them out thoroughly than to be caught with maximum money invested in incomplete assemblies. Also, your credibility instantly turns to mush when you become delinquent on your deliveries.

  4.  Evaluate the “projected longevity” of all outside suppliers of critical material, parts, or components. “Projected longevity” is their ability to stay in business for at least one minute longer than the projected product life cycle. Now, here’s some more of the horror story we started earlier.The next phone call you get from company A is to inform you that they have filed for chapter 11 under the bankruptcy code. After the orders from company B stopped, cash flow dried up. Fast! The horror story really reaches full steam with the word bankruptcy. Company A also states that somehow your twenty thousand dollars’ worth of inventory (which you had already paid for) and which they were storing for you, is somehow missing from the warehouse. In disbelief you check to see how much you owe company A from the last shipment of different and separate components they sent you. You find you owe them ten thousand dollars. The way you see it, besides causing your production line to grind to a halt, company A owes you $10,000 for the balance of the missing inventory. However, the way the bankruptcy Judge sees it, the issue of the lost inventory is a different issue from the issue of the ten thousand dollars you owe company A. You cannot “credit or offset” your account for the lost inventory. Nor can you use the lost inventory as recoupment within 90 days prior to the bankruptcy filing date. This is considered “preferential treatment of a creditor”. He orders you to pay the bankruptcy trustee the full $10,000 for the last shipment you received and orders you to file a separate claim with the trustee for the twenty thousand dollars of your inventory that they lost. A claim for which you will be lucky to get ten cents on the dollar, by the time most of the money morally owed to creditors is magically transformed into “attorneys’ fees”. How can the judge let that happen? Some wags say “That’s easy. Most judges were lawyers before they were judges”.

    The moral is always ask for the financials of any person or company upon whom the products success will depend for survival and CHECK THEM OUT. Don’t guess! If there is any doubt, take out a performance bond to assure that you will get paid.

    Another approach to consider, if any of your suppliers of critical materials, components, sub-assemblies or computer software looks flaky, is to have a third party “escrow”, wherein a third unbiased and impartial party holds documents containing trade secrets for manufacturing processes, or source codes for critical software, or signed licensing agreements etc. Then, if your supplier goes “belly-up”, or fails to perform or support you for any other reason, the third party turns over the critical information or intellectual property to you, so that your business is not interrupted or fatally injured. Let Riordan’s law be your guide: “If it looks as though the supplier has even the slightest or most remote chance of failing, treat them as though they will for sure”.

  5. Thoroughly check out “professional” service organizations.  If you are contracting with outsiders to provide service or repair work, be darn sure they understand exactly what you are expecting of them.  Be sure that they will uphold your quality criteria.  They must also have similar “commitment levels” to customer service.  The probability of success of a product that must be serviced is much greater when the service organization is customer oriented and proficient with the product.
  6. Determine ownership of “intellectual properties’ patents, trademarks, and trade secrets involved in making components for your product. I have seen some real horror stories here. Company A took a new product design to an outsider, company B. Company B developed a novel manufacturing process to make the product for company A. Company B patented the process without telling company A. When company A tried to begin manufacturing the product “in-house”, they immediately discovered that it was taking them far longer than when company B made them. Soon company A and company B ended up in court fighting over patent rights and trade secrets. Whenever an outside vendor will be making parts or components you must include a clause in your Agreement which states that any trade secrets and patentable processes derived from your contract with the vendor are your property.

    In another real-life example, a computer chip manufacturer was selling one of my clients thousands of custom, patented, computer chips per month. The chip manufacturer couldn’t keep up with my client’s demand. My client demanded that the chip company have other chip companies manufacture the product until they could keep up with demand on their own. The chip manufacturer refused, citing trade secrets and patent pending processes as the reason.

    Anytime a critical part or component is patented, trademarked or otherwise protected through trade secrets, etc., you had better get a binding written agreement from the owner of the intellectual property which states that in the event the vendor is incapable of delivering the parts or components per the delivery schedule, you automatically become a “licensee” for the time the vendor can not perform. As a “licensee” you can contract with other manufacturers to make enough components to keep you going while the first vendor gets its act back together.

  7. If your product fits into another product, or into an existing space for products similar to yours, the evaluator must evaluate the chances of the manufacturers of those products changing their products so that yours will no longer be compatible.  One way this can hurt you is if the company that makes the product which yours fits into is suddenly acquired or purchased by a parent corporation which may be hostile to your company.  By hostile, I mean a company that makes a product similar to yours, OR WANTS TO.  It may be easy for them to modify their product so that yours no longer works well with it, or they may choose to produce their product with a product similar to yours already built in.  Another critical form of dependence is a weight constraint determined by another product’s ability to support the weight of your product.

The ideal product will be able to have at least three suppliers of each material and component that goes into the product.  Use the Thomas Register of U.S. Manufacturers at  to locate a list of possible vendors.  You will find the Thomas Register in virtually every library, or, you may call your local research librarian and have them look up the information for you. Many people do not realize how valuable a service the “free look-up” by librarians can be. 



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