How do you manufacture profitably in San Francisco?
Posted on April 3, 2011
The conventional wisdom seems to be that all manufacturing is moving to third-world countries, right? Maybe if you follow conventional wisdom but renaissance innovators may think otherwise. Timbuk2.com, a San Francisco startup (well, it used to be in mid-90s, it is pretty big now) proves this rule wrong by having a highly successful manufacturing business right in down-town of the most expensive US city. How do they do this?
Timbuk2 offers consumers trillions (yes, you read this right, trillions) of different bag designs, all made-to-order and shipped within a couple of days and arriving to your home within a week (try doing this from China!). Anyone can select from different bag sizes, styles, dozens of colors for each of three panels which became a trademark of the company, plus a dozen or so other options. While the number of options may not sound like a lot, they add up to an incredible number of different bags. When I heard about this company I knew I had to write a case about it which is now taught to MBA students at INSEAD, Wharton, Stanford, Columbia and other business schools. Timbuk2 implemented in the luggage industry what Dell did in the computer industry: produce custom-made bags to order, i.e., after getting money from the customer, quickly. This requires super-efficient productions processes which are hard to implement without limiting customization in a smart way. This example demonstrates a unique feature of the renaissance innovation: it can often be transferred from one industry to another.
Essentially, Timbuk2 assembles a bunch of pre-stocked parts according to consumer specification but it does not allow customization of anything that would unnecessarily complicate the production process (the labor contents of every bag is only 30 minutes!). This approach ensures that cost is not too high, but the price premium of customized bags more than compensates for not being able to produce in China. These bags are great (I have three) but they do cost a fortune. Interestingly, you can also buy a “standard” bag from many retailers which costs much less and is often produced in China but it is NOT customized, of course. But the key idea of the business model innovation here is the same as in many other renaissance innovations: the risk in producing such a large variety of products to forecast would be huge, so Timbuk2 changes the risk-return trade-off by producing to order, but the company pays for this by staying at an expensive location. Check out their latest carry-on roller bags, they are great!