Dog Economics

by BILL WADDELL

There are something on the order of 78 million dogs in the United States - almost 40% of US households are home to at least one dog.  That's a lot of dogs.  Let's say the average dog owner spends $25 a year on toys for the dog - probably a conservative number, but still a big one - almost $2 billion worth of canine paraphernalia.

The problem is that a 'dog toy market' does not exist ... it is an economic/business grouping conjured up from whole cloth by egg-headed theorists.  There are 150+ recognized breeds of dogs.  They come in all sorts of different sizes and temperaments.  Further, people own them for all sorts of different reasons - family pets, hunting, breeding, companionship, service animals ...you name it.  And, of course they are different ages, have owners in different economic circumstances, and owners with different interests and priorities when it comes to their dog - for some the dog is the center of their life, for others it is just a dog, and most fall in between.  While asserting that dog owners are 78 million niches of one is a stretch, there are thousands of permutations you can make on the variables to determine exactly what someone would describe as their ideal dog toy.

Drinking the mass market Kool-Aid the wise business approach would be for a company to design a handful of products with 'mass appeal' and have them made in China to keep the cost down, ship them by the container to distribution centers scattered around the USA, then hang them on the hooks at some Megamart big box retailer.  Only a few variations would be made because the whole system is designed that way - the Chinese manufacturer is geared up for the simplicity of mass production, shipping costs are lower when goods are sent by skid and container loads, and Megamart sells all sorts of stuff and will only allot a few hooks to dog toys.  While the toys are not exactly what anyone wants, the price is fairly low and there isn't much choice for dog owners.  So they sell.

Around the edges there are small quantities of specialized dog toys sold at small pet shops, but the low volumes drive high prices and only the real dog fanatics buy them ... the 'niche producers' and 'niche sellers'.  Niches are perceived by the mass producers and mass marketers as pesky, but insignificant.

That's the way it is done.  They teach it at Harvard, and everywhere else.  The mass guys strive to get bigger - moving onto cat toys and dog food - related stuff where they can attain synergies and leverage their business model.  The business is not run by dog people - it is run by business people who are masters at systems, financial ratios and brand management who study market data and develop marketing strategies designed to convince people that the use of their toys will make the dogs healthier, more loyal and lovable.

But that world is changing.  That niche producer isn't selling exclusively through the specialty retailer - the local pet store - any more.  It is also selling on line.  The big guy believes he has to be in China to keep the cost and price down, but that is based on math that assumes the $5 China cost will incur another $4 for shipping and overhead, then be marked up by $2 to make a profit when sold to Megamart, who will mark that $11 total up by another $5 and sell it for $16.  The 'niche' producer makes his toy for $8, tacks on another $4 for SGA and a profit, adds on $3 for UPS to ship the toy - selling it to the on line customer for $15.  The dog owner gets exactly what she wants for $15 instead of the generic mass produced and marketed toy for $16.

This - or variations on it - is what is happening everywhere.  It is why the business press is full of woeful stories about the big multi-nationals, but everywhere I go I hear about small manufacturers doing very well.

It is why big guys can only survive, let alone thrive, by breaking their big business down into small focused chunks - value streams - to create a collection of niche companies within the company (although they will by and large fail by smothering them with 'one size fits all; corporate ERP. accounting, HR and other management systems).  And it is why small guys can only grow by adding self-sustaining, autonomous, cross-functional chunks to address another niche.

It is why most innovation is whistling past the graveyard - an attempt to keep mass-producing and mass-marketing alive by coming up with something so new that all of the niches will return to Megamart to get it ... but even when it works it is just a matter of very little time before all of the niche guys twist it, bend it and adapt it to their niche, with enough twisting and bending that the big guy's patent is irrelevant.  In fact, it is why smart phones are a great innovation.  iPhones and Droids are single platforms, but each owner conjures up their own screen and downloads their own apps so that, in the end, each phone is unique ... perfect for niches of one.

It is why manufacturing cost - or even the total manufacturing company's cost - doesn't matter - let alone the labor portion of manufacturing cost.  The customer ony cares about total supply chain cost.

It is why lean and small lot production is an imperative.  It is why accounting systems based on an assumption that there must always be a big pile of inventory to match expenses and sales to are irrelevant.

And it is not just consumer products.  It doesn't matter whether the market is dog toys, or electric motors or gas valves.  Mass production and mass marketing are dead men walking.

Original: http://idatix.com/manufacturing-leadership/dog-economics/

Comments

[Sean S]

I would submit the customer cares about:
1) function
2) form
3) price
4) lead time
5) return/repair

Of course, supply chain design determines 3 and 4 while R&D determines 1, 2, and 3, but from the point of the view of the customer isn't Total Supply Chain cost an input to some of these key elements, but not important on its own?

Not that I disagree with anything you say; everyday I fight the battle that big batch size is not by definition cheaper, especially if you have big inventories for absorption.

[Bill Waddell]

Sean,

I could have been clearer in my writing, but my point is that the end customer cares about the price to him. Low manufacturing cost means little if it is compounded by high logistics and distribution costs. In my example I described the same item - one with a manufacturing cost in China of $5 but additional costs and markups along the way resulting in a $16 price - and one with an $8 manufacturing cost but less additional supply chain cost resulting in a $15 price. The customer gets the better deal with the second one even though the manufacturing cost was much higher.

The bigger point is that mass production in China to container ship to distribution center to Walmart turns a low cost item into an expensive one because of all of the non-vale adding waste in the traditional model. A USA manufacturer can provide a much better deal even though its manufacturing cost is higher by selling directly to customers through the Internet.

[Christopher Pfeiffer]

Regardless of the cost generation, even the cost itself is irrelevant to the consumer at large. The only thing a consumer cares about is the value proposition to them. This will eventually take all things into account. Price, Quality, ease of procurement, even methods of production (Look at what happens when we find products built in 3rd world sweat shops... Usually a boycott occurs). To the articles premise of a niche of 1, this equation is slightly different for every consumer. I think there is one more facet that reinforces your final point. The buying consumers purchasing IQ is rising every year. In general we collectively are seeking alternatives and this creates the opportunities for the “Niche producers.