Where in the World Is Timbuk2?

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Outsourcing, Offshoring, and Mass Customization

Brennan Mulligan paused to admire the San Francisco skyline before entering the leased building
that housed all of Timbuk2’s activities, from management to manufacturing (Figure 1). 1 Who would
imagine that anyone could profitably manufacture a textile product in San Francisco in 2002? With
competition not only from lower-cost centres in the United States but also from China and other
places in the Far East, a converted warehouse building in San Francisco was an unlikely location for
this manufacturing business. Yet Brennan was not sure Timbuk2 could continue indefinitely to
produce everything in San Francisco. While the pride and satisfaction of producing in San Francisco
was ingrained in Timbuk2’s culture and moving production elsewhere would be a huge change for a
small company with local roots, Timbuk2 needed to remain profitable. Hence, Brennan knew there
was no easy answer to the question on the table: Should Timbuk2 outsource some (or all) of its
production to a Chinese firm?

1. History and Processes

Timbuk2 was founded in 1989 by Rob Honeycutt, a San Francisco bicycle messenger with an old
sewing machine. The Timbuk2 Web site (www.timbuk2.com) describes Rob’s goal, “to make a
messenger bag rugged enough for real bicycle messengers, yet stylish enough to appeal to a broader
market of young, hip urbanites as an alternative to the traditional two-strap day pack. Our catchy
name, three-panel design, distinctive ‘swirl’ logo, and the fact that we’re ‘Made in San Francisco’
added to our cachet.” At one time Timbuk2’s Web site claimed that its bags were “messenger-
designed, civilian-approved, and guaranteed to wear like hell.”

By 1996, Timbuk2 was a smooth-running operation selling a variety of bicycle messenger bags and
similar products whose manufacturing process was first characterized by lean manufacturing and
then, once leanness was achieved, by mass customization. If the company had not pursued lean
manufacturing, Brennan believed that it would not have been able to deliver a product customized
to a mass market. Lean manufacturing’s emphasis on eliminating waste and improving quality
through smaller batch sizes and streamlined product and information flows had been particularly
critical. Brennan recalled that the efforts to reduce batch sizes were much more difficult than they
had made it sound in business school. After much analysis and experimentation, the team purchased
many additional sewing machines, greatly reduced setups at nearly every step of the manufacturing
process and altered the layout and organization of the factory floor to handle batch sizes as small as
one item. In addition, they altered the process so that the information associated with a specific
order, such as colours and add-on options, was available to workers as they worked on individual
bags. A customer order was printed for each bag to accompany it through the manufacturing
process.

Timbuk2’s mass customization initiative that sought to provide their customers highly customized
products at affordable prices was also supported in part by what is called “delayed differentiation”.
To accomplish this, the firms kept assemblies as generic as possible until later in the process where
they were differentiated into specific configurations of the end products after customer demands
1
This case study is originally published in Cachon, G., Netessine, S., & Cattani, K. (2015). “Where in the world is
Timbuk2? Outsourcing, offshoring, and mass customization.” Operations Management Education Review, 9(1),
5– 28. It has been abridged for use in ME30197 at the University of Bath.

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were known. For example, paint stores stock generic paint and add colour pigments only when the
customer is ready to buy. In Timbuk2’s mass-customized process, some parts were pre-assembled
(for example, handles or the most popular panels), but for the most part, assembly occurred after
Timbuk2 received the customer order.

Through experimentation, Timbuk2 found that it was most effective to have work cells of five
employees manufacture bags from start to finish as they filled individual customer orders. As each
cell operated, there would be five bags in process, one for each worker. Each employee was trained
to perform all tasks to produce a bag, and a “bump-back” process was used to balance the workload.
When the worker assigned to the last position finished her bag (sending it off to the shipping area),
she would “bump back” to the next-to-last position and take over production of that bag, wherever
it was in the process. The person in that position would then “bump back” to the previous person,
and so on, until the person at the beginning of the process would go to the order backlog and begin
producing the bag associated with the next order in the queue. Brennan was amazed at the
dexterity, speed, and accuracy of the cutters and sewers.

Timbuk2’s process for determining which choices to offer customers was based on management
intuition. Options were added if they seemed relatively straightforward to offer (in the sense that
they would be easy to manufacture with processes currently in place) and perceived to be attractive
to the customer. For example, they would typically offer between 12 and 16 colour choices for the
material—enough to cover most of the colour palette, but still manageable for stocking and
managing inventory. A nice feature of mass customization was that the company could temporarily
delete a colour from the product offering if it was out of stock.

In 2000, Timbuk2 launched its “Build Your Own Bag” page on its Web site, allowing customers to
configure and order individual bags to their own specifications. In a form of customer co-creation,
customers could see the bag they were configuring on the computer screen and experiment with
different colours and options. In this way, Timbuk2 involved the customer in the design of a bag
unique to the customer. The customer was offered different colours for the three panels at no extra
cost, but most other options, such as the alternate logo colour, came at a price. Spools of different
coloured thread were mounted on the machine that embroidered the logo on the bag. The worker
would specify which colour should go on the bag and the machine would use the thread from the
appropriate spool.

By 2002, the company was shipping bags to multiple channels. The Excel file “Sales data March
2002.xlsx” provides a daily summary of sales for each channel in March 2002. The company
employed about 40 people, with 30 of them in production, including 25 sewers working one eight
hour shift, and booked just over $4 million in revenues in the 12 months between March 2001 and
February 2002.

The domestic and international retail channels were the traditional outlets, sold at wholesale prices
to stores such as REI. The relatively new e-commerce channel sold directly to customers at retail
prices. A fourth channel, the corporate channel, sold bags with specialized logos to corporations. A
final “other” channel was reserved for some special deals that were relatively low priority. The
channels differed considerably not only in pricing, but also in how long the customer would have to
wait for delivery. E-commerce customers received their bags within two to three days, whereas
Timbuk2 delivered to the traditional domestic and international channels in about two to three
weeks, and customers in the corporate channel needed to wait four to six weeks for their orders. All
orders were produced on the same line, with priority given to the e-commerce channel due to the
stringent lead time requirements.

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 2. A New Opportunity: Outsourcing to China

In 2002, Timbuk2 faced an additional challenge, or opportunity, depending on your point of view.
Many textile and textile product manufacturers were leaving the United States, especially to the Far
East. China had captured much of the shift. In many labour-intensive industries it was becoming
increasingly difficult to match the low cost of Chinese labour, particularly in the textiles, plastic
products, and travel goods (e.g., luggage) industries. Chinese wages were very low compared to
those in most other countries, and even countries like Mexico were losing thousands of jobs to China
annually. The average monthly wage in China was around $100 in 2002, about 1/20 of U.S. wages
after accounting for social benefits. 5 On average, a manufacturing worker in textiles earned about
$0.60–$1.30 per hour in China versus $11 to $20 per hour in the U.S. Moreover, an employee in
China had fewer benefits and holidays and worked an average of 2,930 hours per year. Since U.S.
workers tended to focus on high value-added industries, the productivity of manufacturing workers
in China was around 6% of U.S. productivity, but for comparable products Chinese workers were
often as productive as their American counterparts.

Brennan knew that “going to China” was not a simple decision. Timbuk2 would have to visit
potential suppliers, as setting up its own shop in China seemed out of reach at the time. Clear
expectations would need to be set with the supplier, and Timbuk2 would probably have to make
near-monthly (and costly) visits to maintain the relationship and to ensure high quality. Therefore,
some preliminary analysis was necessary before the company could walk down this path.

The then-current hourly wage of a Timbuk2 production worker in the U.S. was set at $12.50.
Brennan estimated that a worker in China could be employed at 10% of this rate. In contrast,
whereas a bag would need 35 minutes of manufacturing time in the U.S. facility, an additional 10
minutes would be required in the China plant. Other manufacturing expenses, including insurance,
equipment, maintenance, and warranty, currently cost $1.50 per bag, which Brennan estimated
would be halved in China. Material costs were $13 per bag, and 40% of direct labour cost was used
to estimate the manufacturing overhead.

Finished bags would have to be shipped from China to San Francisco. A quick check of the size and
cost of a shipping container yielded an estimate of $1 per bag. Of course, that cost assumed that
bags were shipped via an ocean carrier, which required at least a four- to six-week lead time. If bags
were air-freighted, they would arrive within two or three days, but then the cost would rise to
around $15 per bag. With either production option, bags would be shipped from San Francisco to
customers, with an outbound domestic freight cost of about $3 per bag.

3. A Look Ahead

Brennan knew that this analysis was just a rough sketch and incomplete. As mentioned above,
sourcing from China was no simple “turnkey” solution—the supplier relationship would have to be
managed closely. The long lead time from China (assuming ocean shipments) would also involve
more inventory. Based on information Brennan had heard from other firms, he expected that a
Chinese supplier might be willing only to receive monthly orders and deliver with a two- to three-
month lead time. This could easily mean holding finished-goods inventory in anticipation of demand,
something that Timbuk2 had not done before. By examining Timbuk2’s income statement as of
March 1, 2002, Brennan could see clearly that demand fluctuated throughout the last year and that
the mix of orders across the channels changed as well. A friend working at another firm suggested
that annual markdown expenses could account for as much as half their average inventory holdings
or more.

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Then there was the issue of what to do with operations in San Francisco. Could Timbuk2 continue to
use orders from the various channels to ensure a smooth workflow? Furthermore, if the company
sourced all its needs from China, it would be difficult to claim to be a domestic producer, something
that was important to Timbuk2.

Brennan pondered the options. Timbuk2 had successfully navigated its start-up phase and its entry
into e-commerce, but he knew there was no guarantee that the company could continue to make
money with its current supply chain structure. Moreover, the management team was considering
significant expansion of sales through the wholesale channel, which would involve approaching
companies such as CompUSA, Apple, and Dell to offer the possibility of bundling their laptop
messenger bags with laptop computers and other computer accessories. Clearly, further expansion
of the non-customized sales channel would make manufacturing in Asia more attractive in the
future. But Brennan wondered if it was the right time to source from China.

4. The Challenge

In deciding whether to outsource the production of the bags to China or not, Brennan would like to
find answers to the following questions. As experienced supply chain consultants, he has hired your
team for help.

1. Use the data in the “Sales data March 2002.xlsx” file to analyse the sales in multiple
channels. Among others, you may look at the average sales and revenues per bag for each
channel, the revenue from an “average bag”, percent revenue contribution of each channel
to the overall sales, and so on. You may use charts to better present your analysis to
Brennan.

2. Using the discussion from the challenge and the sales data, discuss the pros and cons of the
“Build Your Own” (eCommerce) channel for Timbuk2.

3. Estimate the cost of manufacturing a bag in San Francisco and that of producing it in China,
using the cost figures given. Which option is cheaper? Use the revenue from an “average
bag” in part 1 to estimate the net profit (gross margin) of a bag.

4. If Timbuk2 manufactures in China, it is likely that they will have to make to stock due to the
long transportation lead time involved. In such a case, uncertainty of demand and the level
of product availability (due to holding more stock) play an important role. The following
table shows the loss in the gross margin, given the level of demand uncertainty and the
relative loss due to unavailable products.

Level of demand Level of product availability

0.10 10% 8% 6% 5% 3% 2%

0.25 24% 20% 16% 12% 9% 5%

0.40 39% 32% 26% 20% 14% 8%

0.55 53% 44% 35% 27% 19% 11%

0.70 68% 56% 45% 35% 24% 14%

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 0.85 82% 68% 55% 42% 30% 17%

1.00 97% 80% 64% 50% 35% 19%

[Note from Melih: Level of demand uncertainty is actually coefficient of variation and level of
product availability is the critical ratio.]

Extra explanation on this subject: https://ebp-global.com/using-the-coefficient-of-variation-

Based on the gross margins you have found in part 3, provide a discussion on the gross
margins of producing in China and how it compares to producing in San Francisco using
these numbers.

5. What is your overall conclusion? Should Timbuk2 pursue the option of manufacturing in
China? If so, what challenges are they likely to face and what changes will they need to
make?