Let CSA Packaging become your manufacturing division!
The case for contract manufacturing has been made many times but rarely do you get such a clear and graphic example as you do with the recent Peloton story.
Contract manufacturing gives flexibility and allows management time to gauge actual trends and determine what is real and what is situational and likely to pass. It allows capacity to expand quickly and then retract just as quickly as market forces change or make themselves more clear. It allows companies to conserve capital to deploy efficiently or in ways that are not at all clear from the outset. It allows management to focus on the business, not the complexities of manufacturing.
When the pandemic made working out at home a necessity, Peloton was one of the prime beneficiaries of the unexpected and sudden uptick in demand. Instead of being cautious and recognizing the potential that the demand was temporary, management made the decision to assume that this was the new normal. Had they enlisted contract manufacturers, they would be in a far different position today than they are. Instead, they splashed out $100 million to purchase Precor, for the express purpose of bringing manufacturing in-house. They also committed $400 million to building a factory in Ohio that will eventually encompass 100 million square feet.
It turns out that the old adage that trees do not grow to the sky has been proven true once again. As the pandemic eased and people ventured out again, demand for Peloton equipment evaporated. The company actually had to shut down production for 2 months due to excess inventory. Capital is committed, management is under fire and the very future of the company is in jeopardy due to these decisions.
Of late they have been mentioned as takeover targets at 10% of the value of their highs.
Strategic use of contract manufacturing would have avoided all of this. Management could have waited for the smoke to clear and to get a read on actual demand in a non-pandemic environment. At that point more prudent decisions could have been made and the company would not be in danger of a fire-sale acquisition.
This is an important lesson for start-ups big and small. Do what you do best and outsource what you do not.
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