A Decision To Re-Become Ourselves

January 06, 2019

A Reflection:

Jesse Erickson

Co-Founder / CEO

It was disruptive, yet all so familiar.

In 2015, we decided to make a major change in the way we made bikes. We instructed our trading agents in Taiwan to inform our assembly factory that we would no longer be needing their services. It was a big decision because it meant that from then on, we would be building each of our bikes from the frame-up, by hand, in Minneapolis. This was something we had done before, but at that time, it was out of necessity. Back then, we gauged our first success by when we grew large enough to have an assembly house build for us before we brought them to Minneapolis for distribution. So, in some ways, this decision seemed like a step backward for Handsome. Yet in a real way, it was how Handsome was going to do things better. Not just for us, but for our customers, for the industry, and for the environment.

 

Handsome In The Beginning

Handsome Cycles started as the smallest bike company the world had ever seen. We didn’t have much capital, but we had decades of experience in the bicycle industry, a passion for steel bikes the way they used to be, and a great inspiration for the perfect versatile city bike. Since we couldn’t afford to start big, and we had developed the geometry for what we call the swiss army knife of bikes, we started by producing just 130 of our first frame set, which we named The Devil. It was clean and classic, and could be built-up in tons of configurations. It was a Handsome Devil indeed. With each of those frame sets, we built every customer’s bike to-order with hand-picked components to make each bike unique. We thought of ourselves as a hybrid custom / production bike company, although no term for that model existed. In the beginning, it was done by necessity, and we worked for the day when we could become a real production bike company like all of the rest.

And Then We Grew Up

Or so we thought. Our little bike company was successful, or at least we sold enough to begin making bikes like all the rest. This was the path to becoming a real bike company. We still had our frame sets made the same way, but now, we had our agents collect all of the parts we needed in Taiwan, get everything to the assembly factory, and our bikes were put together on a mass assembly line. Like all of our competitors, we now just saw our complete bikes arrive in boxes, granted with our logo printed on the side, but we didn’t NEED to hand assemble them anymore. We worked really hard to get to this point. We were just like all of the rest. YAY!

And Then Things Got Boring

Everything was going as planned. We were a real bike manufacturer. We had nearly 100 wholesale accounts across the U.S. and we were developing new models. We came out with the She Devil, the step-through version of the Devil. Then, we added a simplified model of the Devil we called the Fredward (that name has a story, and some funny anecdotes, but is better told somewhere else, or over a cup of coffee -- feel free to call me if you want to hear it). The thing is, we didn’t GET to hand assemble our bikes anymore, we didn’t get to talk to our customers about what they would want to personalize about their bikes, we didn’t get to touch every part of the bike and put our stamp of approval on it, because we knew it was built by someone who really cared. We had become something we weren’t, we were just like all the rest. ARRRGH!

So, Then It Happened

We were talking about how things were going and overall we were okay, but not truly happy. We were bike guys. We liked getting our hands dirty. We loved the look on someone’s face when they first saw the bike they designed themselves. New bike day! But, that wasn’t who we were anymore, we were like all of the rest. How could we go backward and hand assemble each bike again? There is no way that could be financially or physically viable. Was there? Well, we didn’t know, and we didn’t care, we just wanted to become ourselves again.

We Just Went For It

But we weren’t just going to blindly follow our hearts (except I think we would have anyway, even if the numbers didn’t seem to work out), we did research on what this would mean for us as a business. We did what any business person worth their salt would do, a good ‘ol cost benefit analysis.

The Costs

For sure we couldn’t do it by ourselves. We would need to hire the right person as our head bike builder, which meant higher payroll and taxes. We would need to develop a process and build out the infrastructure, which meant an initial spend that would become a fixed asset. It would mean adding SKUs and make keeping inventory more time consuming. We calculated that the infrastructure investment would be roughly $2500. The additional employees and taxes would add about $45 per bike and there would be additional operational costs to manage the new system that we couldn’t yet calculate but estimated at about $10 per bike. At the time, we were making 650 bikes per year, so the total additional costs (before deducting savings), would be roughly $38,250 in the first year (but we determined the per bike cost would go down in future years once we developed efficiencies and economies of scale).

The Savings

It wouldn’t be all additional costs, we would also save some of our previous costs by doing this. Most obviously, we wouldn’t be paying Taiwanese workers to assemble our bikes. The average cost of assembly was $20 per bike, so right off the bat we would be saving $13,000. But what about the less obvious cost savings? A-ha! The shipping costs should go down. We knew this would be the case, but we weren’t sure by how much until we set up our first shipment. When you ship complete bicycles in individual boxes, there is a ton of “air” in each box. Meaning that you are shipping a lot of volume that isn’t taken up by goods. Our bicycle parts don’t weigh much, so volume for us was always the most costly shipping factor. Shipping bikes piece by piece meant that we could put nearly twice as many bikes worth of parts in the same shipping container. Way less “air”! When we were shipping complete bikes, we could fit just over 100 in a 40 foot shipping container. Now, we could ship 200 bikes worth of parts in the same container. That meant nearly a 50% savings in shipping costs. To ship one container from Taiwan to Minneapolis, we paid roughly $4300. We were paying roughly $23,650 per year in our old model, the year we transitioned to shipping bikes in parts, we paid $13,760. 2nd grade math says that we saved $9,890 in the first year on international shipping costs. Was that all? Nope! We then we looked into how the government saw the difference in what we were doing. We couldn’t find any incentives in the way of grants at the scale we were at, although that could change as we scale up and add more employees. We were paying 11% per bike duties when we were importing complete bikes. After looking at all of the codes for individual bike parts, we found that the U.S. Government duties average on the parts shipped separately was only 5.5%. That’s a 50% less duties charge to do the assembly ourselves. That’s a big deal. We purchased $209,950 worth of bike parts that year. We would have paid $23,094.50 in duties on that in the standard model. We only paid $11,547.25 that year, the same as our savings. The total savings from no Taiwanese labor, reduced shipping costs, and lower duties totaled $34,437.25.

Net Cost

Of course there would be nominal unforseen costs and savings, but overall we determined the added costs would be $3,812.75. If we removed the $2,500 estimated set-up cost as it would be amortized over years, the net total is $1,312.75. Divided over 650 bikes, that’s only $2.02 per bike increase.

The Benefits

The whole point in making this change was to get back to what we loved and what we were great at. Building bikes from the frame up and being able to customize them for the customer. But there were measurable benefits as well.

We Are Ourselves Again

The passion for making customized bikes at a very reasonable price was what Handsome Cycles was founded on. The ability to do just that is a reality again. This time, however, by choice. Being able to easily customize bikes has brought about great opportunities for expansion. We now use our Fredward model to make a stunning bike for Blu Dot furniture company. We have also made a good number of customized fleets of bikes for hotels and businesses that want to including cycling as part of their culture and promote a healthy lifestyle from within. We are actively looking for our 2019 partnerships for a private label offering and we hope to continue supplying custom branded fleets to great companies. I love to learn about these brands and how we can create something unique that will add to their culture. As a business, being able to offer your clients and employees the ability to explore the city via bike speaks volumes about how they value their community and a healthy lifestyle. Plus they just look super cool in the lobby.

It has taken me three years to really grasp the size of the decision we made that day in 2015. It seemed so natural and almost embarrassing that we had not done it sooner. It is easy to lose yourself when you think the goal is to be like the others. We’ve found our niche and we couldn’t be happier that it was an achievable goal. Our journey may have been challenging, but in the end, we made the decision to re-become ourselves.