Progressive Manufacturer of the Year: Otabo

Companies Mentioned
Posted on Aug 22, 2006

There's one thing you can say about Howard Shaffer: He does not shy away from a challenge. In 1985, fresh off a five-year stint with Nike in Beijing, Shaffer decided to strike out on his own. His plan was to launch a joint venture shoe manufacturing business in China. This was at a time when major brands were making most of their shoes in low-cost locations such as Taiwan and South Korea. Few -- Nike included -- had experienced much success penetrating China's bureaucracy in order to set up successful manufacturing there. Just a few months after its launch, however, Shaffer's plant in Guangzhou began to flourish. Productivity soared and, within a few years, Shaffer's company, Sabry Jen Co. Ltd., had 8,000 employees and was producing 800,000 pairs of shoes a month for brands such as Adidas, Timberland, ASICS, LA Gear and Nike. But that was just a warm up compared to what Shaffer is up to now. The 56-year-old native of New York is intent on achieving what many would call the impossible: Manufacturing shoes on a large scale in the United States while taking on low-cost footwear producers in China and elsewhere. Shaffer and his new company, Otabo LLC, know they can't compete directly with China at its own game, namely mass production of shoes using ultra low-cost labor. So Otabo is taking a different approach. Using advanced scanning and modeling technologies, Otabo is designing men's shoes that are customized for each wearer. And, making extensive use of robotics, Otabo is keeping labor costs low enough that it can manufacture shoes at its plant in Pompano Beach, FL. To date, Shaffer has invested $15 million of his own money in the project, financing much of it so far through the sale of his plants in China. Why? Because Shaffer believes, despite the much lower labor costs enjoyed by offshore competitors, U.S. manufacturers who employ innovative new business models and invest in cutting-edge technologies can compete and win. "Competitive advantage can swing back in our favor through technology, but it takes a huge investment to get there," says Shaffer. "If our investment helps rebuild an industry, then we will have achieved our larger goal." Otabo's commitment to technology and the company's willingness to explore new business models were two of the reasons Managing Automation's Advisory Panel of judges selected the company as the 2005 Progressive Manufacturer of the Year. Judges selected Otabo over much larger manufacturers with marquee names because the company was willing to simultaneously pursue radical innovation on several fronts in order to achieve Shaffer's vision. "Otabo reinvented its entire business model once it understood that it can't compete on cost alone against Chinese firms," says Navi Radjou, vice president for enterprise applications at Forrester Research Inc. (Boston) and a member of MA's Advisory Panel. Faced with increasing competition from lower-cost offshore manufacturers, U.S. companies must, like Otabo, "use innovation around products, services, processes and business models to make their current businesses more competitive," says Radjou. Trail Blazing
While Shaffer and his team have been building and refining the technology underpinnings of Otabo for the last eight years, in many ways the company is still in start-up mode. While Shaffer plans to have 120 retail partners by the end of 2005, and eventually to grow to a production level of 30,000 pairs of shoes per day, so far he has signed up just eight retailers to sell his company's high-end men's shoe line. The company's plant currently produces about 300 pairs per day. Still, Otabo has proven an important point: There is room even in the highly competitive footwear industry for a new, innovative business model based on a unique combination of advanced technologies. By using robots for cutting leather and sole material and computerized stitching equipment for the bulk of its shoe assembly, for example, Otabo has demonstrated it can produce 1,500 pairs of shoes per day with only seven employees on the shop floor. Plants in China need 100 people to produce the same number of shoes. And Otabo has shown it's possible to manufacture a quality, custom-made shoe using fitting information generated from an in-store scanner. Otabo's process is able to produce a well-fitted, custom pair of shoes on the first try 95% of the time, Shaffer says. But there have been times, Shaffer admits, when it wasn't at all clear that his idea of combining mass customization and highly automated production would work. "There's no precedent in this industry for what we have been trying to do," says Shaffer. "There's no database of information telling you what to do and what not to do. Everything has been trial and error." Back to Square One
Shaffer's initial try at competing head-to-head in the United States against low-cost Chinese manufacturers did not take off. Shaffer first got the idea of building a highly-automated footwear plant in the U.S. back in the early 1990s. Ironically, Shaffer at that time saw the U.S. market as a potentially viable location for offshore expansion. His company wanted to expand outside of China, partly to avoid export limitations being imposed by European countries, but also because of issues such as intellectual property protection. He rejected other sites such as Vietnam as already too crowded with competitors or burdened with corruption. Then a friend pointed him toward a French company he said was making advanced robots that could be used to automate most of the shoe-making process. A light went on for Shaffer. "We started to think that, maybe with the support of our China factories and by expanding support into Mexico, we could use robotics to manufacture shoes in the U.S. and compete head-to-head with China," says Shaffer who, at the time, was also interested in spending more time stateside with his family. Shaffer and his team spent the next year setting up an automated factory using the French robots. He got athletic shoe marketer Adidas to agree to buy shoes from his Florida factory if he could deliver them to Adidas' distribution center in North Carolina for the same price the company paid for shoes made in China. In the end, Otabo was able to dramatically reduce labor expenses through automation. But not enough. For every pair of shoes the company eventually shipped to Adidas from the Florida plant it lost $1. Otabo was making $1 per pair on the shoes it shipped from China. "We were paying fully loaded costs for workers of around $15 per hour versus about 30 cents in China," says Shaffer. "It just wouldn't work. If you go head-to-head with China, they're going to win unless you change the rules. So that's what we decided to do." Specifically, Shaffer hit upon the idea of producing highly customized shoes on a mass-market scale. Unlike shoe manufacturers in China and other low-cost countries that produce large quantities of relatively few sizes, Otabo would produce shoes to each individual customer's order from a huge palette of potential sizes. And, to keep costs in line, Otabo would use the automation technologies that it perfected in the first phase of its quest to manufacture in the U.S. Here's how the process works: Customers shopping at one of Otabo's own stores or partner apparel retailers can see samples of the company's shoe styles. After deciding to buy, the customer has his feet digitally scanned in the store. The customer is also asked questions about his fit preferences. Data from the digital scans are sent via FTP files to Otabo's Florida plant where they are entered into a PC-based shoe modeling system, called Shoemaster, produced by CSM 3D Ltd. (Somerset, U.K.). Customer and order information, meanwhile, are entered through a Web interface into Otabo's ERP/CRM system, the NetSuite Small Business package from NetSuite Inc. (San Mateo, CA). Otabo uses the shoe modeling software to select the correct form -- known as a last -- which will be used to make a pair of shoes to fit the specific customer. (For each shoe style, Otabo can select from a large library of 600 lasts. And, using the modeling software, Otabo can fit each foot. Most mass producers of shoes, by comparison, offer between 15 and 45 sizes per style. And none sell a pair of shoes that are actually different sizes.) Once the sizes of the shoes and lasts have been identified for each order, the Shoemaster software generates a series of data files. Those files are fed into the computer-controlled robots that Otabo uses to cut the leather and sole material and stitch them together into the final product. The shoes are then shipped directly to the customer or to the retailer, usually within about 10 days. Since Otabo has a make-to-order model, the company has no finished goods inventory. In effect, Otabo's new business processes and high level of automation have replaced the kind of shoe-making hand skills on which Chinese plants rely with the kind of digital skills that are much more readily available in the United States. "We know this can be a huge market but, if we wanted to build a factory here to address that market, we knew we couldn't do it relying on hand skills," says Shaffer. "That's not the way to build a factory in the states, because those skills no longer exist here." The Long Road to Success
While Otabo's processes and systems are now up and running, putting it all together has taken much more time and money than anticipated. In fact, when Shaffer originally hatched the mass-customization idea, he expected it would take about 18 months to get off the ground since the company already had many of the robots it needed in place. Instead, Shaffer says, it has taken eight years. A large part of the reason for the delay has been that technology vendors weren't ready to deliver what Otabo needed. So Otabo had to wait or take responsibility for developing technology itself. Otabo, for example, had to build its own file translation program in Java to affect integration between the Shoemaster modeling software and the robots running the company's plant floor. The program breaks up files produced by Shoemaster into pieces that can be used by the various robots, translates them from the DFX file format produced by Shoemaster into formats understood by the robots and directs them to the proper robots. "There was no commercial product out there to do that," says Otabo's Vice President of Engineering Richard Musco, who Shaffer hired from Motorola. "There is not a lot of technology developed for the shoe industry to say the least, so we had to build it." Otabo also had to wait for vendors to create critical technologies. Shaffer's business model, for example, could not work without highly reliable and relatively inexpensive three-dimensional scanning technology. But, when Otabo was first starting, scanners capable of meeting the company's needs were selling in the $80,000 range. "You can't fill a lot of retail stores with $80,000-a-pop scanners," notes Shaffer. Shaffer located a start-up Scottish scanner provider whose technology seemed to fit Otabo's needs. Just before going into production, however, the company ran out of financing and shut its doors, leaving Otabo out in the cold. Shaffer eventually found a scanner provider in Japan. Otabo's retail partners say the scanners have functioned flawlessly. And, they say, customers have taken instantly to the high tech, customized shoe buying process. "Initially they thought the technology was neat. It kind of intrigued them," says Wally Hardin, owner of The Man Shop, an apparel retailer in Arlington, TX. "Then, when we explained that the shoes were custom and being made in the U.S., they liked the idea," says Hardin, whose shop sells about 20 pair of the Otabo shoes per month. At $400-500 per pair, the shoes are more expensive than many men's brands, but far short of what it would cost for a pair of hand-made custom shoes. Now that Otabo has mastered the technology end of the business, the company plans a retail expansion, Shaffer says. Otabo is shooting for adding 10 new retail partners per month through 2005. Ultimately, Shaffer plans to expand into lower-priced models and to expand its own network of stores and e-commerce kiosks. By staying focused and putting one foot in front of the other, Shaffer is convinced he can not only prove shoe manufacturing is still possible in the U.S., but that he can also build a healthy and large business. "By redefining the whole playing field the way we've done and by developing the technologies, I think we will be competitive," says Shaffer. "And not just in a small, niche market. This can be 30% of the market."

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