As hardware founders, it doesn’t take long to start requesting quotes for prototyping and production – all you need to do is pick up the phone. But, finding the right contract manufacturer is one of the most important steps in a startup’s go-to-market strategy. Finding great partners early on sets you up for future success and gives you greater control over you COGS, BOM, as well as clarity about your supply chain, and peace of mind from knowing your product is in good hands. Choosing the wrong partner can be disastrous.

In the latest Futureworks x M-Corps workshop on May 1, 2019 at Columbia’s PowerBridgeNY, we explored the request for quote process and the challenge of vetting suppliers.  M-Corps is SecondMuse’s New York State program, sponsored by NYSERDA, to help cleantech startups manufacture and get to market. Futureworks is SecondMuse’s NYC incubator – sponsored by NYCEDC – that champions, supports and accelerates the growth of hardware startups.  To help us understand the topic, leaders in the field of supply chain and vendor management joined a lively panel discussion moderated by SecondMuse’s Shelby Thompson.

  • Mike Geyer of Fictiv supports hardware startups of all stages, from prototype to mass production. Fictiv makes finding and working with trusted suppliers clean and easy by managing the entire process for you, forgoing the standard RFQ process and esqueing Minimum Order Quantities, to help teams scale their products.
  • Edson Greenwood of Anvyl helps teams manage their supplier relationships and connect directly with high quality, pre-vetted suppliers all over the world. Anvyl gives founders and product teams tools for tracking every step of their supply chain and a marketplace of vendors.
  • Max Klein of Arrow works with teams looking for guidance on hardware design and electronics components sourcing. Arrow works closely with startups of all sizes and runs the Arrow Certification program available to qualifying startups crowdfunding through Indiegogo.

Panel Discussion:::

With such an excellent panel, we covered a lot of ground in this two hour workshop. Here’s a recap of the most important points addressed by the panel, plus the most salient questions from the audience Q&A:

What are some key considerations for the RFQ process?

RFQs cover prototypes to production runs, single parts to a startup’s entire BOM. The more detailed your RFQ, the faster the negotiating process and the better the results you’ll receive. Include everything from CAD drawings to two dimensional specification drawings and materials specs, whatever will clearly show what you need made and how you intend to make it.

  • Treat your first interaction with a supplier like an interview for a new job: the more complete your “application” the more confident your future partner will be that working with you is worth their time. It also gives you more protection during negotiations and cements the seriousness of your business proposal.
  • Once a quote is issued, your supplier will conduct a feasibility study that may or may not result in them being able to supply the parts you need. Note that it can take 60 days to two years of feasibility tests and design for manufacturing improvements before you issue a purchase order for manufactured parts. Start early! The complexity of your product, your own team, and your supplier all factor into how quickly you can move from RFQ to PO.
  • Treat your RFQ as a tactic in your company’s overall go-to-market strategy. It assumes that you have already established good product market fit, you understand the unit economics of your business, and you have a grasp of factors affecting current global supplier dynamics, such as tariffs.
  • Before engaging potential CMs, do your research to help mitigate any issues with them down the line. Use tools like Anvyl or Fictiv to help you find the best partner for your specific needs and have a disaster plan in place so you have a way to back out of a bad CM relationship if you have to. Once you commit to working with a CM, treat them like a true partner, exposing them to your design process as much as possible to help with Design for Manufacturing.

How does a startup determine their Minimum Order Quantities?

One of the first questions a CM will askis: what do you  anticipate for your minimum order quantity?. Minimum Order Quantity (MOQ) is the smallest number of units a team can commit to purchasing from a supplier, and it is often used to hedge against the cost of working with you to determine manufacturability. MOQs are generally large and daunting for early stage companies.

  • Mike Geyer of Fictiv pointed out that they don’t support MOQs on their platform, instead offer pricing based on production volume. This transparent pricing model let’s product teams clearly understand the bottom line cost of production regardless of the number of units they need to produce.
  • In scenarios when MOQs are required, founders need to be careful to not over commit themselves. The hardware community is full of horror stories of founders who agreed to overly ambitious MOQs and ended up burning through all of their funding to produce inventory that they didn’t know they could sell. You aren’t doing your supplier any favors by agreeing to MOQs that will hurt your company.
  • Like you, suppliers are looking to build long term relationships so they can have predictable revenue. Over estimating your MOQ and not meeting it can ruin your relationship with a valuable partner forever. Be honest with them about your anticipated sales and treat them like partners.
  • Suppliers often invest heavily in tooling to manufacture new products, but they need reassurance that the investment and risk are worth it. Consider how much time you have to get to market and what materials and processes you need.

 

How many RFQs should a team send out?

When starting out with the RFQ process, it can be tempting to take a shotgun approach. But just like applying for college, submitting hundreds of RFQs for the same part has steadily diminishing returns. The sweat spot is 3- 4, with a range of expensive to cheap, fast to slow, high quality to low.

  • Once you have your 3-4 suppliers identifies and RFQs submitted, you can start drilling down into the specifics and comparing the supplier side-by-side. Having a massive list of suppliers that you submitted RFQs to just makes the comparison process more difficult.
  • When comparing suppliers, consider the old adage “good, fast, cheap. Choose two.” When making a product, these are the three main levers you have to pull to bring it to market. It’s unlikely that you’ll find all three, but your ideal partner should check off at least two of the boxes. Don’t just make decisions based on price, because going with the cheapest option may hurt you on quality, speed, and even IP security. Speed of production, or lead time, is perhaps the most important variable here, because as Mike Geyer of Fictiv pointed out, you and your team will be burning cash during the times between orders and receiving parts.
  • Think about your business strategy: is the #1 objective to get to market as quickly as possible? What kind of price point are you aiming for? Is this a premium product? Your answers to these questions will influence how your prioritize good, fast, and cheap.

 

How does a founder vet Contract Manufacturers?

Vetting manufacturers is more art than science, but it all starts with their track record. Do your research. What have they made and what successes have they had. Ask these questions during your early conversations.

  • It should be noted that the way your approach vetting manufacturers will change depending on the country in which your manufacturer resides. Tariffs, holidays, regulations and MOQs vary from country to country, so you need a firm grasp of those differences as you consider who is the right supplier for you.
  • For example, Eastern Europe is becoming more appealing for manufacturing because labor there is still relatively inexpensive despite sophisticated equipment and training. Manufacturers in Europe also tend to be more transparent than manufacturers in China and more focused on social responsibility, such as minimizing the environmental impact of their operations.  
  • Edson Greenwood cautioned that if you don’t have to go abroad, don’t. There is a lot that can go wrong with a manufacturer you have to travel around the world to meet with, and shipping times and costs will be significantly higher than if you were to stay local. Manufacturing domestically, when possible, also avoids a lot of opaque regulations, tariffs, and taxes that other countries may impose.
  • If you plan to manufacture in China, go into your negotiations knowing that labor costs there are growing 20% per year. Mike Geyer recommended spending 4-5 days on site with your manufacturer to get to know them and how they work.
  • In China in particular, it’s not uncommon for factories to say they have certain capabilities, but to subcontract or outsource parts of projects. This isn’t necessarily a bad thing, but you want to find suppliers who are open and transparent. You should always know when and who your product or parts are being farmed out to so you have a full view of your product’s progress at each step of production.  
  • Ask your supplier about their capacity and push for transparency. Manufacturers will often take on more work than they can accommodate, so you need to get a good sense of their bandwidth before going into business with them. You’ll also want to ask about financial security. There is an increasing amount of turnover among factories in China as the economy tightens and more American companies re-shore their manufacturing.
  • Ask who will own the tools used to manufacture your product if something happens to the manufacturer.

 

How does a founder know when it’s time to end a relationship with a CM?

Chances are, there will come a time when you need to change suppliers for any number of reasons. Determining sooner rather than later when a change is needed will save you a lot of headache, but recognizing the signs is easier said than done.

  • One area to pay attention to is the quality of parts and samples you are receiving. Are you noticing changes to the quality? How is your manufacturer communicating quality changes and requests for rework? If quality isn’t improving (or getting worse) and your CM is hard to communicate with, it’s probably time to cut ties.
  • Deciding to stop working with a supplier shouldn’t be taken lightly and can be very disruptive to both of your businesses. Make sure you have airtight reasons that can be easily explained. Quality, lead times, communication, and other fundamental aspects of your relationship with a CM are all valid considerations in your decision to stay or go.
  • Be very clear with your CM about what is working and what isn’t. Give them a chance to improve with clear milestones. If they don’t improve, no one will be surprised when you decide to go elsewhere. Be proactive here. Have strong feedback loops and documentation in place throughout the entire process to relay concerns to your CM and have a backup plan in place if you do have to cut ties and find a new partner.

 

Q&A with Panelists

After the panel, we opened the room up for Q&A from the audience, allowing us to dig into more nuanced aspects of the RFQ and vetting process.

Q: Do I need an NDA before submitting requests for quotes?

A: Absolutely! Don’t proceed with any negotiations without an NDA first. You will be sharing sensitive engineering files with your potential supplier and you want to make sure your IP is safe. For example, Arrow always provides a three-way NDA for themselves, the startup, and the manufacturer. Be sure to use an airtight NDA from a partner. A template downloaded online won’t be thorough enough for your use case.

Q: How do I price my product and determine market engagement so I can estimate my MOQs?

A: Price your product  3X your COG to make sure you cover your costs and have profit to put towards operational expenses. Use Kickstarter or a Shopify page to gauge customer interest early, just know that if you test with crowdfunding, you’re on the hook to deliver your product to backers.

Q: Should we ask for a trial run (also known as Production Validation Testing – PVT) before moving ahead with full manufacturing?

A: Absolutely. Fictiv encourages this and because they don’t have MOQs, you won’t be on the hook for delivering minimums in exchange for samples. Some manufacturers will be open to you paying for samples only before committing to an MOQ if they see an opportunity in your product.

Q: Do you see manufacturers agreeing to milestone based deliverables?

A: It’s certainly possible, but highly dependant on your leverage with the manufacturer. You need to include this in your RFQ as an early talking point so it’s clearly signaled as something that needs to be negotiated.

Q: Does responsibility for damaged goods fall with the shipper, the factory, or the startup?

A: It depends what is negotiated before the goods are made and shipped. Some suppliers will take responsibility for the product until it reaches you, but you need to negotiate this upfront. It will be an uphill battle; you’re better off focusing your energy on modifying your material, manufacturing, and packaging plan to ensure your product doesn’t break at any point of the process.

Q: How is payment to suppliers typically handled?

A: Wire transfer is the standard, especially for overseas CMs, but some manufacturers will have their own payments system in place.

Q: Can you charge a supplier for their mistakes and the time it takes you to correct them?

A: It’s all in the negotiation, but invoicing for rework isn’t common. Some suppliers will credit your account if mistakes keep happening without resolution, but in most cases this might mean that it’s time to find another supplier (see above).

Q: Do CMs take equity of revenue share as payment?

A: Not generally, but some will, especially if they are relatively new to the game. A word to the wise: be careful about giving up equity for something like manufacturing. If you trust you supplier and have a good relationship with them, it might be beneficial. But avoid getting too entangled with a partner early on.

Q: How does one move production to a different manufacturer if a relationship ends?

A: It’s tough and highly dependent on what you negotiate upfront. If you own all of your tooling, it’s more straight forward: arrange for moving the equipment to the new supplier and go. But if a supplier helped cover the cost of tooling or absorbed it entirely to work with you (not uncommon), they will retain ownership of your tools. At Fictiv, customers (startups) own their own tooling and Fictiv will store them for up to two year. After two years, Fictiv charges $250/month to store each tool.

If you weren’t able to make it to the workshop here’s the presentation from it. We’ll see you at our next M-Corps x Futureworks workshop–focused on Manufacturing Planning–on June 19th.

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