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.
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.
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.
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.
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.
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.
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.
From brewer’s waste upcycling to urban e-biking, the new M-Corps cohort is building a cleaner future, and tackling carbon emissions, from many angles covers more ground as we seek to reduce carbon emissions. Not only are these founders building companies, they’re also allies and mentors for each other during the program. Check out the new M-Corps cohort as well as the class from 2018-2019.
SecondMuse is looking for six cleantech startups who are paving the way for a more sustainable future, especially those with strong teams and products who need assistance scaling up to manufacturing. Applications are open through Sept 9.
In January, SecondMuse continued its newest series of hardware startup support. This session focused on Supply Chain Strategy at New Lab in Brooklyn Navy Yard. NYCEDC’s Stacey Weismiller and Inventaprint’s Rich Mokuolu lead attendees through an essential presentation on sourcing and production.