Jeff Morin
Startups are hard work, but the complexities of global supply chains can make running hardware companies especially difficult. Instead of existing within a codebase behind a screen, the key components of your hardware product can be scattered around the world, subject to the volatility of the global economy.
I’ve spent most of my career establishing global supply chains, setting up manufacturing lines for 3D printers, electric bicycles and home fitness equipment on the ground in Mexico, Hungary, Taiwan and China. I’ve learned the hard way that Murphy’s law is a constant companion in the hardware business.
But after more than a decade of work on three different continents, there are a few lessons I’ve learned that will help you avoid unnecessary mistakes.
Expect cost fluctuations, especially in currency and shipping
Shipping physical products is quite different from “shipping” code — you have to pay a considerable amount of money to transport products around the world. Of course, shipping costs become a line item like any other as they get baked into the overall business plan. The issue is that those costs can change monthly — sometimes drastically.
At this time last year, a shipping container from China cost $3,300. Today, it’s almost $18,000 — a more than fivefold increase in 12 months. It’s safe to assume that most 2020 business plans did not account for such a cost increase for a key line item.
Similar issues also arise with currency exchange rates. Contract manufacturers often allow you to maintain cost agreements for any fluctuations below 5%, but the dollar has dropped much more than 5% against the yuan compared to a year ago, and hardware companies have been forced to renegotiate their manufacturing contracts.
As exchange rates become less favorable and shipping costs increase, you have two options: Operate with lower margins, or pass along the cost to the end customer. Neither choice is ideal, but both are better than going bankrupt.
The takeaway is that when you set up your business, you need to prepare for these possibilities. That means operating with enough margin to handle increased costs, or with the confidence that your end customer will be able to handle a higher price.
Overorder critical parts
Over the past year, many businesses have lost billions of dollars in market value because they didn’t order enough semiconductors. As the owner of a hardware company, you will encounter similar risks.
The supply for certain components, like computer chips, can be limited, and shortages can arise quickly if demand increases or supply chains get disrupted. It’s your job to analyze potential choke points in your supply chain and create redundancies around them.
At Liteboxer, for example, we create stockpiles of every component that is critical for our product. Because we overordered the computer chips we need for our equipment at the beginning of the year, the shortage hasn’t impacted our ability to manufacture and fulfill orders. If we hadn’t done this, our critical holiday season would have been a disaster.
Pick the right region for manufacturing
Different regions around the world have developed singular manufacturing specialties. This has kick-started a benevolent cycle that has caused expertise, equipment and capital to accumulate in one region. They can manufacture their products at a cost and quality level that other regions just can’t match.
Malaysia, for example, is great at textiles. Taiwan is world class at bending metal, and China leads in plastics. I set up a factory line for manufacturing complex 3D printers in Hungary, because it has incredibly skilled, college-educated workers who are expert at reliably producing complex products.
This means that you should choose the region that best suits your product, with little deviation. If you need bent metal, stick to Taiwan and don’t be tempted by offers elsewhere. In China, especially, manufacturers will say yes to everything, even for components they have no expertise in. It’s virtually impossible to rival the expertise that these regions have built up, so don’t try.
Overinspect your first engineering build
First-time hardware entrepreneurs are often tempted to move too quickly. They might create a prototype for early testing and market exploration, set up manufacturing for the “engineering build,” and then immediately ship that build after limited testing.
This is a recipe for disaster. I have a rule of thumb: If you don’t find something seriously wrong when testing your first engineering build, you’re not doing it right. You should assume that you will need to work closely with your contract manufacturer to correct several critical issues after their first engineering build. Then test again, correct more issues and only after you are 100% confident that you have a flawlessly manufactured product should you ship to customers.
I realize this recommendation flies in the face of established methodologies for shipping software. However, remember that shipping a buggy hardware product can be exponentially costlier than shipping buggy software. Recalls, angry customers, return shipping and other issues can become existential problems. You need to make sure you get the product right before selling it, even if that means spending $10,000 in overnight shipping to get another test build.
Have one person to call when things go wrong
A global supply chain is, well, global. Each region, supplier and subcontractor in your chain needs to work in harmony with each other, because a single snag can ruin the whole process.
This is why I always make sure to give one individual at my contract manufacturer the responsibility for the entire organization. This means that if issues arise anywhere on the line, I only need to have one name on speed dial to get to the bottom of it — one person who understands that it’s their responsibility to fix things.
Otherwise, you’ll end up chasing down a dozen people across as many time zones just to find that one missing container has jammed up your supply chain. This is no way to run a business.
Never act as your own supplier
A corollary of the above rule is that you should never act as your supplier’s supplier. Companies are sometimes tempted to manufacture one or two custom components themselves, and then ship those components out to their main contract manufacturer.
This creates a degree of complexity that sounds fine in theory, but rarely works in practice. Any delay or error in those components will provide your manufacturer with a ready-made excuse for their own shortcomings, and you’ll be hard-pressed to prove otherwise.
The joy of hardware
Hardware is hard, but in my view, there’s nothing that rivals the satisfaction of designing and building a product that you can feel and see — something that lives in people’s homes and offices, and provides tactile joy.
Setting up a global supply chain that reliably builds such products is no easy feat, but if you’re clear-eyed about the challenges and apply some rigor and forethought to the process, the end result can be hard to match.
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