How to Select a Supplier

Adam Craft VP Manufacturing & Project Management

www.dragoninnovation.com

§  Informal! Please interrupt with questions & comments.

§  Background: Dragon Innovation / Adam

§  Importance of choosing the right supplier

§  Where should I build it?

§  The RFQ Process and how do I decide?

§  Award the contract

§  MSA / Schedules (time permitting) §  Key Takeaways

OVERVIEW

DRAGON INNOVATION RADICALLY DERISKS AND SIMPLIFIES THE MANUFACTURING PROCESS FOR A NEW BREED OF HARDWARE

PRODUCTS AND ENTREPRENEURS

DRAGON CERTIFIED Up Front Design Review &

Cost Estimation

MANUFACTURING SERVICES Factory Selection Process &

On Site Project Management

WHO WE’VE HELPED

And many more

Why does it matter so much?

Choosing the right supplier is as important as choosing the right investor, the right co-worker, the right retail partners, and even the right product / features. Why?

Importance of Choosing the Right Supplier

Schedule Cost

Quality

DIRECTLY IMPACT

Your Company’s Business and Reputation

Schedule Delays: §  Opportunity Cost §  Expediting fees / air freight

Cost Impacts: §  Margins §  PO procedures, lead times, cancellation

Quality Issues: §  What do you want your customers to think about your first product? §  What if it doesn’t work? §  Cost of returns / failures – in dollars and in reputation?

Why? §  You need help, and they can provide it – you hired them for their

expertise, so treat them like they are part of your team. §  They will be invested in your success and motivated to help you

succeed. §  You’re not Apple, Google, or their largest customer (yet!)

How? §  Treat them like part of the team. §  Ask for their input, and then accept it where you can. Push back where

you can’t. The more you incorporate their input, the more invested they are in the product.

§  Remember that they need to make money too, or there’s no motivation to keep working with you.

Important: Your “supplier” is your “Manufacturing Partner”

Where do I build?

Are your volumes high enough? §  10K minimum, and CM’s are

looking at long term business

China / Asia?

Do you have a high labor content? §  Both machine rates and labor

rates are lower than in the US

Is your product very cost sensitive? §  Electrical components and many

other materials are least expensive in Asia

China / Asia?

Does your product use existing manufacturing techologies?

§  Breakthrough methods can be more difficult to implement

Can you tolerate variations in supply chain and logistics?

§  Distance, weather, other customers can impact your deliveries

China / Asia?

Can you benefit from low cost Design for Manufacturability (DFM) and/or Non-recurring Engineering (NRE)?

§  Utilizing a supplier’s enginering resources can be very cost effective

Is your IP physically protectable? §  What’s your “secret sauce,” and

can you control access?

China / Asia?

China / Asia Drawbacks

Distance! §  Travel time, logistics, and time

zones make working together more challenging

Language! §  Unless you speak Chinese or

have representation on the ground, communicating can be difficult

China / Asia Drawbacks

Labor Rates! §  Labor rates have been steadily

rising for many years.

Exchange Rate! §  Exchange rate is also moving in

the wrong direction

Are your volumes lower than 5K? §  Lower volumes make it harder to

offset costs of working with China

US Manufacturing?

Are you able to automate assembly? §  Automation can minimize labor

and the resulting cost if your volumes are high enough

Are you sensitive to shipping times and expense?

§  Beyond the obvious time implications, large products are expensive to ship

US Manufacturing?

Is your IP difficult to protect? §  Locally you have more control

over your IP

Do you require non-standard capital equipment?

§  Or is there significant new process development?

US Manufacturing?

Are you producing product for a government contract?

§  Limitations on partners

Transitioning from US to Asia Benefits:

§  Minimize travel time and cost.

§  More team members can be part of the process and be hands-on.

§  Leverage benefits of proximity to iterate more quickly and learn from Gen. 1, then transition to Asia to scale.

Drawbacks:

§  Not all tooling / investment will transfer. You’ll have additional capital investment when you bring up second CM.

§  You may not actually save any time.

§  DFMA suggestions from new CM may differ from original CM.

§  You may find it difficult to scale quickly if the need arises.

What about Mexico? Benefits:

§  Minimize travel time and cost when compared to China.

§  Transportation can be less expensive, especially for large products.

§  Cost benefits over US, and closing the gap with China.

Drawbacks:

§  Likely not the lowest cost solution.

§  Quality can vary greatly – very important to have a partner / recommended CM.

§  Safety concerns in some areas.

The Request for Quote (RFQ) Process

§  Determine when you need to choose a supplier

§  Determine what type of supplier you need

§  Identify potential suppliers

§  Gauge interest and narrow the field

§  Create RFQ package

§  Visit! §  Analyze results

§  Check references

§  Negotiate BIG items

§  Decide, and leave others on good terms

RFQ Process Overview

RFQ Process

When am I ready to choose a Manufacturing Partner?

§  You have a “80% Prototype”

§  You need development and/or DFMA help

§  Can also be influenced by desired shipping date

What kind of supplier do I need?

§  ODM: Original Design Manufacturer

§  OEM: Original Equipment Manufacturer

§  JDM: Joint Development Manufacturer

§  CM: Contract Manufacturer

RFQ Process Identify potential suppliers:

§  Reach out to your network, ask people with experience that you trust

§  Who makes similar products? (Or uses similar technology?)

§  Trade shows, conferences, etc.

Gauge interest and narrow the field:

§  Send high-level pitch/description (non-sensitive), outline business potential, and needs. Send any questions you have about capabilities, competitive products, etc.

§  Consider your size vs. supplier size – is it a match? How many clients do they have?

§  If responses are good, send NDA prior to sending full RFQ package

RFQ Process: Create the RFQ Package

Overview: §  Company Overview §  Team overview §  Funding, market potential §  Product & assembly info §  Quality and test requirements §  Compliance info §  What’s done §  What needs to be done §  Roles / Responsibilities §  Factory Criteria §  Expected timing for RFQ

Bill of Materials (BOM): §  Roles / Responsibilities §  Factory Criteria §  Canonical format (A2A) in Excel §  Transparent and Formula Driven §  Separate Std, Special and

Consigned Margins/Markups §  Include all costs to Ex-Factory §  Fill in the blanks

Schedule: §  Gantt Chart §  Milestones §  Fill in the blanks

RFQ Process: Visit Checklist

ü  Do you like the team? Are they experienced and friendly?

ü  Do they have the right manufacturing capabilities?

ü  Does your intended volume match their volume capabilities?

ü  Are they financially stable?

ü  Do they have enough working capital to get going?

ü  Do they have favorable payment terms?

ü  Do they have other large Western or European clients?

ü  Are they transparent in their costing?

ü  Do they take IP seriously? Did they show you something they shouldn’t have?

ü  Are they ethical in their treatment of their workers and otherwise?

ü  Do you have access to upper management?

ü  Are they excited about working on your product?

RFQ Process: Analyze Results CM Comparison / Apples-to-Apples (A2A):

§  Total Material Costs

§  Labor

§  Margins/Markup (Standard, Special, Consigned)

§  Pareto of Top 5 Most Expensive Components

§  Fixed Costs (tooling, fixtures, NRE)

§  Schedule

§  Fit Criteria

RFQ Process Check References:

§  Ask for references from recent / current customers

§  Ask your network if you haven’t already

§  And then call them!

Negotiate the BIG items:

§  You can’t share one CM’s costing with another, but you can push back generically – i.e. “Your tooling is very high, please take another look.”

§  If you have special pricing from a vendor, it can likely be passed on to the CM.

§  If something looks out of whack, there may be a misunderstanding. Clarify with the CM.

RFQ Process

Finally, Award the Business!!

§  Use the A2A info + intangibles to choose your partner

§  Send an official notification

§  Set a kick-off date, plan to be on site

§  Start technology transfer process

§  Kick off negotiation of Manufacturing Services Agreement (MSA)

§  Follow up with other CM’s

The Contract

Protecting yourself

The contract, sometimes known as the Manufacturing Services Agreement (MSA), is a legal document spelling out the details of the arrangement with your supplier.

Manufacturing Services Agreement

§  Manufacturing Services: Who’s doing what

§  Forecasts and Purchase Orders, policies

§  Fees and Payment, Pricing §  Shipping requirements, Samples §  Quality Testing: Who does it, who

pays for it, how it is done §  Epidemic failures §  Audit: Record keeping §  Product Acceptance & Warranty

§  Representations & Covenants: Legal document, ethical, etc.

§  Intellectual Property Ownership §  Mutual Non-Disclosure Agreement §  Term & Termination §  Indemnification & Liability

Limitation §  Terms of agreement, use of name §  Successors / assignment – new

agreement §  Controlling law, jurisdiction, venue

Schedule

How long does it really take?

You have a working prototype and you’ve chosen a factory. Now you “just” have to start making thousands of identical and robust production versions of your prototype. What could possibly go wrong?

Production Schedule

Question: How long should you budget from supplier selection until

you ship your first production units?

Scheduling Tips

When creating a production schedule, consider the following:

§  Many consumer schedules are driven by Christmas, which doesn’t move. However, you need to be realistic.

§  Plan contingency in your schedule. Things never go according to plan.

§  Allow several prototype cycles and allow enough time between prototype cycles so you can fix issues that are found during testing.

§  Your manufacturing partner is unlikely to be as optimistic or aggressive as you (and this is good).

Scheduling Tips

Scheduling considerations (continued):

§  Have an onsite presence in the factory.

§  Track schedule closely and take corrective actions early. Don’t expect to make up the time in the end.

§  In almost all cases, shipping known bad product is worse than shipping late product. Large numbers of returns can kill your business and reputation.

§  Avoid: “There’s never enough time to do it right the first time, but always enough time to do it again.”

8 wks 8 wks 8 wks 2 wks 2 mths 1.5 mths

DFM / Mold Drawing

6 -10wks

1st OBS

1 wks 2 wks 2-5 wks*

2-5 wks*

* Depends on Complexity

2-5wks* 2-5 wks*

1 year

Critical Components

Selection e.g.

Motors Magnetic Encoder Wheel

Life testing…

Oct 2004

Prototype 1st Round

Nov 2005

Jan 2006

2nd Round

Apr 2006

3rd Round

Jun 2006

Finished Prototype

VQP Project Hand Over

Quotation Finished Factory Selected

Aug 2006

First Shot

Dec 2006

Tool Start

Oct 2006

MEP

Jan 2007

EP1

Feb 2007

EP2 A-B

Mar/Apr 2007

FEP

Apr 2007

PP

May 2007

PS

Jun 2007

2-5wks*

* Product Complexity Lead Time Between Each Milestone

New Accessory 2 weeks New Version with some minor changes 3 weeks New Generation or Simpler New Product 4 weeks New Product Line – Complicated 4-5 weeks New Product Line – Very Complicated 5 weeks

The Road to Production Reference example: Roomba 3

§  Choosing the right supplier is the most important manufacturing decision you’ll make

§  Your supplier is your partner, not just your vendor

§  After you decide where to build and what type of supplier you need, use a formalized process to evaluate and choose

§  Use your A2A + intangibles to choose your partner

§  Set up a MSA to formalize your relationship

§  Scheduling: It takes longer than you think!

Key Takeaways

Ques%ons?  

Find us at DragonInnovation.com

dragon@dragoninnovation.com

@dragoninnovate /dragoninnovation