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Negotiating Manufacturing Agreements: What Would Ovid Do?

January 31, 2016

Folks,

Regardless of whether it’s in a LCC (Low Cost Country) or right at home, negotiating a manufacturing or supply agreement with a new vendor is always challenging and often painful.

When we’re sitting across from the table from a supplier, I often flash back to high school Latin class. The lengthy process required to get to the goal line reminds me of this quote from Ovid, “Perfer et obdura, dolor hic tibi proderit olim” or “Be patient and tough; someday this pain will be useful to you”.

Well, the pain of hundreds of negotiations (and a high school Classics education) have been useful to us. During a career spent crafting countless supply agreements, I’ve come up with a checklist that keeps us on track and helps to minimize the pain. It’s summarized below:

  1. In advance of meeting with the supplier (always in person) submit an agenda setting the goals for the discussion.
  2. Also in advance, provide rock solid drawings, CAD files, prototypes, specifications, etc. By the time you’re ready to negotiate the details of a supply agreement, the technical variables should be well defined.
  3. During the meeting, pause often to summarize key points. Use that pause to restate important elements using slightly different language. This reinforces the importance of the topic and helps to prevent doubt or misunderstanding.
  4. Embrace a “win-win” mindset. You don’t want to do business with a supplier that can’t make money or feels that they’ve been backed into a corner.
  5. Per Ovid, be firm, but also be respectful. No one likes to do business with someone who swaggers like a pimp. If you get to loggerheads, ask for a break or politely disengage. Stalking out of the building doesn’t accomplish anything.
  6. Include arbitration language in the written agreement. You don’t want to “go legal” if there’s anyway to avoid it. We recommend CIETAC arbitration be utilized in China.
  7. At the conclusion of the negotiation, write the key points of the agreement on the whiteboard. Work for verbal confirmation as well as head nods and other physical checks to confirm that you are in alignment. Then publish a written summary promptly.

This is a lengthy and granular process, but it’s worth it. Marching slowly and deliberately forward, taking regular breaks to summarize your mutual goals (especially offshore) and publishing meeting notes pays dividends. And your high school Classics teacher will be proud of you!

Cheers,

Jack Daniels
+1.617.285.2486

Taking Cost Out Of Your Supply Chain

January 21, 2016

Folks,

Based upon the strong response we received to last month’s blog regarding how to negotiate advantageous and fair manufacturing agreements, this month we’d like to share our thoughts on how best to reliably take cost out of your supply chain. The five recommendations listed below are tried and true tactics that we find yield strong results and enhance your purchasing power and improve your company’s EBITDA.

Buy Direct and Bypass Distribution

We’re always surprised when we encounter situations where our customers are           purchasing reasonable quantities of hardware through distribution because “it’s easy” or “that’s the way we’ve always done it”. Unless you’re buying only a handful of units or your distributor is providing kitting, stocking, etc., there’s no reason not to trade directly with the manufacturer.

Piggyback on the Vendor’s International Certifications

Many products require some form of international certification such as CE, Energy Star, FDA, or UL. While it’s often feasible to apply for your own dedicated registration, this is expensive and time consuming. Many product segments will allow you to piggyback on your vendor’s existing registrations. Explore adding your product listing to their registration and save time and cost..

Pay the Freight Yourself

This is a no brainer, especially if you have a relationship with a good freight forwarder. No manufacturer will coordinate your shipment door-to-door and pay the freight bill without adding in some commission or mark-up.

80/20 Split Your Orders

Or 70/30 . . . The level of granularity on the split isn’t so critical. What is important is to have a strong relationship with your majority supplier plus a hungry minority supplier waiting in the wings. This provides you with supply redundancy, a more secure supply chain and two suppliers that are fighting to make you happy.

Leverage Economically Useful Lot Sizes

We constantly see RFQs listing oddball quantity breaks: 1 – 219; 220 – 1773; and 1774 – 11,250. While an order from your customer may specify these quantities, chances are that candidate vendors’ factories are structured around very different lot or run sizes. Requests for weird quantity breaks usually yield weird pricing. Ask suppliers for quotes based upon their (not your) economically feasible or desired lot size. With some products that require significant set-up time, the aggregated cost of a larger lot may cost dramatically less than a smaller lot.

These tactics help us and our clients to be smart, get it right, get it on time and make some money for our companies!

Cheers,

Jack Daniels
+1.617.285.2486

It Can’t Possibly Take That Long…

November 18, 2015

Folks,

When we’re launching into a new manufacturing launch project, our customers will very reasonably ask “How long will it take to get products that we can ship”?  We review the 2D and 3D drawings, their BOM, specifications, Product Requirements Document ,etc., and based upon our experience offer a good faith time line.

If we use the example of a mid level technology product, say an automotive aftermarket electronic module that installs in the diagnostic port under the dashboard, the short answer is “Five months. . . If everything goes perfectly”.

Our time estimate is often met with head shaking, looks of disbelief, and utterances of “That’s crazy! It can’t possibly take that long.” Well, guess what? It can and does. We’re not hacking prototypes, we’re building retail ready products and that takes time.

The beginning of the process looks something like this:

  1. Review the product documentation: one week
  2. Ask questions/resolve BOM and design issues/recommend DFM tweaks: one week
  3. Identify suitable manufacturers and send out RFQs: one week
  4. Respond to the candidate manufacturers’ questions, requests for design relief, component or material substitutions, etc.: one week
  5. Share the above requests with our customer and negotiate buy-offs: one week
  6. Update the manufacturers and receive their quotations: one week

That’s six weeks to get to the point where we have a budgetary quotation. If we’re doing our job (and not forcing a guesstimate rather than an estimate through the pipeline) it can take longer. And the delays are unavoidable. If the CM has suggested an alternate component because the one you designed around has an eleven week lead time, it’s necessary to review the data sheet, order a few samples and test them in your prototype.

More significant design changes or finding alternate sub systems, electronic modules and active components takes longer still. And that’s all before we can order and build the tooling for the enclosure (four to six weeks), shoot the first articles (one week), tweak the molds through T1, T2 and maybe T3 changes (a couple more weeks) and spin out bare PCBs (one week minimum). And if we need to apply for FCC, UL or other international certifications, work around various holiday shutdowns, more time still.

If the product development gods are with us, we’ll hit the five month estimate. They rarely are.

We know that you did all of the heavy lifting through the brainstorming, design and prototyping phase and your product looks “finished”. It’s not. The messy and somewhat unpredictable transition into mass production is part of the process. Please budget time in your launch plan and treat your manufacturer gently while this is all happening.

Cheers,

Jack Daniels
+1.617.285.2486

 

Has Product Development Gotten Too Quirky?

October 8, 2015

Folks,

Troubling news emerged from the new product development community in New York last week. A well known crowd funding platform (with an unconventional and offbeat name) that brought interesting consumer products to market filed for bankruptcy. Since it’s founding, they brought almost 400 products to market. Blue chip corporations and venture capital firms had invested more than $185M to tap into the deal flow of new products. 

Were they too quirky for their own good? Perhaps … While early stage companies, start-ups and inventors form a portion of our client base, they don’t represent a majority of the work that we do. We purposefully limit them to less than twenty-five percent of our projects.

Why? For two principal reasons:

  1. There’s a limit to the amount of coaching, hand holding, love and manufacturing therapy that we can provide.
  2. There isn’t an endless supply of money to fund smart pitching machines, Internet enabled makeup compacts and next generation pet food dispensers.

After more then eleven years of doing this for a living, ‘Projects We Love’ (to borrow a term from another crowd funding platform) are fairly rare. About 1/200 new product concepts make us really get excited and think “wow – that’s a great idea – I’d buy that”. 

That leaves 199 projects that occupy the category of “Projects That We Don’t Love, and May Not Even Like”.

 While we’re not the perfect predictor of commercial success – I’m sure that a few good ideas that didn’t make it through our filter ended up being fabulously successful. But not many.

What does this mean for design engineers, industrial designers, UX specialists and business development gurus? The gold rush to chase down, develop, prop up and fund the next great idea may be slowing down. ‘Smart money’ is getting smart again. If you’re willing to roll the dice with an early stage company, make sure that they’re building a cutting edge product that consumers can understand, have a tried and true way to purchase and don’t say ‘yes’ too often.

Cheers,

Jack Daniels
+1.617.285.2486

There’s Safety in (Audit) Numbers!

July 24, 2015

Folks,

We recently re-audited a contract manufacturer located in eastern China for a design/build client. The CM was tapped to fabricate complex formed metal and molded plastic sub-assemblies that were to be shipped to the USA for final assembly and testing.

They had selected this CM after meeting with its local representative.

On the first go round, our engineer carried out the on-site general audit and awarded a One… That’s a One on a twenty-two point scorecard. We’ve actually awarded a Zero before, but it’s the first time in our history that we’ve given a One on an audit.

Our client (and the rep) couldn’t accept that the vendor was “that bad”. “You had to have missed something. The local rep said that they’re really good”.

They didn’t have an IQC (Incoming Quality Control) function to confirm the quality of components and materials before putting them on the shop floor. There were only a handful of work instructions on the floor, there was no In-Process Quality Control (IPQC) or record keeping and the instrument and machine calibrations were nonexistent. 1/22. What we saw is what they got.

Well… The local rep was so convinced that the result was the combination of the vendor having a bad day and our auditor not doing his job, he proposed that we re-audit at his expense. So we did.

10/22.

They’d given the factory a quickie makeover, posted a few charts and work instructions and smiled a lot. All meaningless window dressing. We still couldn’t advise our client to place an order there.

Here’s how we rank factories:

>20: Qualified

18~20: Accepted

10~17: Requires review on case by case basis

<10: Unqualified

It doesn’t matter if the supplier is molding rubber, die casting aluminum alloy, providing electronic box build or building dental instruments. Good factories have processes and procedures in place that provide the necessary framework for control and predictability. Our experienced engineers know this and can sniff out a fraud in minutes.

We rely upon and trust the numbers generated during our audits. I recommend that you utilize a similar discipline in qualifying new vendors. If you’d like a copy of our audit template, please drop me a note.

Cheers,

Jack Daniels
+1.617.285.2486
www.EB-INTL.com

“Is Your Product Fully Defined?”

July 1, 2015

Folks,

We had a conversation with a potential client last week who wants to produce an automotive aftermarket product. What he described sounded cool, I could visualize how it would be used (cooler still) and I could imagine customers actually buying and using the device. [Way cool as many product concepts that entrepreneurs think are the best thing since canned beer don’t generate a single dollar in sales!]

This guy had gotten started on a crowd funding website and tried to procure a prototype from a broker before getting completely sideways. The campaign was canceled as it didn’t hit its funding target and the prototype was so poorly executed it couldn’t be used as proof of concept to raise funds from other sources.

Now beyond this guy not having a clue on how he was going to sell the product, (the most common downfall for inventors and early stage companies) he had no grasp of the complexity of the task ahead and the costs involved.

Jack: “Do you have a PRD (Product Requirements Document)?”

Entrepreneur: “What’s a PRD?

Jack: “Is the product fully defined?”

Entrepreneur: “Yup… It might have Bluetooth. It will definitely have a switch on the dashboard. It will probably have video. I think that it will work with your smart phone. We’ll probably need an app.”

Jack: “How much have you paid the broker?”

Entrepreneur: “$40K for the development and the prototypes.”

Jack: “Does that include NRE and tooling?”

Entrepreneur: “What’s NRE and tooling?”

Ugh… A lamb being led to the slaughter.

This poor fellow believed that without design or direction, an offshore CM could cobble together off the shelf parts including sensors, Bluetooth modules, wire harnesses, switches, adhesives, PCBs, aluminum extrusions (and a long list of items that he had no knowledge of) and come up with a finished product.

Jack: “You’re way too early for us. You need to hire an electronic/industrial design firm to generate a solid design and prototypes. Someone nearby that you can work with closely while the product is being defined.”

Entrepreneur: “Will that cost more than $4OK?”

Jack: “Way more…”

Moral of the story: make sure that your product is defined and the design is “in the can” before you consider manufacturing onshore or offshore.

Cheers,

Jack Daniels
+1.617.285.2486

 

Making a New Product is Like Making an Omelet…

June 5, 2015

Folks,

I’m sure that many of you read the recent New York Times article “ZPM Espresso and the Rage of the Jilted Crowdfunder” published on April 30th. Beyond the well written narrative that described the maker movement and the travails of building a new product on a crowd funded shoestring, I gleaned a powerful and resonant takeaway “You sort of have to make 2,000 of something to find out if you can make 2,000 of something.”

This clear and direct language expresses what we’ve shared with many early stage and startup companies: the learning curve associated with building a new product is painful and costly. While you (the entrepreneur, garage genius, maker, hacker, etc.) can hand craft one to five units on a limited budget, a contract manufacturer cannot.

Even after the tooling is made and paid for (and yes, once we get past the modeling and prototype phase, tooling is a must) the CM must use conventional and real industrial manufacturing techniques to make retail-ready products. This is an essential stage in the new product development cycle.

There are very few products that are a “drop-in” fit in most factories. Until the fabricator develops the methods to make your product and then adjusts their processes to suit it, it’s a learning process.

The industrial pump needs to be primed by making many units… Sometimes hundreds and in some cases thousands are consumed in this process. And these aren’t shippable or saleable. They can end up in the Dumpster.
There’s obviously a financial cost to this. There’s also the emotional cost of seeing components that you specified and purchased replaced with a better fit. Or T1, T2 and T3 molded plastic housings tossed in the trash can.

A well-crafted turnover package will minimize the cost, effort and stress associated with making a new product. It won’t eliminate it. So – get your emotions and checkbook ready to be exercised.

Cheers,

Jack Daniels
+1.617.285.2486

Lower End of the BOM: Ain’t Nothing Like The Real Thing Baby!

April 8, 2015

Folks,

With respect and proper attribution, I make reference to the great R&B hit “Ain’t Nothing Like the Real Thing (Baby). Sung by Marvin Gaye and Tammi Terrell and written by the extraordinary Ashford and Simpson, it peaked at #8 on the Billboard Hot 100 chart in 1968.

How could this possibly connect to our work in strategic sourcing and new product manufacturing you ask?

Most covers of this classic (IMHO) don’t hold a candle to the original. Give a listen to the versions recorded by Aretha Franklin, Elton John & Marcella Detroit or even Donnie & Marie Osmond… No comparison.

In the same manner, materials and components that are the “technical equivalent” or “easily substituted” don’t always hold up well in the field (or in your all-in-one printer). We’ve experienced major problems when seemingly low risk or ancillary materials & parts are used in production builds.

New product design teams go to great lengths to define key components and sub systems. This extends to printed circuit board materials, continuous duty motors and pumps, active electronic components, specialty grades of metals, etc.

Second or third tier components and materials such as adhesives, gasket & seal substrates, cable jacket materials, molding compound, tapes and stainless steel tubing usually aren’t explicitly called out and defined in the BOM or specification.

In some cases this is fine. Most standard “B grade” fasteners are going to work in your device. Adhesives that don’t bond effectively to the mating surfaces in a plastic housing won’t.

When you built your first units, the law of “positive unintended consequences” worked in your favor. The multitude of materials and their properties, many knowable, many not, combined to yield functioning prototypes. In the transition to mass production, the law of “negative unintended consequences” can often trip up your supplier. They and we would prefer not to be forced into the role of materials interaction detective.

We ask our customers to clearly define all of the “low risk” materials in their BOM. We’ll probably find reasonable substitutes for many of them, and can move forward in an organized approach, changing one or two variables at a time. It may be necessary to stick with the original and avoid the “cover” versions.

Cheers,

Jack Daniels
1.617.285.2486
www.EB-INTL.com

What’s More Difficult to Source & Build: Toys or High Tech Devices?

April 1, 2015

Folks,

We were recently approached by a new customer who asked for assistance with qualifying suppliers of toys, some designed from scratch, some modified standard products an then guiding the build cycle.

Knowing that we source many high tech products, he asked if EastBridge was interested in supporting their offshore procurement activities.

This got me to thinking, what’s more difficult: manufacturing high tech products or “low end” consumer products, such as toys?

Please see a comparison of the process below:

PARAMETER TOYS HIGH TECH DEVICES
Well Written Specifications Usually Not Yes
Detailed Design Files Sometimes Always
Sophisticated Vendor Base Rarely Usually
Culture of Quality Occasionally Mostly
Product Risk High Moderate

 

When we’re tasked with building a high tech products, we generally can depend on the vendors, our customers and us speaking a common (engineering oriented) language, being able to mutually follow understandable specifications and applying well defined & proven manufacturing methods and quality standards to the process.

For fast moving/low cost consumer products (think something you’ll find in a big box retailer or at the local dollar store) the process isn’t quite so well pinned down. Even if the vendor is mid sized, it’s unlikely that they’ll have much process engineering depth, well written SOPs, quality infrastructure or significant control of their supply chain.

This segment is characterized by mom & pop proprietors… Long on gumption, short on discipline.

While it’s bad for strain gauges, printed circuit board assemblies and peristaltic pumps to be defective or fail in the field, it’s really (REALLY!) bad when a low cost baby or juvenile product hurts a kid.

This all translates into high tech products being “easy” to build and consumer products being a “challenge”. If you’re in this market, best to expect a bumpy ride.

Cheers,

Jack Daniels
+1.617.285.2486

The Unwritten Specification — Where Common Sense Can Go To Die

March 5, 2015

Folks,

I’ve recently experienced two examples (one professionally and one personally) where the concept of the ‘Unwritten Specification’ has become brutally evident.

When we manufacture technically complex products, a fair amount of effort goes into drafting a well written and comprehensive specification. These documents include critical, major and minor features to verify, AQL (Acceptable Quality Level), inspection techniques, photographs of the product, packaging format, international standards, etc.

Our specifications help a great deal in defining product acceptance standards and assist in making the “tough calls”.

What the spec doesn’t do is help with the common sense aspects, or the “easy calls” when clear thinking should rule.

So, when we inspected a lot of urinary catheters and found a raised burr on the business end (YEOW!) we immediately rejected the lot. The manufacturer (not one that was selected by EastBridge) protested, stating that “The specification doesn’t mention anything about burrs on the tip of the catheter. It’s not a rejectable defect”. Our team offered the option of field testing several of the discrepant catheters on the factory owner to confirm acceptability.

On the personal front, we purchased a car last August and recently discovered that it rolls backwards on hills when you take your foot off the brake. Not an inch or two, but all the way down the hill. And yes, it’s an automatic transmission. And yes, it’s in ‘D’ when this happens. The car dealer told me that “That’s what this model does. You should have asked when you bought the car”.

Beyond the absurdity of the dealership saying that it’s my responsibility to inquire about a safety hazard that no experienced driver has ever encountered, this reinforces that not everything can be captured in a written specification.

At EastBridge, we put a lot of effort into selecting vendors where common sense has not died. We believe in forming personal relationships with the management team, embedding our engineers on site and maintaining a dialog that allows us to understand production techniques, material characteristics and the unwritten spec. This is more work, but we feel that it’s needed and makes a difference for our customers. We think that you should do the same.

Cheers,

Jack Daniels
+1.617.285.2486

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