In-house manufacturing for a hardware startup

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TLDR: Almost every new hardware startup founder I speak to wants to find a contract manufacturer for their production with little thought given to manufacturing in-house. Bringing initial production in house with some benches and a few temporary staff will get you a long way, and it can be a lot of fun. It adds flexibility, reduces cash burn and allows you to really understand your supply chain and assembly process before scaling up.

Outsource! Outsource! Outsource!

The early days of our company’s history (Radfan) were full of discussions about how we were going to find a contract manufacturer to build our product. What country should we choose? Will they be able to keep up with demand? What if they rip us off? How do we even find a local contract manufacturer, let alone one in China?

Our investors were dead set on us outsourcing production but something never felt quite right to us.

We were very early stage, we had raised a fairly small amount of money (total pre-launch raise was about $200,000) and all of the contract manufacturer minimum order quantities we found were way higher than what we were expecting to sell in our first year. Our biggest fear was commissioning a 10,000 unit build and then not being able to pay for it, we hadn’t raised enough money to pay for everything up front so we would have been relying on the credit terms of one very generous (and in hindsight, crazy/unscrupulous) contract manufacturer (CM).

• Minor side note here, if you are very early stage and a CM is offering very generous credit terms then be wary. Offering credit to a first-time customer, with no trading history, without doing the same level of due diligence as an investor can be a sign that they will intentionally cause problems with your initial batch, wait for you to go bust and then buy your assets (essentially any IP you have) out of liquidation at a song. It’s rare but not unheard of, your CM should not be your investor and offering credit without doing full due diligence at this stage is a red flag in my book.

So, we decided to have a go at manufacturing our first 1,000 units in house ourselves and do a staged release:

1. Build 10 units and test them in our own homes, all seemed fine. This is similar to an engineering trial.
2. Build 200 units and do a soft launch to our mailing list — essentially beta users. This would be the equivalent of a production trial.
3. Waited for feedback and discovered 2 big flaws in our assembly process that had been fine in prototype stages.
4. Scrapped the remaining unsold 50 units and put in countermeasures to fix the issues.
5. Went on a national radio station in the UK and sold 600 units in 2 days, went “out of stock”.
6. Built 700 units in 5 days with 2 members of temp staff to fulfill the radio orders and replace the bad units from the production trial.

The above all happened over the course of 2.5 weeks and allowed us much greater flexibility than we would have had with a CM. A CM would have allowed us about 10 samples but the issues that plagued the first 200 units would have been across the full batch and we would probably have gone out of business.

Since that first batch, we have produced around 50,000 units across 6 similar products under our own roof and have moved into a unit that will allow us to scale to around 60,000 units a year. We supply products to our own website customers, Amazon and a large national UK retailer.

Seriously though, in-house production?

The first thing to say is that we were not manufacturing experts, it wasn’t until we started touring CMs that we realized most production lines are just people clipping, gluing and screwing components together at benches. They weren’t the automated monoliths we though they were, in fact, we noticed that the only factories with any level of mechanization (at least in the sub 100,000 units per year bracket) were those doing printed circuit boards or where the product was too heavy/large to be easily lifted by a single worker.

Over the years we’ve found many benefits to in-house production including:

• Increased flexibility. As our product is sort of modular, we can buy all the parts in and then decide, based on real-time sales information. which models to produce. This means we don’t have to worry about our CM making too many of one unit and not enough of another.
• Eases cash flow. This was the main reason we went down this path in the first place. Buying in the individual components means that rather than placing one big order with a single supplier you are placing many small orders with a variety of suppliers, the overall cash commitment might be similar but the risk to each individual supplier is much smaller and so you can get better credit terms. It also means that if you ever are late on a payment you can negotiate a payment schedule on a supplier by supplier basis, who, because the sums are much smaller than they could be, tend to be a bit more relaxed about extending your credit.
• Flex with demand. If your business has any level of seasonality (which most do) this can be a big help. Rather than committing to ever increasing purchase orders with your CM and then getting left with stock during quiet periods, you can flex your production rate with demand and keep things more efficient.
• You’ll make more margin. Your overhead running the production line will be less than a CMs markup so you’ll make more money in the long run.
• It’s fun. Ok, so this isn’t really a business critical benefit but it is nice to work on fun stuff. Dealing with production gives a new challenge every day, from people management, supply chain logistics, quality control, building jigs and generally making things run smoothly, there is always some way you can improve things for your business. Unhappy with the BOM/assembly cost? No problem, unlike with a CM, you have direct access people on the shop floor handling your product day in day out who can give you efficiency insights that no CM would pass on to you.

So, what about the downsides? Well:

• If you are aiming to build a location independent business then tying yourself to a tin shed unit won’t be for you.
• If you mess up your supply logistics then you have no one to shout at to get it solved. On the plus side, you will probably be a whole lot more bothered about fixing it quickly than your CM will be. (Always have some cash set aside to pay the air freight cost on critical components you might get caught out on)
• Staff can be a nightmare, they can also provide you with some of the most rewarding moments of running your own business.
• If you absolutely need specialist equipment or accreditations to assemble your product the costs may be too high to consider this route.
• Running production can be a nearly full-time job which may detract from your core competencies in the business.

Actionable advice for running your own production line

• Use some kind of stock or production management application!
• Always have a backup supplier for every component — known as Second Sourcing. Ideally, the second supplier will be one that can supply quickly, this often this means they are more expensive or don’t offer credit terms though (otherwise they’d be the primary supplier!)
• For unique parts that are hard to second source (injection molded parts for example) ask your supplier for a draw down. This means you commit to buying a certain number of parts over 6–12 months and they will either make the whole lot up front and you can draw down from as you need, or agree to always hold a percentage you can dip into and be ready to make the whole order very quickly
• Get drawdowns for long lead time parts as well, even if they are generic parts, a second source may still not be able to deliver quicker than a few weeks
• Always know how much stock you have on hand
• Use temporary agency staff initially, give short term contracts to those who are good and …
• Don’t be an arse to your staff, they are not robots — at the same time make sure they are focussed
• Everything seems to have a lead time of 6–10 weeks + shipping from China
• Build product as part of a continuous line with each member of staff doing a portion of the work, this is more efficient than batch building or one member of staff building one product start to finish
• Don’t aim to run your line at 100% capacity, stuff will go wrong. Aim for 85% instead so side jobs can still get done and you can handle people being off sick
• Make sure all your staff can do all the jobs on your line
• Pay closer attention to the component stock level for parts that are used earlier in the production process. If you run out of the last component added to the product you can just stockpile unfinished products while waiting for it to arrive. If you run out of a part that is used first and it can’t be added in later then you just have to stop production.

Got a specific question about running your own production line? Shoot me a question from the comments.