Hardware Myths
With a subject as diverse and complex as manufacturing, it’s easy for misinformation to spread. When one client develops a theory on why manufacturing has adopted a certain practice, it’s easy for that idea to be passed along down the line to other clients, regardless of how accurate it actually is. In some cases, these myths are harmless; in others, they may lead to major disagreements down the road if they aren’t corrected.
People often experiment with changes in manufacturing in an effort to save money, but without the right information, these choices can lead to sacrificing quality, as well as losing money and time. We want to spread accurate manufacturing information so that everyone, whether they are a client or a manufacturer, can understand one another. Everyone deserves to have a smooth, cooperative work experience with materials and methods that are designed to do the best work possible.
Economies of Scale in Hardware: Myth Busting
It is common knowledge that when you buy one item, that item will be more expensive than it would have been if you had purchased millions of the same thing on a per piece price. This seems like a fairly innocent assumption, especially because it applies to many other fields and not only manufacturing. The problem is that many hardware founders think this phenomenon applies to them regardless of their technical risk and size of production runs, and they make bad decisions on these bad assumptions. By breaking down a few of the common misunderstandings behind per piece pricing, we hope we can help people avoid these mistakes. You’ll be able to save money and have greater peace of mind all at once by using these valuable tips.
Myth 1) Equipment Utilization
Some founders think that they need to consume enough equipment to minimize waste, while also worrying about the capacity at a supplier — either contract manufacturer (CM) or joint design manufacturer (JDM) — and want to monopolize a line 24/7 to avoid this perceived threat. They feel like idle equipment is costing them money and needs to be amortized by as many units as possible. While there is a small truth to this, most manufacturing experts have moved away from tracking equipment utilization rates, and for good reason.
One thing that may surprise original equipment manufacturers is that nearly all CM/JDMs have more than enough capacity for any given job. In fact, it’s not uncommon for lines to run at 25% capacity as often as possible. If 25% sounds low, know that there is sound logic behind it. It may sound counterintuitive to work at less than capacity, but it will almost always work in your favor. By running at a lower total capacity, it is possible to enable both a single shift as well as a lane for expedited orders without overburdening the indirect labor. If a customer ever wants to pull in from one quarter to another, there is always the capacity to do so when the initial capacity starts off relatively low.
Working at less than 100% capacity won’t be a problem when you have competent people at the project’s helm. Manufacturers know the critical bottlenecks that can affect each line and can add people, equipment, or hours to that particular operation to meet the deadline, so an increase in demand won’t lead to a lack of product. During testing, these manufacturing lines can invest in automation of repetitive tasks to boost throughput. If there is global capacity, then any savvy contract manufacturer should be able to spend their way out of “capacity concerns.”
Naturally, factories can run at high initial capacity rates, even nearing 100%. However, there are inherent consequences to this strategy. With such a high capacity, a production team is required to work a very rigid schedule that does not allow for flexibility. When a job is taken from the line and the production schedule is changed, for example, equipment will inevitably go down for the changeover. As a result, a supply chain team will have to move hundreds of orders around. Running at 100% might sound like a reasonable goal, but getting there means sacrificing a lot of manufacturing’s freedom to adjust.
Any machine downtime is often welcomed by folks on the line because it allows for many to “sharpen the saw” and perform preventative maintenance. With preventative work, employees aren’t actively cranking out products, but what they are doing could save a significant amount of time and money in the future. If a small amount of preventative work here and there can keep machines running smoothly, it’s certainly worth those few compiled moments of work time.
Nearing 100% uptime is awesome if you are making millions of iPhones with a fairly predictable demand curve, but it’s not great for everyone else. Few manufacturing jobs are completely predictable all the time, and so few manufacturing plants will do well if its process, and its workers, are pushed to their upper limits.
If you decide to work through a factory that runs multiple shifts, you may notice shift variability playing a roll in both throughput and quality. The more manual a process is, the more likely that humans will undervalue or overvalue certain product attributes such as a discrepancy in solder from one document to another, or a chip that looks nearly identical to the one on the spec. To ensure strict shift consistency will require top tier management and quality talent in both communication skills as well as professional experience.
Key takeaway: don’t try to keep your equipment operating 100% of the time, even if the number sounds like the most efficient speed to work at. It’s often not the right metric, and can lead to mistakes and inflexibility down the line.
Myth 2) Bypassing Distributors
Can one get cheaper parts by bypassing a distributor? Today, more and more founders are taking control of their inventory and managing the process during the first production batch. Another current trend that has been taking place across the field is that many of these founders are eager to cut out their distributors margin once they hit scale. The idea may be appealing from a money-saving perspective, and it might give you the impression of a little additional freedom with one fewer party to work with, but anyone considering it should be sure to think through all the angles before they make any changes. There are benefits to working with distributors that you won’t have access to otherwise, and the small amount of money you’ll make up by cutting margins may not be worth it.
Working with a distributor like Digikey, Arrow, Avnet, Future, Mauser, or Newark, for example, can provide access to parts that are often hard to find regularly. This is because companies like those listed on the BOM generally do not want to talk to every new startup and go through the long process of comparing needs and understanding the processes of new companies. These companies and organizations want to focus on making the best products possible, and not spend time working with needy CTOs that are still toying with their breadboards. When you have a close relationship with your distributor, they can help hardware founders get access to the best chip makers in the globe. Even if you have to sacrifice some of your margin in order to get to this point, the resulting benefits will nearly always be worth it.
As you start to hit scale, smart hardware founders begin to ask their team to manage the CM/JDM relationship instead of the distributor relationship, which is a great idea if you’re looking for ways to save your company money. Manufacturers can often get better pricing, so it’s an option that is well worth your time to investigate. If you are comfortable with your suppliers and have a robust change management process, delegating this step often results in lower material costs at the manufacturer and a smaller supply chain team on your side.
Key takeaway: Don’t cut your distributor too early, as they can often do more for you than many people realize, particularly if your operation is fairly small. When your company finally hits $200M US in sales, maybe you should consider going direct. Until then, maintain a good relationship with your neighborhood distributor.
Myth 3) Dual Source
Dual source manufacturing means working with two suppliers to provide any product, material, or service. Given the state of pandemics like coronavirus COVID-19, there are benefits to diversifying your manufacturing, but, like anything else, there are variables and moving parts to consider. When you’re considering dual sourcing, it’s essential to have a deep understanding of what your company needs, and whether dual sourcing can meet those needs. Each company has different needs, and dual source manufacturing is a great example of a very specific opportunity to make a choice based on your specific organization.
Ask yourself: does it make sense to have a second source make parts for you on top of an original supplier? Having another source of materials can be a relief if you are unsure of your initial source, or have had difficulties working with them in the past. A second supplier can relieve some of this stress and help ensure you aren’t left scrambling at the last minute of production on the chance that your first supplier can’t meet your needs by the deadline. When you’ve only got one source, you’re essentially locked into that partner, which can be risky. Some suppliers may try to take advantage of this, knowing that many manufacturers want to avoid the hassle of finding a new supplier. If your primary manufacturing need is to have some flexibility and peace of mind in regards to where your materials are coming from, dual source manufacturing might be right for you and your team.
If you have a rock steady supplier who you trust to supply what you need, when you need it, dual source might make things unnecessarily complicated. It means that much more back and forth with another party, as well as payments, agreements, and other paperwork and red tape. It can also hurt your relationship with your primary supplier if they are aware that you are splitting your attention between two suppliers. You inherently won’t be able to give your supplier your full attention, and they may not bother to give you the quality of customer service that they could offer someone who works with them exclusively. If you are more interested in developing a deep relationship with a supplier, it may be a good idea to limit yourself to only one. The trick then, of course, is making sure that the supplier you’ve chosen meets your standards.
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When you’re making hardware decisions, you always want to be sure you’re making choices that are right for your company. When you hear stories about why certain manufacturers do things in a certain way, check your sources. Particularly when it comes to the subject of money, stories are often thrown around without substantial support behind them. Make sure you do your research before making any long-lasting decisions! That said, there are plenty of manufacturing myths out there to avoid, but the majority of these recommendations and stories will vary company to company. Most companies won’t benefit from operating at 100% capacity, but maybe yours is one of a small percentage that will. Similarly, most manufacturing companies are an appropriate size to work with their local distributor, but maybe your company is clearing profits over $200 million.
These hardware myths can serve as great guides to promote critical thinking about what your company needs, but ultimately all of these factors are variable. When you know your company inside and out, you’ll not only be able to see through any myths that come your way, but you’ll know when your company’s needs are the exception to the general rule. When you always act in your company’s best interest, rather than following trends, your company will succeed.
