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Best Practices & Strategies for High Volume Factory Selection

However you've raised funding in order to manufacture your prototype, the next step in the journey is factory selection and building your product. While it seems like the most challenging roadblock is out of the way - the money part - it's at this stage where most failures happen. Many entrepreneurs find themselves in a virtual guessing game when it comes to taking their prototype into production.

One route, if you’re dealing with high volume production (more than 5,000) would be to look toward Far East manufacturing. At this point, entrepreneurs may start a Google, Global Sources, or Alibaba search, which could provide a list of potential factories. But will this list also provide some key information such as, do these factories have humane working conditions? Do they pay their workers on time? Imagine contracting with a factory, bringing a product to market only to have it come out that the CM is a factory that does not treat its workers fairly. All of a sudden that customer validation is null and void. Another development could be that the entrepreneur picks the factory they hope to work with only to find out that the CM may not want to work with them! Surprisingly, it’s as much about a factory deciding that they want to partner with the entrepreneur as it is about the entrepreneur making their choice in factories. In general, the factories operate in a fashion similar to a VC, investing their time and resources in a portfolio of high growth companies.

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In the case of one of our clients, they had very quickly raised significant money through crowdfunding. Clearly the customer validation was in place, but that’s when they picked up the phone and called us. Why? For all of the reasons discussed above.

We have a network of vetted factories. Not only do we know that these factories are capable of delivering on high volume production, we also know that the people who work in these factories are working in humane conditions. We have vetted, and in many cases, worked for years with these factories firsthand. We have the ability to help guide you through what questions to ask and how to evaluate potential Contract Manufacturers.

Here's a broad outline of what we look for when evaluating potential CMs:

  • Relationships
  • Similar Products
  • Team Skills
  • Manufacturing Capability
  • Fish vs. Pond Sizing
  • Access to Top Management
  • Stability
  • Working Capital
  • Business Terms
  • Costing
  • Quality
  • IP Protection
  • Strong Code of Conduct
  • Location
  • Hunger
  • Financing Opportunities
  • Government Relationships

The next step in selecting a CM is the Request for Quote (RFQ) process:

  • Select 4-6 CMs
  • Release RFQ Package Containing
    • Company Overview, Management Bios, Funding, Sales and Marketing plan, Product Description
    • Questons for CM's response: team, why a good fit, describe similar products, engineering input, payment terms, NRE, etc.
    • BOM Template: Make transparent. Plastics (shot weight, resin cost, cycle time, mold tonage, etc.) EE Cost, lead time, separate into under UDS 1 and over UDS 1. Labor, markups (STD, special, consigned). Push for open book costing.
    • Schedule (fill in the blanks)
  • Compare Results "Apples to Apples"
    • Margins (STD, special, consigned)
    • Normalized COGS (remove special components with high price variability).
    • Payment Terms
  • Follow Up
    • Clarify any incomplete answers
    • Push for lower margins and better terms
    • Component pricing: push for lowest common denominator pricing

After going through the RFQ process, it becomes clear which 1-2 factories may be the right fit for your manufacturing needs.  At this stage, we highly recommend going to visit the factories in person.  It's probably one of the best educational experiences you could have but at the same time, it's important to get to know the people who will ultimately be a part of your team.  At this stage, you will be ready to make the biggest decision thus far in the product development cycle: which CM will be the right partner to successfully build your product.  And the journey continues...

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