What are the Limitations of Working with Larger Contract Manufacturers


You look up the cost of the Amazon Fire tablet and wonder why they can sell it for $45 and you can’t get your device below a COGs of $150. The big companies launch with quality and you struggle with aesthetic, software, or mechanical issues. They launch on time and you have to cut out pilot runs to make schedule. Why the difference? Understanding why you won’t be the same as Apple or Amazon is important.  Too many startups assume that “it should be easy.” Understanding the differences is important so you can plan and avoid problems.  

Sorry guys, size matters.

First and foremost, the big guys are simply that: bigger.  iPhone 6 sold 10 million units in the first week. Most of our customers start with runs of 1K-5K units in the first month and if the product sells well, may increase to 20K per month in a few months. A two or three fold increase in your sales will not move the needle for many of your suppliers and the cost reductions from those increases will not be big. Larger companies can negotiate better initial prices because they have the leverage and the real threat of taking away business. In addition, they often share components across multiple platforms increasing their volume discounts.

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Incremental vs. Radical Changes.

Most new hardware startups are building new hardware, software, business models, and customer interaction models simultaneously. Products need to be over-designed with safety factors built in to account for the unknowns. More established products can design closer to the edge because the teams are experienced. In addition, managing quality in incremental changes is much easier because there are a smaller number of known and unknown interactions. The larger companies already have suites of product testing protocols that can quickly find problems. Because a well-established company will go into manufacturing with its product design, specifications, and test plans well defined, they will be faced with fewer last minute changes that can add to cost and delay product launches.

Automation and assembly efficiency.

Larger volumes enable the investments in assembly and testing automation which can both reduce cycle times, reduce labor, and improve quality. In small runs, the operators may only build a product for a short run and then are reassigned to other lines. The variability introduced by hand assembly and a changing workforce will impact quality and unit costs.

Lots of people looking at the problem.

Larger companies will have dedicated people on quality, regulatory, supply chain, etc.  There are just not enough people with the right skill sets in a small company to provide the deep expertise to critical areas such as quality and cost. In addition, larger companies often embed quality, project management and supply chain people at the CM site full time to oversee and manage the cost, quality, and schedule.

Lots of money to throw at the problem.

Just at the point that small companies are struggling with cash flow is often when they need to throw money and people at problems. At the pilot phase when a new tool is needed, or rapid testing completed, or a redesign implemented, is just when small companies have laid out a lot of cash for their first PO, have tapped out their development budget, and are running on fumes just waiting for the first product to arrive. Doubling down is much easier for the bigger company who can afford to fix problems right and quickly.

So the above sounds really depressing, we get it. However, there are so many success stories in the hardware startup space. Knowing the above, what can you do better to address the challenges of being a small startup?

Use other products as your baseline.  

You might not have a history designing camera systems or tablets, but you can use other products as a baseline to learn from. Teardowns, cost analyses, and researching problems that these products have had historically can help you to “stand on the shoulders” of the giants.

Align on your project objectives early.  

New startups often want the highest quality AND the highest performance AND the lowest cost AND the shortest schedule, etc. If you are Apple with high volumes, huge resources, and lots of experience, you can do a much better job of achieving conflicting objectives. For a startup with limited resources and limited experience, this is almost never possible. The startup must choose its objectives carefully and oftentimes sacrifice certain priorities over others as a nearer term strategy in achieving the overall objective.

Build a cost model as soon as possible.  

In the rush to get a cutting edge product out quickly that delights customers, startups often can design in very expensive parts and assemblies. These decisions have “long shadows” and  can be difficult to cost down later. Understanding the impact of these decisions and planning for cost down before the tooling is cut will save your recutting tooling, redesigning and retesting your product downstream.  Asking hard questions about key components and pushing for cost early will set you on a good path. At Dragon, we offer a cost estimate solution as a quick and efficient way to get an accurate estimate of what your actual costs will be. Having a complete BOM is the foundation for everything downstream - here's a link to the Dragon Standard BOM to get you started. 

Test early and often.  

Avoid last minute changes which often cost 3-5x what they would cost early in design. The earlier you can do mocks-ups, durability, and life testing, the better.

Hire strategic partners.

You can’t afford a supply chain, quality, continual improvement, industrial engineer, and a quality inspector. As an individual entrepreneur you can’t learn and be an expert in every aspect of launching a new product. However, there are services that can provide critical feedback and help in these areas as you need them. Strategic partners can supplement your in-house capabilities with the right and deep expertise to help you early on. We'll obviously point you to Dragon Innovation for all of your manufacturing needs, but we also work with a lot of great partners who can support you in areas ranging from ID to packaging and logistics and much more. 

Your work isn’t done after product launch.  

Building a continual improvement, cost down, and quality improvement into your business after launch will help drive costs and improve quality. It can’t hurt to go back to suppliers and ask for cost reductions, rebid expensive parts, and look for areas where the product is over-designed and can be scaled back. You may think that your design work is done after the first unit ships but there should be engineering effort put against the product throughout its life.

Being small means being nimble and not constrained by standard business practices but it does come at a price. Many of these limitations can be avoided through upfront work, analysis, planning and continual improvement.


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