When to Engage With a Contract Manufacturer

When to Engage With a Contract Manufacturer

Down the street from the Lab IX offices, there’s a great store that sells practically everything you could need to build electronic prototypes and more — hand tools, oscilloscopes, components, motors, IC chips, plastic parts, ceramics and more . It’s a maker’s paradise. They get most of their items from companies that have surplus inventory that they either don’t need or can’t sell.

 

I was lucky enough to get a tour of this gigantic warehouse store from the owner, who showed me the wide range of things they sell. Aside from parts that can be used to build prototypes, there were office furniture, poker tables, books, vinyl records, vacuum generators, silicon wafers, and even a brand new hot tub. What really caught my eye was an entire row of pallets full of coffee makers that they were trying to sell for a few dollars each. Apparently, they had received a shipment of 10,000 brand new high quality coffee makers, and when I asked the owner about them, he said, “Well, the company had made all these new coffee makers, but, in the end, nobody wanted to buy them.”

 

We meet a lot of hardware startups who come to us looking for volume manufacturing before they’re ready. While we advocate starting a relationship early with contract manufacturers, it does help to have some customers in hand. And therein lies a classic chicken vs. egg problem. How do you attract a CM when you have no customers? How do you attract customers if you don’t have a product made by a CM?

 

It helps to understand that contract manufacturing is a low margin business and many CMs cannot afford to take a risk on manufacturing for a customer that may not necessarily survive long enough to pay their bills. We’ve seen CMs request anywhere between 50 and 75 percent upfront payment from startups to cover the costs of engineering, tooling, parts, labor, testing and manufacturing. Unless you’ve already got some prepaid customers, it’s difficult to come up with that much money upfront. This is where a crowdfunding campaign can improve the chances of getting a CM to work with you – for example, if you’ve got a successful Kickstarter or Indiegogo campaign, you’ve proven there’s demand for your product and you’ve also got some capital in hand to pay for manufacturing.

 

Although it’s safer to get initial market validation before producing actual products in volume, it is possible to make products and see if consumers will purchase them.  However, you need to have a significant amount of funding up front. If you already have cash, an intuitive sense of what consumers will buy, and robust marketing and sales channels, you could be successful along this route. Or, you could end up with a huge inventory of unsold products – like those guys with the 10,000 coffee makers.

Winnie Yu

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