In the first three articles in this series you’ve learned to solve a customer pain with a bike product, build prototypes, and hunt for a quality contract manufacturer (CM) to build it in volume. If you’ve done well in steps 1-3, you’ll have 3-5 viable CMs.
Now you get to choose one and mass-produce your dream product, the success of which will ultimately hinge on your ability to navigate myriad landmines. Watch out for these 5 in particular:
Landmine #1: Your CM Isn’t Excited About Your Company
You’re not IBM. You’re a tiny company no one’s heard of and your CM doesn’t care about your $100K first order. They do care, however, about your big, future orders. You MUST start by selling the big vision of your company and show them the product roadmap with their pot of gold at the end of the rainbow. In our case, every CM knows our vision: we are on a mission to protect city cyclists and “while we’re only placing this small, 5,000 unit order now, next year it’ll be 25,000 bike lights plus three new products.” And it’s true.
Landmine #2: You Skip The Factory Audit And Place Your Order Site Unseen
Our office neighbor once hired a CM through Alibaba to make his custom sandals. After months of emails and late-night Skype calls he decided he didn’t need to visit the factory and instead wired a $38K check. After six months, 10,000 hideous sandals arrived at his doorstep. And each one fell apart within hours of use. Not only must you visit your CM, you need to conduct a factory audit, which we can cover in the Q&A within the comments section.
Landmine #3. You Overlook Design For Manufacturing (DFM)
After you’ve designed your perfect prototype you can just hand it off to your CM and let them produce it en masse, right? Not even close.
You need to make sure that the CM has a blueprint for producing your product in volume. This requires an entirely different process and different machinery than was used to create your prototype. Additionally, a good DFM enables you to simplify the production process and complexity of parts required, which will cut your costs dramatically.
Trust us on this one – it’s worth the investment. We lost several months and over $500K in missed revenue by messing this up.
Landmine #4: You Don’t Negotiate Terms and Pricing
Working with a CM isn’t like ordering takeout. There’s always room for negotiation.
- Anchor Pricing: Calculate your target bill of materials (BOM) cost in advance. If you need a BOM of $20, anchor your CM at $15. They’ll either balk or bid, but it starts the price negotiation at a number that’s profitable for your startup.
- Create competition: If you have a short list of 3-5 CMs you can make them compete against each other until you get a fair price.
- Get Terms: Negotiations aren’t just about price. There are many levers you can pull including volume, minimum order quantities, and payment terms.
Landmine #5: You Don’t Ask for Help
You know what’s much easier and faster than learning 40 years worth of manufacturing expertise? Asking someone who has 40 years of expertise to help you.
Manufacturing partners like Dragon Innovation will take you from DFM through production and quality control (QC). If you can’t afford to hire DFM consulting, learn from their DFM course and supplement it by finding gray-haired engineers who have built consumer products. For a little equity and $50 of pad thai and beer, I’ve brought over 100 years of collective DFM experience to our product design reviews.
In the next issue of #BIKESTARTUP we’ll give you our secret sauce for our favorite entrepreneurial pursuit: getting money to build your product.
In the meantime, ask us questions. We’ll answer every single one of them.
Slava Menn is a serial entrepreneur and CEO of Fortified Bicycle. He loves biking, building, entrepreneuring, and teaching. In this monthly series, he shares his team’s hard-learned startup lessons with aspiring entrepreneurs.