The Manufacturing Triangle: Cost, Quality and Schedule

Building hardware is hard. To launch a new product, you will face many hurdles along the amazing journey from transforming an idea into a viable product your customers love. Over the last 20 years of leading teams that have launched products at iRobot to helping other companies launch their own products at Dragon Innovation, I’ve found that most of the manufacturing issues that derail companies tend to fall into three categories: Cost, Quality, and Schedule

Cost: “Cash flow is king”

Running out of money is the number one killer of hardware companies. Cash flow and capital requirements are much more complex for hardware companies than for software companies.  There are three main factors to understand in manufacturing costs:

1. Delivered Cost of Goods Sold (COGS): How much each unit cost to manufacture, including the materials, labor, factory profit, scrap, factory overhead, shipping, and warehousing. Keep in mind that the COGS will be greater than the Bill of Materials(BOM) costs.
2. Fixed Costs: The costs which are not directly tied to the production quantity, including tooling, fixtures, engineering services (Non-Recurring Engineering), and safety compliance.
3. Payment Terms: Both with the factory and with your customer.

Each bill you need to pay or payment received will be driven by the payment terms you negotiate with your vendors and customers. The goal is to extend the payments you need to make to your vendors as far into the future as possible while receiving payments from your customers as soon as possible. How you negotiate these terms will have a significant impact on the amount of working capital you need to run and grow your business. An example of a favorable set up would be paying the factory for the product after you receive payment from your customers, allowing you to use the factory effectively to finance your business. An example of an unfavorable situation would be needing to pay your factory 12 weeks before you received the product, and then receiving payment from your customer 120 days after they took delivery from you. In the latter situation, your business would require significantly more capital, eroding your margins through interest payments or further dilution to investors.

Quality: “Nothing is more valuable than reputation”

You can make your product efficiently, at a minimal cost, and deliver it right on time - but none of this will matter if your product has quality issues and fails to delight the customer. Many companies end up rushing through the New Product Introduction (NPI) process and don’t take the time to fix known issues, but rather leapfrog to the next stage. This mistake can result in significant delays and costs. Even worse, the problem could be identified after shipping by your customers, which increases the cost - both in real dollar value (the money spent rectifying the issue) and in a significantly more important metric: Consumer trust. Products can be fixed, but reputations are brittle: there is a long list of companies that have been brought down because their brand was irreparably damaged.

The key is to build plenty of time into your schedule for testing - after all, quality testing takes time, and rushing it can be a disaster. There will always be some level of uncertainty -- even the most prepared teams will always have to make decisions based on limited data -- but building in ample time to test your product will likely pay dividends in the long run.

Schedule: “It’s all about timing”

Companies often have a sales deadline they need to hit to survive. In consumer electronics, the product sales cycle is driven by the winter holiday season -- many companies make the majority of their revenue in the last month of the year. That means that being late to market can be devastating, since it would mean waiting a full year before realizing any profits. This delay could allow competitors to launch, and also increases the risk of burning through your cash, as the team still needs to be paid.

In high volume (as opposed to prototyping) quantities, many components have significant lead times -- and some can be over a year. For fabricated parts, such as injection molding, it often takes up to eight weeks to make the tool. If a company has not factored in these lead times, they run the risk of missing their sales cycle or paying a fortune in expedited shipping.

Understanding and navigating Cost, Quality and Schedule will set you up to succeed in the market. It’s often said that you can only choose two of these key areas to focus on. However, if you have the acute awareness of all three, and the understanding of the consequences of the decisions you’re making based on cost, quality and schedule, then you will be well on your way to success. Manufacturing is about risk management, and with this framework you’ll be well prepared to make the best decisions to ensure a successful product launch.