Voices: Leveling the playing field for small hardware start-ups
By Margery Conner, Technical Editor -- EDN, October 22, 2009
Andrew Huang is the designer of Chumby, an open-source-hardware device that serves as a customizable interface to the Internet and must compete with devices manufactured by high-volume production lines feeding goods to big-box retailers. He is among the first of a new breed of small-hardware-system entrepreneurs using China’s electronics supply chain. Huang recently told EDN what he has learned in the process.
Why did you go overseas to manufacture Chumby?
Chumby Industries is a start-up. We had no assembly line, and we weren’t about to invest our small capital in a hardware-manufacturing infrastructure. By using a Chinese supply-chain partner, a small company can look and act like a huge company. The Chinese partner can provide supply-chain and procurement management, including costing, sourcing, and scheduling; quality engineering; testing approvals; certification; logistics planning; and order fulfillment. I can turn [around] a fairly complex PCB [printed-circuit board] in one night because electronic design is so modular. You start with a microcontroller, wire up the USB [Universal Serial Bus] interface, add a voltage regulator, lay it out, and [perform] design-rule checking. It can sometimes take longer to create the BOM [bill of materials] than the design itself.
However, when it’s time to go into production, the board may not be manufacturable as is. In addition, how do I test 10,000 units, one every 30 seconds, and get the throughput I need? How do I get FCC [Federal Communications Commission] approval? I’ve got only X dollars in the bank: I can’t leverage all that into my supply chain to put product on the shelf for my retailers.
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Our Chinese manufacturing partners have a massive network of suppliers in China—really good relationships. I may need only 5000 of one part today, but our Chinese manufacturing partner buys 100,000 of those parts a year, and it can extend that quantity price break to me, which is value added in BOM costs. Then there are postponement services: The Chinese manufacturing partners have a working relationship with distributors, so they receive very good credit terms. If I were working on my own, they’d want cash upfront because no one knows who I am. The difference between 90-day terms and cash upfront is the difference between succeeding and failing, especially in today’s credit market.
How do you design for a lean supply chain?
Typically, the majority of any BOM by component count—not by value—is jellybean components such as capacitors and resistors. Maybe 10% of the BOM line items comprises parts that are important to optimize for a long list of possible local-branded substitutes that are already in their supply chain. These local- brand parts are tricky to design with because they are often copies of a brand-name part and lack adequate documentation. To qualify these parts and modify my design, I’m expecting to do two to three spins on the board and that it will smoke the first time. But once I get through it and qualify the design, I will have saved about 90% of the cost of the expensive integrated part.
The important number is “time to revenue,” which is how long it takes from purchasing parts and labor to receiving payment for selling the product. You want to avoid having to pay any bills to your suppliers before you capture revenue from your product’s sales. Imagine designing a product that had no longer than two weeks’ leadtime for any component and that ships directly from Shenzhen to the shelf of a store so the store is restocked every two weeks. You actually don’t have to build too much to keep product on the shelf. Then, if I need to change inventory due to demand or a change in the economy, it’s very quick to do so. The total capital outlay you need to keep a stock of products on retail shelves is significant, and a lean supply chain minimizes that stock.
Can the United States duplicate the lean supply chain?
I kind of have this fantasy of setting up a Chinese-style efficient manufacturing line in the United States because it would be great if I could walk down the street to my fab line instead of having to get on a plane. But the obvious problem is that the labor-rate differential is so huge. And the Chinese do use a lot of manual labor ... . I was shocked by how much in China is done manually, such as custom-order fulfillment and boxing orders.
Chumby comes with all these knickknacks in a little charms bag. The assembly line for kitting the bags is almost as long as [the one for] making the Chumby itself. I couldn’t afford this [assembly] in the United States. Consumers have come to expect the beautiful out-of-box experience, such as power supplies with the cables bound up. If I were to include a note that said, “I apologize for sending you a bunch of unfinished parts and plastic stuff, but it’s made in the United States, so you should love it,” well, people would slam me.
But even if the labor rates were to change drastically, there’s still no place in the United States that’s like Shenzhen. For one thing, there are all those electronic parts in one very small area. And there’s also just the comfort that people there have with electronics: I always feel like in Shenzhen I could walk down the street and ask, “Where can I buy a reel of resistors?” and anyone could point me in the right direction. In the United States, first, who knows what a resistor is, and, second, who knows what a reel of them is?
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We design and manufacture our products still in the US.
The company in the article risks becoming a sales office of a Chinese OEM/ODM .
paul - 2009-5-11 00:31:00 PST -
The Chumby maker benefits from education and freedoms of America, but is using parts with stolen IP from USA and Europe threatening Semi-conductor future in first World. All products should be thoroughly checked for IP stealing, at their expense, before importing to America, Europe, or Japan. Cheaper doesn't make it right or legal.
John Reid - 2009-4-11 11:32:00 PST -
He talks about a two week lead time. A container ship takes about 54 days to get to the US from China. He can't be flying product in, can he?
Richard - 2009-2-11 15:25:00 PST -
thank you for a great article as to how things actually are firsthand in a one man shop. i have been playing with the idea of doing that sort of thing myself; as i was laid off from last job back in july, and need to generate income again.
i have some product prototype ideas that i am working on. there is a regional peer based new product review group where i live. i would like to take my prototypes before the group and see if they think the product could fly. if so, then i could either establish a partnership with one of them or go it alone. since i never have done this, the former would probably be a smart move for me to for starters.
I recall a previous article that talked about using Mexico as a US Manufacturing base. THere is an increasing incentive to do this as overall cost comparisions between Far east and Mexico are becoming substantial. I am currently investigating how to get on board with Mexico manufacturing partners.
your comments on this would be welcome.
have a good day everyone.
Ron Harding - 2009-28-10 07:07:00 PDT -
1oo percent true . The U.S.A. cannot compete...its Labor cost is in orbit and the crash is about to begin....or should I say..... is continuing.
Pierre Bourget - 2009-27-10 11:36:00 PDT
