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.

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?