Startups are hard work, but the complexities of global supply chains can make running hardware companies especially difficult. Instead of existing within a codebase behind a screen, the key components of your hardware product can be scattered around the world, subject to the volatility of the global economy.
I’ve spent most of my career establishing global supply chains, setting up manufacturing lines for 3D printers, electric bicycles and home fitness equipment on the ground in Mexico, Hungary, Taiwan and China. I’ve learned the hard way that Murphy’s law is a constant companion in the hardware business.
But after more than a decade of work on three different continents, there are a few lessons I’ve learned that will help you avoid unnecessary mistakes.
Expect cost fluctuations, especially in currency and shipping
Shipping physical products is quite different from “shipping” code — you have to pay a considerable amount of money to transport products around the world. Of course, shipping costs become a line item like any other as they get baked into the overall business plan. The issue is that those costs can change monthly — sometimes drastically.
At this time last year, a shipping container from China cost $3,300. Today, it’s almost $18,000 — a more than fivefold increase in 12 months. It’s safe to assume that most 2020 business plans did not account for such a cost increase for a key line item.
Shipping a buggy hardware product can be exponentially costlier than shipping buggy software. Recalls, angry customers, return shipping and other issues can become existential problems.
Similar issues also arise with currency exchange rates. Contract manufacturers often allow you to maintain cost agreements for any fluctuations below 5%, but the dollar has dropped much more than 5% against the yuan compared to a year ago, and hardware companies have been forced to renegotiate their manufacturing contracts.
As exchange rates become less favorable and shipping costs increase, you have two options: Operate with lower margins, or pass along the cost to the end customer. Neither choice is ideal, but both are better than going bankrupt.
The takeaway is that when you set up your business, you need to prepare for these possibilities. That means operating with enough margin to handle increased costs, or with the confidence that your end customer will be able to handle a higher price.
Overorder critical parts
Over the past year, many businesses have lost billions of dollars in market value because they didn’t order enough semiconductors. As the owner of a hardware company, you will encounter similar risks.
The supply for certain components, like computer chips, can be limited, and shortages can arise quickly if demand increases or supply chains get disrupted. It’s your job to analyze potential choke points in your supply chain and create redundancies around them.