Supply chain plays a pivotal role in hardware development. It is an immense yet complex system that supports various aspects of business operations, from inventory management to product delivery. The vulnerability of global supply chains could not be better illuminated than by their struggles to adjust to the recent COVID pandemic. At the recent Mosaic Mashup 2021, TECHDesign VP Charles Lin shared his insights on navigating hardware development through uncertainty. Watch a recap of the live panel here. We also summarized the key insights here, which can be handy as you navigate the supply chain risks in your project.
What are the different types of supply chain risks and how can we mitigate them?
1. Raw Materials Risks
Raw material shortage is the most commonly faced risk by supply chain professionals. It could be caused by a spike in demand, an unexpected issue at your supplier, or even a raw material shortage at their upstream supplier. No matter the root cause, the end result is you are without the raw materials required to manufacture meaning your goods can’t get to your customers. The current chip shortage is a good example of a raw material shortage. Many automobile and electronics companies aren’t able to produce their products as they don’t have enough chip supply. There are a number of things that can be done to mitigate raw material risk, though any approach comes with an inherent cost. So, you will need to balance the added cost of each strategy with the risk mitigation received.
Holding a lot of raw material inventory
Holding larger stocks of inventory is the most common risk mitigation method. The amount of additional inventory you hold should be based on the lead-time of the raw material (longer lead time requires more inventory), the variability of your demand for it (higher variability requires more inventory), as well as how many sources you have for it (fewer sources requires more inventory). Obviously, the more inventory you hold, the more buffer you have against running out of materials but also the more costs you have in terms of inventory holding costs.
Having multiple sources
Having multiple sources for your materials is also an important risk mitigation strategy. If one source has an issue, you can ask the other sources to supply more instead. Having multiple sources can be more costly though as by placing smaller volumes on each supplier you have less bargaining power. On the flip side, if your volumes are large enough, you can have suppliers compete with each other to keep providing lower costs. Another additional cost comes from the time spent qualifying and negotiating with each source, and if there’s any development cost associated with the material that will be duplicated.
Leave it to the manufacturers
For smaller companies and startups, it often makes sense to rely on your manufacturer to handle all the material procurement for you. They have experienced professionals and are often able to get better pricing and lead times through their relationships with suppliers. At the same time, their incentives are not 100% aligned with yours (they bear the inventory holding costs), so you may want to check on their inventory levels/strategy and # of sources to make sure you are well protected.
2. Manufacturing risks
The second category of risks is manufacturing risk—the risk that something goes wrong during the manufacturing process. To mitigate these risks, you’ll want to take a few critical steps before entering mass production to make sure that mass production goes smoothly. You don’t want to already be in mass production when you realize that some part of the manufacturing process is going horribly wrong, and you have to scrap everything that’s been produced.
Design for Manufacturing (DFM)
You should work with the manufacturer to make sure your design is optimized for manufacturing, something referred to as DFM or Design for Manufacturing. DFM attempts to maximize manufacturing yield rates while decreasing materials and production costs. If you don’t do DFM, not only could your costs be higher, but you could also end up with a very inefficient manufacturing process which causes lower yields and delayed deliveries.
Utilize pilot runs
You should use small volume pilot runs for testing and to check the quality of your product. These will be important to fix any issues before moving to large volume production. Any serious manufacturer will schedule at least one pilot run before beginning mass production to minimize its manufacturing risk.
Implement quality control processes
Lastly, you should check with your manufacturer to ensure they have adequate quality control processes in place. Ideally, any defective products will be caught at the factory before they are shipped to you. Strong manufacturers will have quality control checkpoints throughout the manufacturing process. Catching the issue as early in the manufacturing process as possible has numerous benefits: not having to scrap an entire finished good, stopping production before many defective products are produced, and more easily identifying the root cause of the problem.
3. Logistics risks
The third category is risk due to logistics – the shipping of the product from the factory to the customer. There are often many links in this chain, and an issue with any part of it can cause delays for your customer. One of the more unexpected impacts of COVID has been the disruption it has caused to global shipping. Due to the spike in demand for physical goods coupled with irregular shipping patterns and labor shortages, there is a global shortage in available ships resulting in high shipping costs and delayed schedules. While such a global issue affects everyone, there are a few things you can do minimize your risk.
Find a reliable and experienced forwarder
For most startups, managing logistics is not something you want to worry about, so finding a reliable and experienced forwarder who knows the ins and outs of global trade is important. Not only will they take care of all the fine details of customs, tariffs, insurance, etc., but they will also be able to better manage when unexpected surprises inevitably arise.
Keep production local
One simple way to avoid logistics risk is to not have to ship your product very far by producing closer to your end user market. For example, if your major market is the US, producing in Mexico eliminates ship fees; producing in the US further eliminates any customs/tariffs. Of course, local production sites are often more costly than in overseas markets.
4. Macro Risks
The final category of risks is any that stems from larger macro issues, such as social, economic, political, or environmental upheavals that will affect your supply chain. These risks tend to affect a larger scope of society and are difficult to plan for. COVID as well as the US-China trade war are two such examples. While it is difficult to foresee and plan around these risks, having a diversified supply chain is a good way to build in resiliency.
Diversify your supply chain
Having multiple redundant parts of your supply chain in different geographies means that production can continue even if one site falters. For example,
one of our customers would have suffered a large cost increase due to the US trade tariffs imposed on China. We helped them move some of their manufacturing to Taiwan to mitigate this while providing resilience against any future China shocks. Now, for example, if COVID results in factories shutting down in China, they can shift some demand to Taiwan instead.
Holding more finished goods inventory
Lastly, to mitigate against all types of supply chain risk together, you can also simply carry more inventory at your end market. This should be the last option though, as this will add a significant amount of finished goods inventory holding costs as well as additional obsolescence when you move onto new generations of products.
If you are struggling with your product development or supply chain and would like to talk with some professionals, please feel free to reach out. TECHDesign helps startups and small/medium businesses to find capable supply chain partners so you can focus on the core parts of your business. We’d love to hear from you!