Are You Ready to Launch at Your Outsourced Supplier?

Introducing a new product into manufacturing is never an easy task. Introducing that product into an outsourced supplier’s manufacturing adds another level of complexity. As a consultant, I am often asked to help clients get ready to launch new products, particularly if they have failed in the past. One of my recent clients – a start up in clean tech that I’ll call Example Energy – offers a case study of what’s needed before you are ready to launch at an outsourced supplier.

The first time I walked through the Example Energy factory, I was surprised to see two things. The first was all the in-house processes: plastics molding, electronics and cable assembly, machining, chemical formulation. Here was a low volume startup investing their limited capital in commonly available manufacturing capacity that was not core to their competence or differentiation. What were they thinking?

The second thing I saw was huge racks of inventory, most of it obsolete. When I asked about it, I found much of the inventory had been returned from a contract manufacturer they had tried to engage. The product had never worked right and the supplier relationship fell apart. Now the story started to add up: They had tried to move some of their manufacturing outside and it was a complete failure. They were stuck with inventory and forced to try to do much of their own work because their product was not ready to be moved.

The CFO of Example Energy was, naturally, eager to solve the problem. He knew that using outsourced manufacturing would help them manage working capital and provide access to capacity, technology and manufacturing locations that a startup could never build on its own. “We are working on our next generation product,” he told me. “Can we start transferring to an outsourced manufacturer again?”

“Steve?!?” I said, because that was his name, and because my tone of bewilderment warranted three punctuation marks. “Did you learn from last time? Let me explain what went wrong, and what you still need to do to be ready…”

Can I see Your Papers? Complete the Design and Documentation. Example Energy’s biggest mistake was trying to launch a product with a design that wasn’t fully baked. Design tweaks were still being made. Documentation was not fully released. Product performance was not fully proven. Example Energy had a mistaken belief that the outsourced manufacturer would easily roll with the changes and even fill in some of the blanks.

“When you outsource manufacturing,” I told Steve, “you have to know what you are asking them to build. The supplier can’t build an idea or an expectation. The supplier builds to your specifications.”

“Look,” said Steve, “we’re still a startup. We need suppliers that can help us develop the product so it can ramp up. The contract manufacturer’s own slideware said they offer product design, DFM, prototyping and NPI services. Can’t we give them a preliminary design to start working on?”

Engaging a Supplier Too Early

“Steve?!” I said, removing only one question mark from my intonation. “You believed their slideware? This is worse than I thought. The supplier shouldn’t start preparing for production on a design that you know will still change significantly. You may think that is getting a ‘head start’ but it really only wastes time and money.

“Many contract manufacturers do offer DFM and NPI services, but usually for the purpose of winning new production, not because they are in the business of R&D. The manufacturer expects that these services lead directly into volume production of a stable product. Engaging a supplier too early in the development process – like when you are still validating basic design concepts – can actually discourage the supplier if you fail to complete the design in a timely manner. Even when the supplier helps with prototyping or DFM feedback, it is ultimately your responsibility to make sure the final product design is functional and the specifications are complete and accurate. In fact, compared to in-house manufacturing, working with an outsourced manufacturing supplier requires a higher level of stability, discipline and control of engineering changes and design documentation.

“Example Energy shouldn’t engage an outsourced supplier until you know what you want to buy – i.e. when there is a documented product to build, at least at the functional prototype level. By the time of launch, that design needs to be frozen, working, stable and have completed, released documentation.”

Get your Approved Vendor List in order. Example Energy’s AVL was typical of many AVLs for new products – lots of holes and single sources. One-off buys were made for prototypes, so pricing and supply agreements were not in place. For many design critical components, Example Energy had personal relationships and special terms with the suppliers.

“We were able to buy everything,” said Steve, “at least once.”

“Steve,” I said, no longer surprised enough for an exclamation point, “this supply chain has to be transferred to the outsourced manufacturer. They need to be able to buy materials consistently. Every part needs an approved vendor. For assurance of supply, you should have multiple vendors if possible. For critical parts, you need supply agreements so you can be sure the supplier will keep delivering at a consistent price.”

“Isn’t sourcing something they are supposed to be good at?” asked Steve, “Can’t they just go set up those suppliers and find other suppliers if they need to?”

“Yes,” I explained, “Contract manufacturers can add a lot of value by helping you find alternate sources, but they can’t confirm that a different part from a new supplier works properly in your product. And you don’t want them to make arbitrary changes in their sources. Even if you allow the contract manufacturer to source replacement components, you are still responsible for the final approval of the parts and suppliers that are on your BOM and AVL.

“And contract manufacturers can negotiate pricing and terms with suppliers, but your unique, design-critical suppliers have to be managed with care. If you already have special pricing or terms with them, you need to work with the supplier and the contract manufacturer to honor those. Even with outsourced manufacturing, you don’t get to stop managing the supply base in some fashion. You are not ready to launch at an outsourced manufacturer until you have a supply base that is ready to launch.”

Have a Test Plan

Make Sure You Know What “Good” Looks Like. Example Energy’s product had an unusual characteristic: You could never be sure if any particular sub-system was going to work properly until the whole product came together and got fired up. Therefore, when Example Energy attempted to have those subsystems built by outside suppliers, they couldn’t be sure they were built correctly until they were back in house. There was always finger pointing when problems occurred.

“Before you can launch with an outsourced supplier,” I told Steve, “You have to have a test plan. That plan needs to specify appropriate functional testing and a clear definition of what’s acceptable so that both you and the supplier know that the thing they built is good.”

Example Energy’s (now former) CEO once said to me, “Can you believe we had to design a test fixture for this contract manufacturer? Aren’t they supposed to know how to test things?”

“Well, no,” I responded. “They understand their manufacturing process, not necessarily the proper function of your Q-36 Space Modulator. You won’t be successful with an outsourced supplier until you provide a test plan that they can use before they ship you a bad part or product.”

Have You Popped the Question? Get Serious In Your Relationship. I often speak of strategic supplier relationships in the same terms as romantic relationships. “Dating,” “getting married,” and “seeing other people” are all apt metaphors for stages in a relationship with a strategic supplier. Example Energy had never completed their prenuptial agreement before eloping. They never finished pricing all their sub-assemblies, and the supplier had committed to make capital improvements without any agreement on cost sharing. Now in the “divorce” stage of the relationship, it was difficult to sort out the liabilities.

“I may be old fashioned,” I told Steve, “but I would never buy a house with someone I wasn’t married to.”

“Sorry, Jeff, but you aren’t my type,” said Steve, “Anyway we were talking about outsourcing.”

“Steve?!?” I said, “No, I mean I wouldn’t try to launch a new product until I had the right relationship defined with my supplier in writing. Defining the right relationship means that you should get all the legal and business issues out of the way up front. Both parties should agree and commit to expected volumes. Pricing, payment terms, warranty, material liabilities and risk allocation should all be known before you start down the path to launch a new product with a supplier. If you award a product to a supplier and start taking steps towards launch before the details have been ironed out, you run the risk of being surprised by costs or terms you haven’t discussed. Then, with the countdown already ticking on your launch, you are in a very bad position to negotiate.”

Steve thought for a moment, “So it sounds like we need a well-documented design, an approved supply base, a test plan and an established legal and business framework. We’ve got plenty of work to do!”

Good luck launching your product at an outsourced supplier.