When it comes to startups with physical products, the supply chain aspect of the business is just as important to success as the sales metrics and financial models. Startup founders and employees find themselves getting asked questions about their supply chain daily, whether it’s coming from potential investors, partners, job candidates or other team members and the ability to answer those questions with confidence can set a company apart from its competitors. This blog reviews five key items that startups should understand about their supply chains so they’re prepared for that next investor meeting or candidate interview.
5 Things Startups Should Understand About Their Supply Chains
1. Bill of Materials (BOM)
Startups should understand the product(s) they’re creating, and what goes into it/them. It can’t be emphasized enough that this is the most important part of the supply chain. Every nut, bolt, screw, bracket, microchip, etc. should be recorded in a BOM. At its most basic level, each BOM should have a record for each item with at least nine columns worth of information:
1. Part name
2. Part number (even if it is just 1, 2, 3, ….)
3. Quantity required
5. Manufacturer number
7. Supplier number
8. Price currently being paid for the part
9. P,M,C: Is the part purchased off-the-shelf, is it purchased and then modified, or is it completely custom fabricated?
The BOM should have basic levels that help everyone understand which parts go into which assemblies. Design changes constantly take place with a new product so its BOM can help keep track of the latest version of the product and ensure everyone is on the same page. Potential investors and partners can clearly see what parts go into the product and what they may be able to help with. Having a comprehensive BOM is the first step to developing an effective and efficient supply chain.
2. Cost Reduction Opportunities
It’s expected that young companies overpay for their products while they’re in the development, prototype, and early launch phases. This is due to a variety of reasons, including low volumes and hasty supplier selection. Every startup should understand the largest factors that are driving the cost of the product(s) and the opportunities to reduce those costs. Maybe those opportunities lie in taking something from a 3D-printed operation to an injection molding process, or in re-engineering the product to incorporate a smaller motor. Knowing what those opportunities are, how big of an impact they have, and the hurdles that stand in the way of them are critical to developing a solid investor pitch and setting goals. Tip: having a BOM helps identify cost drivers.
3. Tooling Costs
When developing physical products, the largest financial hurdle startups will likely face is the tooling costs needed to create a cost-effective product. If the startup founders and employees are new to the manufacturing world, it may shock them to find out how much it costs to build a plastics mold or to build a progressive die for their parts. Each supplier will offer slightly varying tooling costs depending on how they decide to build their quote; however, the more information that a startup has with these numbers, the better. When going into an investor meeting, tooling quotes can help set a realistic goal for how much cash injection the company will need.
4. Potential Engineering Changes & Configurations
Revisions, configurations, and engineering changes are highly encouraged in the initial launch phases of a product. The product should quickly adapt to customer feedback to become an ideal solution in the market. But engineering changes and revisions can cause headaches for the supply chain team. Therefore, it’s important to anticipate these changes as soon as possible and understand what the market might be looking for.
Maybe it’s understood that the first product is too noisy, and therefore the engineering team will be trying out new motors. Or, perhaps the product is only available in one color, but the plan is to launch three or four new colors soon. Regardless of the changes to be made to the BOM, they should be anticipated and relayed to the team as soon as possible. This can avoid unwanted inventory buildup, bad tooling investments, and wasted time.
5. Customer Base Location
In most business models, logistics costs and risks are secondary to those associated with the manufacturing of the product itself; however, logistics are important to think about early on. Startups should be extremely adaptive to customer needs, which means early logistics operations should center around customer locations. Deciding where to put warehouses, distribution centers, and manufacturing operations in an early stage company can ease a lot of future logistics concerns. Knowing where the company plans to operate also makes it easier to hire and provides notice to early stage employees should they have to move in the future.
The next time a startup goes into a meeting with an investor or needs to persuade a future partner, they should review the list above to prepare for any questions related to the supply chain they may need to answer. Additionally, knowing the above enforces knowledge sharing and can help align the goals of all employees.