Startups are tough They work, but the complexities of global supply chains can make it especially difficult for hardware companies to function. Instead of existing within a code base behind a screen, the key components of your hardware product may be scattered around the world, subject to the volatility of the global economy.
I spent most of my career establishing global supply chains, establishing manufacturing lines for 3D printers, electric bikes, and home fitness equipment 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 working on three different continents, there are some lessons I have learned that will help you avoid unnecessary mistakes.
Expect cost fluctuations, especially currency and shipping
Shipping physical products is quite different from the “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 are incorporated into the overall business plan. The problem is, those costs can change monthly, sometimes drastically.
At this time last year, a shipping container from China cost $ 3,300. Today is almost $ 18,000 – an increase of more than five times in 12 months. It’s safe to assume that most 2020 business plans didn’t account for that cost increase for a key line item.
Shipping a buggy hardware product can be exponentially more expensive than shipping buggy software. Withdrawals, angry customers, return shipping, and other problems can turn into existential problems.
Similar problems also arise with currency exchange rates. Contract manufacturers often allow you to maintain cost agreements for any fluctuation below 5%, but the dollar has fallen 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 rise, you have two options: operate with lower margins or pass the cost on to the end customer. Neither option is ideal, but both are better than going bankrupt.
The bottom line is that when you set up your business, you need to prepare for these possibilities. That means operating with enough margin to handle rising 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 companies lost billions of dollars in market value because they did not order enough semiconductors. As a hardware business owner, you will run into similar risks.
The supply of certain components, such as computer chips, can be limited and shortages can emerge quickly if demand increases or supply chains are disrupted. It’s your job to analyze potential bottlenecks in your supply chain and create redundancies around it.