Second in a series about why running a successful manufacturing business is more tricky than running a successful software business. Part one is here.
Holding stock is a problem that affects both manufacturers and retailers: you could be holding stock of raw materials, or stock of finished or part-finished products. That stuff represents money in limbo: you have paid out for it, and you hope to sell it eventually, but right now it’s taking up space and running all sorts of risks: pilferage, accidental or deliberate damage (these three are collectively known as “stock shrinkage”), the risk that it’ll just gather dust and eventually get sold off at a loss or be thrown away. The longer your stock is on the shelf, the more money you’re losing because the money is tied up in the physical stock and not available to do other things with. The elite ninjas of manufacturing – Toyota – have gone to great lengths to avoid holding stock, setting up whole supply chains that are designed to ensure that all their suppliers deliver exactly the right parts at exactly the right time.
Of course, there are business for whom holding stock is their whole business: this is what distributors (and to some extent retailers) do – they buy goods wholesale, hold the stock and sell it out in smaller quantities for immediate delivery. They accept the risks associated with stockholdings in order to buy in high volume at low prices, and sell in smaller quantities at higher ones.
Accountants, and particularly auditors, really, really hate stock, because it often forma a large part of a business’s assets and there’s always some uncertainty over how much the stock is really worth. It’s only really “worth” what a customer will pay for it, and that may turn out to be less than you had hoped!
So: try not to hold too much stock, and look carefully at the price breaks on your materials to decide how much to order. You can outsource, too: some contract manufacturers (Newbury Electronics, for example) will supply common components for you from their stock so that you don’t have to – in Newbury’s case, passive components they have in stock are free, included in the price of the board manufacture. If you’re making small volumes and don’t have the storage space, this may sway you to a more expensive manufacturer offering a full kitting service rather than using someone cheap and having to manage it all yourself.
Suppliers can be astonishingly difficult to deal with. Compared with the world of retail, where you take a product off the shelf, or choose it from a real or virtual catalogue, the world of business-to-business (B2B) suppliers can be excruciatingly opaque and inconvenient. You will rarely find that manufacturers give pricing on the web, preferring instead that you get a quote from a salesperson. Even some distributors can be astonishingly reluctant to give you a price unless you hand over a huge amount of detail about your business and all the details of your new product idea. Generally, if a company gives you prices upfront after a short conversation with a salesperson, it means they’re keen to deal with you and will probably be quite good to deal with generally. In electronics, semiconductor vendors can be astonishingly fussy about who they deal with – particularly if the IC you want is a new one, the chances are that their production process may not actually be producing all that many good ones to start off with (i.e. a low yield) and they may be “rationing” the ICs for their biggest customers. Apparently when Intel first made microprocessors, the yield was 1% – the other 99% went back in the furnace to be recycled!
The other reason for IC vendors to be awkward is “application support” – the time and effort spent by their engineering team in helping you to incorporate their product into yours. This is effectively free consulting you get bundled into the price of the chips, and so companies are often keen to restrict supply to “serious” customers only. One chip vendor I dealt with (when working for a big multinational) actually refused to deal with me in a rather brusque automated email – I’d filled in a web form asking for prices on a particular IC and giving some details of my product design programme, and they came back and said pretty much “no, we’re not interested in selling you our chip”. I was astonished at how rude that was!
So beware. You can waste weeks just getting prices for the parts you may or may not end up using in your product. It’s vital to know your “volume”, and a good rule of thumb (for electronic products) is that if you are intending to make fewer than 10,000 units a year, you are probably going to be buying everything from a distributor, as manufacturers won’t be all that interested in orders of that size. 50k or 100k volumes start to make people take notice, and buying more than a million of anything generally gets you the best prices and attentive salespeople. A keen salesperson will often offer you free samples of the product for your prototype, or free evaluation kits, and will generally make an effort to support you. There is an encouraging trend for the more customer-focussed electronics firms to sell sensibly-priced (<£100) evaluation kits via the major distributors (RS, Farnell and Digikey are the three I use most often) so that you can try out their product right away, whereas in days of yore you were often charged several hundred pounds or more for an eval kit to make sure that you were a “serious” buyer…
One final useful rule of thumb: if you are pricing a prototype, it’s fair to assume that the wholesale price for 100k/year is roughly half the distributor’s price for a one-off. Never make the schoolboy error of trying to write a business case based on the cost of making your one-off prototype, as your product will appear to be much too expensive!