Bathtub to warehouse: turning product ideas into reality · Bathtub to warehouse: turning product ideas into reality Introdution Raising money for a technology venture is hard. No

2016 DUNCAN SMITH & DEREK WALLIS

Bathtub to warehouse: turning product ideas into reality

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IntrodutionRaising money for a technology venture is hard. No one is going to give

you £5m, £1m or even £100k straight off for a product development

until they have seen that you’ve understood the risks involved, and

reduced them to the point where an investment makes good business

sense. This will, of course, happen in stages.

You can see that product development process maps very well onto the venture funding ladder for technology-based startups. This is no coincidence: product development is all about achieving milestones, asking the difficult questions early on, reducing risk, building confidence, and pushing hard and fast. In other words, it is just like smart management of any business investment, and like any other investment, there are key questions you need to answer at each milestone before your investors will take the plunge.

As a minimum, your potential investors will do their diligence on you at each of the stages in the diagram above. They will probably send a junior analyst with a shiny new MBA to crawl all over your business and technology, looking for weaknesses and putting them into a large spreadsheet. Your investors will then use this as the basis for asking a series of detailed difficult questions at each investment stage, as well as the big questions shown in the diagram.

The purpose of this article is to introduce these key questions. Good product development practice will help you to plan for them, give credible answers to your investors and, ultimately, get you to market with the right

product at the right price, and quickly. This is true whether you are developing your first product or your tenth.

Cambridge Consultants is only one of the many options for outsourced product development and, if this article prompts questions, we’d be more than happy to answer them – we don’t charge for this! We know what you are going through – as well as developing many products for startups, high growth SMEs and blue chips, we’ve spun out more than 30 companies in our 50 year history – and we’d be delighted to help you if we can.

Stage 1: Concept – what should our first product be?

If you’ve got a novel piece of technology, you will almost certainly have a dilemma on your hands. “Our new Panacea technology can do everything!” is something we hear quite often. On the one hand, you will want to demonstrate value by being widely applicable – by having a platform for multiple applications. On the other, you have limited resource, budget and time, so you will need to select and concentrate on a lead application.

If there is a single ‘low-hanging fruit’ application that has the potential to generate rapid return on investment, or at least turnover, you would be well advised to focus your efforts on this. Early sales will help significantly with further funding rounds.

During seed funding you will probably investigate several application ideas in parallel, but by the end of your initial funding you will need to choose a lead application for further development in the next phase. In order to make an informed decision you will need to answer some, if not all, of the following questions.

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Q1. Who is going to buy it?

Hang on a minute: market research is part of the business case development, not the product development, isn’t it? Well…no. Firstly because the two are intertwined; and secondly, if you want to develop the right product, it is essential to have a clear image of who your end user is. Is it Martha or Steve?

More of this in the development stage, but for now, you will need to be sure you are addressing a genuine customer need. You also need to be clear who makes the buying decision for a product like this – is it the end consumer or someone further up the value chain, for example a retailer? What are their specific needs? Look and learn from others selling similar products into similar channels, even if they are not a direct competitor. As with all these questions, your investors will be looking for a credible answer.

Q2. Why would your customers buy it?

Can you articulate your product’s value proposition? Please note that this is different and distinct from stating how clever you and your company are. For any potential lead application you need a ‘product pitch’ that resonates with your target customer. It has to explain, in one or two sentences, what the benefit is to the customer and why your solution is differentiated. Again this is vital for the product development as well as the business case as it will act as a benchmark for your team. When extra features start to creep into your specification, they can be compared to the product pitch to check whether or not they are really important.

If it is a novel application and not a direct replacement for an existing product, then creating storyboards will help to explain the end-user benefits and articulate your key messages. If you have the

budget, then models are also very useful: putting an object into the hands of a stakeholder makes your proposition tangible and can be very compelling. Beware of setting expectations though – a good mock-up model can sometimes look too real and can misrepresent the amount of work required to actually complete the product. You may be better with concept sketches at this stage. More about models in stage 2.

Q3. How much can the market afford it to cost?

Do a back-of-an-envelope costing. It’s likely you won’t be able to do an accurate costing for a product, based on your technology, at the concept stage. However it is never too early to try, and back-of-an-envelope costings can be very

useful – even if all they expose is what you don’t know at this stage, as this will highlight what you need to find out during the next stage.

A good place to start is to look at the mark-up in the value chain for your product. In other words the breakdown of the final price by who is taking what percentage cut, and where. If, for example, it is going to be manufactured and sold

through distribution, then you can work back from what you think a consumer would be prepared to pay, as compared to competitive or similar products.

This will in turn lead you back to what it can cost to make, and, of equal importance, how much profit you can make.

Information about margins can be hard to obtain, as most industries are quite guarded about margin structures, so it is not something you can always Google for. You will need to ask around. It’s also important to remember any import and export duties.

If you are looking to license a technology rather than to sell hardware, then you should look at other technologies that have been licensed into the same market as a starting point. Licensing deal structures can vary substantially and specialist advice should be sought on this topic.

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Q4. What hard technical questions am I going to be asked?

Potential investors are very good at asking awkward questions. As well as looking for cracks in your business case they will ask about the technical risks associated with your technology and its applications. You should assume that they – or their technical advisers – will see beyond your product pitch and will imagine the hard technical issues that need to be solved during the development of your product.

You will need to bridge the credibility gap, so it’s important that you anticipate the questions you are going to be asked at the next milestone, and are able to explain credibly how you are addressing, or plan to address, these risks. Essentially this means carrying out a risk assessment. Risk assessments can be very dry, so use ‘devil’s advocate’ questions that should help stimulate a discussion, such as “What part of my pitch will my investors disbelieve?”, “What will they raise their eyebrows at?”, and “How would my competitors dismiss my technology?”.

Once you have the list of issues that need to be addressed you can prioritise according to the level of risk – i.e. how wide the credibility gap is – and the effort and cost required to reduce that risk. You can then address the top risks according to how much time, manpower and budget you have available.

Level of risk

Effort/Cost of mitigation

Action

High LowThese are risks you should address in the concept stage – easy wins that will build credibility.

Low High

These are risks that will tend to get answered in the development phase and should be included in the plans for that phase.

Low Low

Consider whether to mitigate or not. However, if they are not important they may be a distraction at this stage.

High High

These are the risks you cannot afford to address at this stage, but that you will need to have credible plans to address early in development.

Part of this is planning for the next phase, as it is highly unlikely that you will have reduced the technical risk of your product to zero by the end of your seed funding. Don’t expect to be able to address all the issues at this stage, but be prepared to explain credibly how you plan to address them.

Q5. How many can we sell?

Sensible estimates of quantities are vital not only for your business case, but they also greatly influence your approach to both development and manufacturing, so they must be realistic. Manufacturers tend to look at product turnover, so low volumes are not necessarily unattractive provided the product is of high value. However, manufacturers will generally have a minimum threshold and will not look at your product if the volume is too low.

So, be realistic but bullish. The argument “If I can get 1% of this $8B market then we’ll all be millionaires!” ignores the fact that if you have a really excellent product, your competitors will react immediately when it is launched, if not earlier. You must be realistic about your potential market size – produce a bottom-up forecast and validate it with this top-down estimate.

Q6. Who is in my network?

Entrepreneurs are generally excellent at networking and by now you will have developed relationships with various companies, some of whom will be potential suppliers and customers as well as investors.

It’s important to consider who you want as subcontractors, suppliers and customers, and who you want as partners. There is lots of talk of ‘partners’ in business but be careful of the flipside – there is no such thing as a non-transactional relationship in business. There is a temptation to get companies to do you favours – special deals for small startups – but if you are asking them to do something that reduces their profitability they will see themselves as investors. This could bite you later on when you want to treat them as a supplier. If your idea is strong enough you shouldn’t need to dilute your position too much by asking for favours.

That’s not to say you shouldn’t trust people. The right network of people you trust will provide you with invaluable advice and they will ask the awkward questions you don’t necessarily want to hear. The best partners are those whose interests are well aligned with yours.


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Q7. So what is my lead application?

At some point soon – probably at the end of your seed funding – you will have to choose a lead application for your technology, and pitch for the investment that will allow you to develop it further. All of the questions above will help inform the choice of application, but it helps to use a process to guide the decision making: don’t just go with gut reaction or with the application favoured by the loudest voice in your team. There are a variety of these decision-making processes – ask around for those that are appropriate – not only the obvious strengths, weaknesses, opportunities and threats (SWOT) and the like.

Remember, getting buy-in from your potential investors is all about bridging the credibility gap. They will ask you tough technical questions about your potential applications as well as business questions about your potential market size and value. They will expect a really compelling product pitch – if you can’t convince them, you will not convince customers. Be confident – make sure you believe in the product yourself – and, in particular, believe that the customer you have in mind will be delighted to see your product on the market. It costs very little to find a small sample of target customers to validate this.

Stage 2: Development – how are we going to get it to market?

Now you have selected your lead application – the first product you want to get to market – you will be raising the funding for the development stage. This stage of a product’s lifecycle is about getting your precious idea out of your head and into your hands as a prototype, with the right set of features at the right potential price, and with as much IP protection as you can afford. By the end of this stage you will not only have a working prototype but you will know what it is going to look like, where it is going to be made, how much it will cost and roughly when you can start selling it. This is where all your networking will pay off, as you will almost certainly need support from suppliers, partners, companies with complementary products and services, and of course initial customers.

Q8. Who are we?

There are lots of approaches to developing products, and lots of potential types of partners to help take at least some of the pain out of the process. Before looking at those options,

it is important to look at yourself: who are you, and who do you want to be? All entrepreneurs are encouraged to stick at what they are good at – often against their instinct which is to do everything themselves. You will need to recognise your core inadequacies as well as competences. At one extreme there is a trend towards completely outsourced organisations, but – especially for high-tech products – this doesn’t necessarily create the most value for your shareholders. So there is a balance to be struck: focus your internal resource on your core competences, and get the best external partners you can afford to do the rest for you. More about outsourcing later.

It’s important to think about how your business will scale. There may only be a few of you now, but you will want to have the right people in place to grow. Which functions do you want to grow in-house? You are likely to have a core R&D competence relating to your technology, but you will have a need for partners to provide the rest of the development resource, and possibly the project management of the product development. This is not to be underestimated; the more dependent you are on other partners, the more time you will need to spend managing them.

Cash, of course, is king, and startups will be forced to keep things very tight where they can. Good managerial judgement is required to ensure you aren’t compromising on critical parts of the product development process.

Q9. What are our brand values?

“Your brand is your most important asset”, according to a large number of Google hits. Everyone from Google to Innocent Drinks was a startup once and it’s never too early to consider your brand image. This does not mean getting your mate to design a logo for your webpage; it is about working out who you are as a group of people and what values you are conveying through your products and services.

Why is this important now? It is important because it affects your product development strategy. If you are a product company, it won’t be your technology that you are remembered for in ten years’ time – no matter how impressive it is – it will be your brand. It is essential that everyone involved in your product development understands your brand values. Brand experts talk about ‘touchpoints’: the moments that a customer – or in fact anyone – comes into contact with your company or its marketing materials. If this is consistently representative of your values, from the start, it will help hugely in conveying your message to those involved in developing your product.


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Q10. What is the best sort of protection for us?

Have you protected what is core to your business? The type of protection you choose will have an influence on your product development. Protect what is core to who you are.

Patents are important, especially if you are looking to license technology. You should, of course, take advice on this. However, patents are by no means the only form of protection, nor necessarily the most appropriate. Other options include:

� Being fastest to market. If you have a highly novel product then you may win market share simply by being first. However going fast is risky, and it’s important to make sure you not only come out with the first solution, but also the best one; history is full of ‘fast overtakers’ who were not first to market but had the most compelling product.

� Registering design. If your design is very novel, or the shape of the product is critical to the user interface, then registering the design is a relatively inexpensive form of protection.

� Trade secret. It is often possible to protect yourself by not disclosing anything. Of course as soon as you talk to manufacturing partners you are at risk of disclosure, but products where the IP resides in a mixture of hardware and software are much harder to reverse-engineer.

Q11. Make, buy or borrow?

Having worked out what your skills are and what you need to outsource, you can work out which parts of your product you want to develop in-house, how much you want to manage, and to what extent you want to have a partner take on the development for you.

The classical ‘make or buy’ decision is rarely as binary as it sounds. In reality it is unlikely that you will be able to buy your entire product off-the-shelf, otherwise it would not be novel. You will need to ‘make’, or at least design, some part of it separately. There will be critical parts of your product that you may want to design in-house, either because you have the skills or because you want to keep the intellectual property very close to you. However there is no point in reinventing the wheel, so you should apply the ‘make or buy’ decision to parts of the system rather than the whole.

So, whether you need a trusted partner, or ‘someone else to do this for you’, who should your development partner be?

R&D Magazine surveyed companies who outsource research and development, and the largest three categories of organisation used were academia, independent R&D organisations and suppliers . Each option is suitable in different situations. You will find much anecdotal discussion on the relative merits of these categories, such as….

� Academia “Low cost but they have their own agenda so they can be slow”

� Independent R&D “Fast and I own the results but crikey they are expensive… although I do get all the upside”

� Suppliers “Willing to share development risk and cost in exchange for more upside later, but I’m not sure they understand how to do something this novel”.

We have to declare a vested interest here: our company is an independent R&D organisation, but, like all our competitors, it isn’t in our interests to push our services when not appropriate. If you have grey-haired advisors or board members, their experience will be valuable here as they will probably have experience of all these types of organisations. Whoever you choose, you will need to work very closely with them, so make sure their goals are aligned with yours. You’ll certainly need to find someone you trust not to run off with your idea or inadvertently reveal it to a competitor.

Suppliers i.e. manufacturing partners and, more specifically, Original Design Manufacturers (ODMs) are potentially an attractive option. It may well be too early for you to approach a manufacturer, but it is worth giving serious consideration to this option at this stage, especially if your idea has many parts in common with a product already in volume manufacture.

There is also an interesting, and very cost-effective, ‘halfway house’ option here. Your development partner may offer a managed ODM service: they will undertake the more challenging aspects of the development, and identify and manage a suitable ODM to undertake the more straightforward aspects of the design such as interior mechanical details, tooling design and circuit board layouts. This approach has the added advantage that the ODM will also usually be responsible for the manufacture of your product, and involvement of the manufacturing partner early in the design process can only ever be a good thing. More of this in stage 3.


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There is an alternative to making or buying: ‘borrowing’. Licensing whole parts of the product, particularly software, from other sources may considerably reduce development time. It may even be possible to find someone doing something similar to you but in a totally different market, and you may be able to license their technology or have them work as a development partner if there is no conflict of interests, and if the commercial deal is suitably attractive. We often transfer technology from one market to another, such as consumer to medical or vice versa, with dramatic effect. Technology that is quite commoditised in one market may be quite disruptive in another. It is well worth looking out for this as you cannot afford to reinvent.

Q12. What exactly is it we are trying to make?

You must have a specification for your product. Often just writing the specification is a major piece of work. You will probably want to get your development partner to drive this process, because this will allow you to blame them later! Seriously though, it is essential to invest the time to get the specification right and understand the trade-offs as it will be much harder, certainly more expensive and maybe impractical to change later.

There are many forms of specification but usually there will be a single document that describes the key functionality of the product. It is important that there is only one version of the specification in circulation at a time, and only one ‘owner’ who is allowed to change it. Having multiple versions and ownership by committee will be very bad news, so be disciplined on this.

Quite often products have separate design (i.e. appearance or ‘industrial/product design’) and engineering partners. Whether you have two partners or one, you will need to give them the right information. That way, you will end up with the right specification and ultimately the right product.

Whatever your approach, specifications are vital. Don’t give them a blank piece of paper or you might end up with a Segway™ when you wanted a bicycle. There is a common misconception that designers come up with better ideas if they are unconstrained. This is a complete fallacy – good designers will come up with better, smarter designs if they know the constraints. Designing is about information not just inspiration. Although concept products have their place, most designers are actually motivated by seeing their designs flying off the shelves.

So what information should you give a design or development partner?

� Of course you should give them a wish list of features and, at this stage, they should be as wide ranging as possible. However you must be prepared to compromise if there are conflicts between features.

� What it can cost. By now, your earlier ‘back-of-an-envelope’ should have developed into a more detailed breakdown.

� Explain your product pitch, and your brand values, as described in Q2 & Q9.

� Explain your customer. You will have thought about this earlier, back in Q1, but by now you should have developed your view of your customers. It may be a good idea to create personas for your customers; for example Martha from Q1. Don’t describe yourself! Generate some insight into your customer. Even if you can’t afford large-scale user studies, you should be able to talk to a sample of target customers. If you make a collage like this then stick it to the wall, as it will help your team remember who they are designing for.

� Explain your product’s ecosystem. Your product is not being used in isolation – what products surround it? What else is an end user doing at the same time as using your product?

� Explain your value chain – your designers will want to know if there are any features required for the retailers for example. They will also need to know who your competitors are so they can differentiate your design as well as your features.

� Explain your exit strategy. Companies are always reluctant to do this, but it is no more sensitive than any other confidential information. Again, this influences the approach to product development. If you are committed to taking a product all the way to large-scale manufacture, then you will have a different set of requirements at this stage, compared to, say, developing a platform sufficiently to license it for further development by a licensee.

Q13. How do I demonstrate it?

At the end of the development stage you will probably have a sample product or ‘demonstrator’ of your technology which will be representative of the final product. If you are working


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towards a mass market product then it may well be the first fully working prototype. There are various steps along the way to this that you may need to take:

‘Looks-like’ model. You may have had a ‘mock-up’ model very early on back in Q2. By now however, a looks-like model should be more representative of what the product will actually look like, given the constraints on real estate, battery size and so on. This is very

valuable when put into the hands of stakeholders, especially marketers, as it will help hugely to communicate your proposition. You should be able to explain credibly how all the parts will fit into the space.

‘Works-like’ model. This is a demonstrator that functions but is not necessarily the right shape or size. Often for electronic products this will be based on development hardware – the real bits, but in an off-the-shelf package, not your final form factor. It addresses the credibility question “Will it work?”.

‘Looks-like works-like’ model. This is a model that both functions and has the correct form factor. It will probably be an early prototype – it may be held together by glue and string but it will be your precious first representative product.

Depending on what you want to achieve before your next funding milestone, you may not need all of these steps. In the case of the Iona internet radio shown here, the product was never intended for final production, but it was important to have ‘looks-like’ models to put in stakeholder’s hands as they conveyed very clearly the product pitch – it was the world’s smallest, lowest power internet radio, and the model shown was the best way of making this obvious.

Early ‘looks-like’ demonstrators can also be very helpful in checking the useability of the device. Everyone on your team will be accustomed to using it, and it is important to try the product on somebody independent early on. Ideally this would be a group of your target customers. Having it light up, for example, rather than just being a static model, will help greatly.

The ultimate demonstrator is the ‘made-like’ model: a product that is actually made using the manufacturing processes that will scale up to mass production. More of this in stage 3.

Stage 3: Commercialisation – when can I have a warehouse full?

I have a working prototype in my hands! It even looks like the real thing! Surely I can have 10,000 by next week? Well…no. Unfortunately there is still a lot of work, and significant cost, between these two points – making the first looks-like works-like demonstrator and making, for example, 100,000 a year with >99% yield and where >95% still work at the end of the warranty period are two, quite different, challenges. The development activities in the commercialisation stage focus on the manufacturer, and are known as ‘industrialisation’, or new product introduction (NPI). Be prepared for some acronyms in this section, we will try to keep them to a minimum.

This section is most relevant if you are taking the product to mass production – whether that is high volume, low value or low volume, high value. If you are looking to license your technology for a third party to develop then you will be able to start those discussions with the aid of the demonstrators discussed in Q13.

Q14. What are our manufacturing options?

It is very likely that you will have already looked at your manufacturing options before the start of commercialisation, especially if you are looking to modify and existing product. The start of the commercialisation stage is the point at which you will have to decide which route makes most sense for your business. The main routes are:

� Original Equipment Manufacturer (OEM). These are companies that have ‘standard’ products on the shelf, that can be minimally customised – colour change branding and so on. Any in-house development capability they have beyond this is not accessible to their customers. This is an unlikely option for a truly novel product.

� ODM total. An ODM has its own design capability, and will normally have off-the-shelf ‘platforms’ that can be heavily customised to suit your needs. The ODM may be capable of offering this development as a complete package to complement a production order.


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� ODM partial/managed. Some of the product is designed by the ODM, some of the product is designed by you and/or your development partner. This is more suitable for novel products and needs careful management as discussed in Q11.

� Contract Electronics Manufacturer (CEM) or Electronic Manufacturing Services (EMS). These are providers who build something to a design provided to them in its entirety.

If you have already chosen a development route that utilises the capabilities and existing product-base of an OEM or ODM, then it is almost certain that they will also be your partner for volume manufacture. The only likely reason for this not to be the case is if they have failed to deliver as a design partner, in which case you will have bigger issues to deal with than finding a manufacturing partner!

If you have used an independent development partner, they may have incumbent manufacturing partners or – preferably – a process for helping you to find a suitable manufacturer. We have such as process which we call ‘Dancing with the Tiger’ . In addition to finding your ideal manufacturer, these organisations will, if required, manage the entire NPI process for you. More about this in Q15 and Q16.

In the event that you have developed your product entirely ‘in-house’, then you will need to find a suitable partner for yourselves – this is not a task to be undertaken lightly! If your organisation does not have experience of transfer to manufacture, you need to recruit it quickly! Even with suitable expertise within your team, you need to be sure that you find a partner who will help you – and your product – succeed, and not hide behind carefully worded contract clauses when things get difficult. Blind optimism won’t help here – if your product is technologically complex and / or innovative, things will, at some point during the NPI process, become ‘challenging’.

For the remaining questions, we will make a general assumption that one of the ODM product development models – i.e. 2 or 3 above – has been chosen. Note also that ODMs typically offer a complete engineering capability – i.e. mechanical, electronics and software design – and different ODMs tend to focus on particular types of product, such as consumer electronics, medical devices, instruments or appliances.

Here’s a summary of who takes responsibility for what for each of the approaches. Note that the design and development partners could be the same organisation.

Who is reponsible

for ...

Route 1:

OEM

Route 2:

ODM total

Route 3: ODM partial

Route 4: Contract

Manufacturer

Design OEM ODMDesign Partner or you

Design Partner or you

Development OEM ODM

Novel parts – you or Development Partner, everything else: ODM

Development Partner or you

Manufacturing OEM ODM ODMContract Manufacturer

NPI management

OEM ODM

You, ODM, Development Partner or NPI agency: See Q15

You, Development Partner or NPI agency: See Q15

Q15. How do I manage the NPI process?

First and foremost, you must have a process for transferring your product from design to manufacture – i.e. an agreed set of deliverables, milestones, responsibility matrix and documentation list for the process. It is absolutely imperative that the development partner and the manufacturing partner understand and agree what needs to be done, when it needs to be done, who is responsible for doing it, and who is responsible for ‘signing it off’ at different points. It is similarly important that the manufacturing partner’s processes are appropriate for the design – or that the design is suitable for the available processes – clearly you can look at this either way! Whatever your viewpoint, you should try to engage with your manufacturing partner early in the product design process.

Many large manufacturers will have offices local to you, who will appoint a representative to be your NPI manager, and attempt to take the pain out of this process. On the other hand you will be one step removed from the front line, and this is rarely a good thing.

There are other options to consider that may be better aligned with your interests:

You can hire a project manager with NPI experience in your sector – often on a contract basis, if required.

You could use an ‘NPI agency’. These organisations are


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particularly prevalent in China, and will probably have offices both local to you and your manufacturer. They can act as both the project management and also your local eyes and ears – manufacturers are often quite used to having their customers’ representatives in the factories on a long-term basis. However, the agency must understand the needs of your product and business to be able to represent your best interests.

The last option is to have your development partner oversee the process. This makes sense if they are already designing critical parts of the product, as they can remain the design authority, with responsibility for the detailed design of the critical aspects of the product (e.g. user interfaces, innovative electronics and software solutions).

Q16. How do we find and qualify manufacturers?

Even if you have had a manufacturing partner in mind from the start of your company, and have developed a relationship with them, it is still worth knowing how this process takes place. If you don’t have a manufacturing partner yet then this is one of the most important business decisions you will make.

Finding the right manufacturing partner is a matter of searching for candidates, and then qualifying them technically and commercially. However, throughout this process, you must remember that they will also be qualifying you. Manufacturers base their interest in a project on the total value to them – i.e. the product of potential volume and ex-works cost (which includes their profits). There are other factors, but if you find that you are not getting the interest you expected from a manufacturer, it is likely you are not hitting their sweet spot in terms of product value.

The first task in a typical manufacturer search programme is to explore the available options. Part of this process will be to ensure that the focus of subsequent research is geographically appropriate, and that it targets the most suitable types of organisation. Geography is particularly important. Don’t assume that you have to go to Asia to get low cost in high volume. Equally, don’t assume that, because a manufacturer is in the next town, they will be inherently easier to deal with. Some factors to consider at this stage include:

� The technical complexity of the product design;

� The likely costs of supporting your chosen partner through the design and NPI processes;

� The likely Bill of Materials (BoM) costs;

� Supply chain and supply chain management requirements, e.g. finding, qualifying and managing the manufacturer’s own suppliers (the ‘tier 2’);

� The technical complexity of the manufacturing processes;

� Any import / export restrictions on raw materials and finished goods;

� Transportation costs of raw materials and finished goods.

As you can see, there are many variables!

Assuming that you are going to start your search process from scratch, you will need to create a briefing document from your specification (often called request for interest (RFI)). Ideally, it should identify the key must-have requirements versus the nice to have requirements. This will enable a wider choice of potential suppliers and platforms, but will reduce the level of confidential information that you need to divulge – we would certainly recommend against disclosing any detailed design information or novel functionality at this stage. Keep the crown jewels under lock-and-key for the time being!

The RFI document will be required, even if you are going to ask a third party – such as your development partner – to carry out the search for you. The difference is that they will already have a process for this, and will also have pre-existing knowledge of potentially suitable partners – and unsuitable ones!

This investigation results in a ‘long-list’ of potential suppliers, which is further filtered after research into the suitability and credibility of the manufacturers – maybe through something as simple as a telephone ‘interview’. Assuming the process is being undertaken by your development partner, the ‘filtered long-list’ will be given back to you, along with a report containing recommendations for the next stage in the selection and engagement process.

The next stage is to further consolidate the product specification with the capabilities and / or platforms on offer from the manufacturers you have identified in the ‘filtered long-list’. Typically, this would entail face-to-face meetings with manufacturers and analysis of representative product samples to assess their technical suitability. It might also include audit visits to the manufacturer’s design offices and manufacturing facilities, although – to minimise costs – this may be delayed until after detailed quotations have been


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obtained. Even if you are relying on your development partner to manage this process, you should be involved at this stage – you need to start building the business relationship that will prevail after your development partner’s work is done. You should aim for a ‘short-list’ of 2–3 manufacturers who you believe to be capable of supplying the services or platform that meet your requirements. There may well be a strong leader emerging at this stage.

Whilst the preliminary technical qualification will have a significant bearing on the final selection, it is by no means conclusive. Having narrowed the options down to a manageable choice, you will need to start to develop your commercial relationship with the potential manufacturers, in order to ensure that you will be able to reach mutually acceptable contractual and pricing terms. To do this, we would expect you to engage in some preliminary contractual discussions and also to conduct a final Request For Quotation (RFQ) exercise to obtain more accurate cost estimates. To do this, you will have to release detailed design documentation and functional descriptions of your novel product idea, so it is imperative that the appropriate legal protections are now in place.

Large companies, when qualifying manufacturers, consider the manufacturer’s capability in some detail, including the maturity and robustness of their design processes, the capability and quality of their manufacturing processes, and contractual terms. Assuming that detailed design and manufacturing process audits have not already been conducted, this is the right time to undertake them. Optionally, you may also conduct due-diligence on the financial stability and / or a target pricing study (see Q17).

You should now have a contractual agreement with your ideal manufacturing partner.

Q17. How do I know I’m getting a fair price?

If the RFQ responses you received during your manufacturing partner selection were sufficiently detailed, you should be in a good position to compare like-with-like, and your commercial decision may be relatively straightforward.

However, it is often hard to get like-for-like quotes, primarily because manufacturers do not like to give line-by-line BoM quotes. There is often a simple reason for this: there will probably be profit margin ‘hidden’ in the BoM. There is also the issue of the non-disclosure agreements the manufacturer may have with their suppliers, but many of these suppliers

will enter into a three-way agreement if pushed – you will probably find most of the resistance coming from the manufacturing partner!

For high-value parts you need to have an agreed contract price with the part manufacturer. You then need to find out if your chosen manufacturing partner has negotiated a better price because they already use this part in high volume. This can be tricky, but it is usually worth the effort.

The key here is transparency – the more willing your manufacturing partner is to be ‘open-book’ regarding BoM quotes, process costs and profit margins, the better chance there is of a long-lasting, harmonious business relationship. If your short-listed partner is unwilling to give a reasonable level of cost transparency, ask yourself (and them) why this should be? They will almost certainly tell you “It’s corporate policy”, so ask yourself why they should need such a corporate policy? Do allow this to influence your final choice of manufacturing partner.

Sometimes your choice of manufacturer may be constrained by other factors, e.g. your product requires FDA approval, and the manufacturer must therefore comply with ISO 13485. This may put you in a weak negotiating position when it comes to obtaining cost transparency.

If you want (or need) to use a given supplier, and also want to negotiate aggressively to obtain the lowest possible price, then you can engage a consultant to assist with a target pricing study. They will calculate what you should be paying for the product manufactured, in the given location. The manufacturer will then have to defend their pricing against this study, and this often forces them to negotiate on a line-by-line basis.

However, by the same token, you should be mindful of the pitfalls of overly aggressive price negotiation. If, for example, you exploit a supplier’s empty order book to obtain a price which is barely profitable for them, do you really believe that, when times are better, your product will be receiving the best efforts of their best people? Moreover, do you really want your product manufactured by a supplier who is teetering on the edge of bankruptcy?

Q18. What approvals do I need?

The approvals required for any given product will depend on what the product is and where you are going to sell it. For example, for a product to be sold in Europe it must be CE marked, but the CE mark covers different regulations


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depending on the product category – radio receivers vs. IT equipment, for example. In general, products must meet electromagnetic compatibility (EMC) standards, safety standards, and materials contents and processing standards such as the RoHS and WEEE directives. However, there are also country-specific requirements that may need to be met, even within Europe (e.g. for mains connectors). You’ll find there are local test houses for all these standards, who will help advise what is appropriate and when in the development process to start testing. Generally speaking, it is wise – and usually most cost-effective – to utilise the expertise of these organisations wherever possible.

If you are using a manufacturer they will almost certainly carry out much of the testing for you, but it is important to remember that you will probably remain legally responsible for approvals – for example, it is the organisation that brings the product into the EU that is responsible for the CE compliance.

Think about approvals early on. Your product’s market may be limited by international variations in standards – for example, different use of spectrum for communications between the EU and the US.

Finally, there are ‘soft’ approvals to consider. Typically these will include industry compatibility certifications like WiFi, Bluetooth or those required by Microsoft before you can use their logos on your packaging etc.

Q19. How do we make sure the product is ‘right’?

As well as approvals, it is important that the product is fit for purpose – i.e. that it works as advertised, is sufficiently reliable and can be manufactured with a yield that the manufacturer is happy with. Confidence that your product is ‘right’ is usually gained through robust reliability engineering and confirmed through verification and validation testing. We are not covering reliability engineering here – that is a whole topic in itself, and is the responsibility of your development partner to ensure the product meets your specification.

There is a distinction between “verification” and “validation”. Unfortunately the meanings of these terms are often interchanged, or are otherwise different, depending on which organisation you are talking to.

Verification is demonstrating that the design is right. In other words, that the product that has been developed for you (or by you) meets your technical specifications. You should assume that verification is your responsibility. Your

development partner and manufacturer will have procedures in place, such as test specifications and plans, which will allow them to demonstrate that they did their job properly, but ultimately the responsibility for whether the product meets your needs is yours.

You should push your development and manufacturing partners to test to an appropriate level, including environmental testing and accelerated lifetime testing. Note, however, that much of this testing requires specialist equipment, and is therefore expensive, so plan your test programme carefully, and remember it only needs to be good enough.

Validation is demonstrating that you designed the right product. This is where you need to ensure that the design meets the needs of your business…and the market! Clearly, this is much more subjective than verification. You are comparing the product that has been designed with the detailed product specifications developed all the way back in Stage 1. You did produce and maintain these specification documents…didn’t you? If not then you may have asked for the wrong product, and you will almost certainly get the wrong product – hence the emphasis on getting the specification right in Q12.

The product specifications should have encompassed some of the hard, non-legislative requirements like:

� Quality and product life. Does the quality reflect the brand image? Does the expected time to product failure reflect the retail price? Does the end customer feel that they got good value for money, or do they feel cheated? It only has to be good enough, but it does have to be good enough!

� Green credentials. Can it be recycled? Is it made from X% of recycled materials? Does it meet its energy efficiency and / or carbon footprint targets? Are the materials and / or labour ethically / responsibly sourced?

� Interoperability with other products. What at the other products that your will interact with. Are there service eco-systems that your product needs to work within?

In terms of in-use testing you must take responsibility for this yourself; you will be answerable to your customers after all. In particular you should not expect a manufacturer to understand interoperability issues that may be quite subtle and dependent on the installation.

Finally, validation is also about some of the ‘softer’, non-legislative requirements: form-factor, look and feel, surface texture, perceived quality, as well as the ‘soft’ certifications mentioned in Q18.

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Q20. So when can I start selling them?

At this point you have a reliable design that may be partly verified and validated, so next you need to execute the new product introduction (NPI) process and production ramp-up. This is a tough time for any company as you wait for the real product, fully approved, and ready to sell.

For a high volume product this may take 6–18 months as the manufacturer will need time to prove their own processes and be happy that the yield is good enough. This may take less time for lower volume products.

Broadly speaking, an engineering verification build (EV or EVT) is used to confirm that the design is technically correct (verification); a design validation build (DV or DVT) is used to confirm that the design meets your functional requirements specifications (and those of the end-user); and a manufacturing validation build (MV or MVT) is used to confirm that the manufacturing process is capable of delivering the required yield, quality and capacity.

You will be able to get samples from each build during this period and they can be used for marketing purposes for market testing, but you won’t be able to sell the product until the end of the process. The product must have its approvals before it can be legally sold, and also you won’t want to raise the expectations of your sales network before you are ready to supply your product.

It will be worth the wait!

In conclusion…

We’ve seen that the product development cycle maps onto the funding cycle. To raise investment for your business you will need to credibly answer tough questions at the different funding stages. Demonstrators can help you communicate your message and show how you have reduced the technical and commercial risks that were barriers to investment in your business. Smart use of demonstrators and engineering practice can help you to answer the tough questions your investors will ask, and ultimately to be successful.

Cambridge Consultants has worked with many early stage companies over the years and all of them have had to address the questions we’ve outlined in this booklet – we invite you to consider how your business will answer these questions.

About Cambridge ConsultantsCambridge Consultants is a world-class supplier of innovative product development engineering and technology consulting. We work with companies globally to help them manage the business impact of the changing technology landscape.

With a team of more than 500 staff in Cambridge (UK), Boston (USA) and Singapore, we have all the in-house skills needed to help you – from creating innovative concepts right the way through to taking your product into manufacturing. Most of our projects deliver prototype hardware or software and trials production batches. Equally, our technology consultants can help you to maximise your product portfolio and technology roadmap.

We’re not content just to create ‘me-too’ products that make incremental change; we specialise in helping companies achieve the seemingly impossible. We work with some of the world’s largest blue-chip companies as well as with some of the smallest, innovative start-ups who want to change the status quo fast.

Cambridge Consultants is part of the Altran Group, a global leader in innovation. www.Altran.com

We hope that this booklet has been helpful to you. For further questions and enquiries about how Cambridge Consultants could help you with your product development please contact:

Duncan Smith, Commercial [email protected]

Derek Wallis, Programme [email protected]

About the authors

Duncan Smith is a Commercial Director and heads the IDEC Division of Cambridge Consultants, focussed on innovation in the Industrial, Defence, Energy and Consumer market sectors. His background is in our consumer electronics manufacturing where he has worked with both blue chips and high-growth startups.

Dr Derek Wallis is a Programme Director at Cambridge Consultants and leads the NPI programmes. He has managed collaborative development projects with Asian ODMs including the search, qualification and engagement of the suppliers. He has also managed several NPIs in Eastern Europe and Asia. His experience spans consumer, industrial and automotive electronics products.

Cambridge Consultants is part of the Altran group, a global leader in innovation. www.Altran.com

www.CambridgeConsultants.com

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