DRAGON INNOVATION, INC. !

WORKING WITH OVERSEAS CONTRACT MANUFACTURES

!MAY 19, 2014

LV HARDWARE STARTUPS MEETUP| LAS VEGAS !!!!!

SCOTT N. MILLER | CEO | @DRAGONINNOVATE | WWW.DRAGONINNOVATION.COM

No Need To Take Notes

http://bit.ly/Overseas-Contract-Manufacturers

MIT RoboTuna

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Disney Dino

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My Real Baby

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Product Development !

The Old Way

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Build then Sell

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Agenda

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Arrgh!

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Agenda

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HARDWARE IS EXPLODING

Unprecedented periods of growth come with lots of chaos.

DRAGON INNOVATION HAS HELPED LAUNCH AND SCALE OVER 100 COMPANIES SINCE 2009

HARDWARE INNOVATION NOW COMES FROM THE LITTLE GUY Prototyping has never been easier thanks to 3D printing, Arduino, the Maker Movement

(all of these guys are Dragon clients)

Product Development !

The New Way

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CROWDFUNDING IS FUEL ON THE FIRE

•Raise capital upfront •Validate product / market fit •Create engaged & passionate community early •Get the attention of media and investors •Understand build volumes

New transactional model is perfect for hardware

But the promise of the hardware revolution faces an existential

threat.

75% OF CROWDFUNDED HARDWARE PROJECTS

DELIVER LATE OR NOT AT ALL

!!

PROF. ETHAN MOLLICK, UNIVERSITY OF PENNSYLVANIA / WHARTON

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•COGS & Tooling Estimation •DFMA •Funding Threshold Calculation •Production Strategy & Scheduling •Marketing Strategy •Connections

STEP 1: DECIDE WHERE TO BUILD

Examples to Talk Through

China?

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Yes! Manufacture in China If Your Product... Is COGS (Cost of Goods Sold) sensitive

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Yes! Manufacture in China If Your Product... Requires higher production volumes (>10k units)

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Yes! Manufacture in China If Your Product... Requires significant manual labor to manufacture and assemble

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Yes! Manufacture in China If Your Product... Uses existing manufacturing technology (i.e. injection molding, etc)

http://berkeleysg.com

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Yes! Manufacture in China If Your Product... Is tolerant of variations in supply chain and logistics

http://berkeleysg.comhttp://kilterpulse.com

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Yes! Manufacture in China If Your Product... Can benefit from low cost Design for Manufacturing (DFM) Non-recurring Engineering (NRE)

http://berkeleysg.comhttp://kilterpulse.com

http://plasticstoday.com

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Yes! Manufacture in China If Your Product... Has “physically” protectable IP

http://berkeleysg.comhttp://kilterpulse.com

China Drawbacks for Manufacturing

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China Drawback Significant Distance from USA

http://supplychaindigital.com

http://skeptically.orghttp://studentuniverse.com

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China Drawback Significant Language Barrier

http://supplychaindigital.com

http://skeptically.orghttp://studentuniverse.com

http://asiasociety.org

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China Wages Rising Wages

http://en.wikipedia.org

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China Concern Rising Exchange Rate

http://en.wikipedia.org

USA?

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Yes! Manufacture in the US If Your Product... Requires low volumes

http://berkeleysg.comhttp://kilterpulse.com

http://www.theguardian.com

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Yes! Manufacture in the US If Your Product... Can be manufactured and assembled through automation

http://berkeleysg.comhttp://kilterpulse.com

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Yes! Manufacture in the US If Your Product... Is sensitive to shipping time and expense

http://berkeleysg.comhttp://kilterpulse.com

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Yes! Manufacture in the US If Your Product... Has difficult-to-protect IP

http://berkeleysg.comhttp://kilterpulse.com

http://www.independent.co.uk

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Yes! Manufacture in the US If Your Product... Requires non-standard capital equipment

http://scientificmachining.com

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Yes! Manufacture in the US If Your Product... Is part of a government contract

http://en.wikipedia.org

STEP 2: REQUEST FOR QUOTE / CM SELECTION*

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!*THE MOST IMPORTANT MANUFACTURING DECISION YOU’LL MAKE

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Overview of the CM Selection Process

http://en.wikipedia.org

1. Talk with trusted network connections who have manufacturing experience. 2. Create a differentiated list of 5 - 10 CMs. 3. Down select to 3 - 5 factories based on your product category (why?) 4. Create a Request for Quote (RFQ) Package. 5. Visit! 6. Analyze Results. 7. Negotiate Big Items. 8. Talk with the CM’s customers. 9. Select the winner, and leave the others on good terms.

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RFQ Package

http://en.wikipedia.org

•Company Overview -Team overview -Funding -Product -What’s done -What needs to be done -Factory Criteria

•BOM -Canonical format (A2A) in Excel -Transparent and Formula Driven -Separate Std, Special and Consigned Margins/Markups -Include all costs to Ex-Factory -Fill in the blanks

•Schedule -Gantt chart (Cloud) -Fill in the blanks

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Factory Visit Checklist

http://en.wikipedia.org

Do you like the team? Are they experienced and friendly? Do they have the right manufacturing capabilities? Does your intended volume match their volume capabilities? Are they financially stable? Do they have enough working capital to get going? Do they have favorable payment terms? Are they transparent in their costing? Do they take IP seriously? Did they show you something they shouldn’t have? Are they ethical in their treatment of their workers and otherwise? Do you have access to upper management? Are they excited about working on your product?

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CM Comparison (A2A Decision Matrix)

http://en.wikipedia.org

•Total Material Costs •Labor •Margins/Markup (Std, Special, Consigned) •Pareto of Top 5 Most Expensive Components •Fixed Costs (tooling, fixtures, NRE) •Schedule •Fit Criteria

POP QUIZ

• Question: What is the biggest challenge in manufacturing ?

Hint

POP QUIZ

• Question: What is the biggest challenge in manufacturing?

• Answer: Communication! • You cannot design in a vacuum (even if you design

vacuums). Strong communication and teamwork skills are critical to success. Engineering is team sport. It’s all about the people. “Us” and “Them” won’t work.

Communication At Work

Bi-Directional Knowledge Flow

Product Designed In U.S.A. Database Sent To Cm Tooling Manufactured

Parts Molded Product Assembled Final Inspection & Shipping

Manufacturing Management Triangle

Quality

Cost

Schedule

Cost of Goods Sold

(COGS)

• Direct costs for goods produced. • Does NOT include Tooling. • Actual price depends on where a

company takes ownership: - Ex-Factory (XF) - FOB (add overland transport to

XF) - Landed (add shipping to FOB) - Inventory (add warehousing)

• Price will vary by date depending on running changes, transportation costs, currency exchange, commodity costs, etc.

Very Simple Retail Costing Model

$

Sell-Through Price (Retail Price)

Sell-In Price (Wholesale Price)

COGS

Retailer Gross Profit

Company Gross Profit

COGS

COGS YOUR DESIGN

• Material and Component Selection

• Fabrication Method • Manufacturing Efficiency

(First Time Yield, machine tonnage, assembly labor, number of operations, etc.)

• Quality Requirements (driven by requirements / Voice of Customer)

• Packout (replaceable vs. rechargeable batteries; packaging; spares, etc.)

MANUFACTURING PARTNER • BOM Transparency • Profit Margin • Labor Rate • Currency • Geographic Location

(shipping, tariffs, etc.) • Capability (in-house vs.

outsourced) • Supply Chain (Purchasing

Power, volume (piggy back), Consigned vs Purchased, etc).

Controlling Costs

1.Deconstruct  the  BOM.  2.Separate  special  components.  3.Transparency  4.Compare  to  standards.  5.NegoAate  Inclusions

Additional COGS Strategies

Cost

•Bill  of  Material  Transparency:    Require  factories  to  provide  an  item  by  item  costed  BOM.    No  mysteries  or  hidden  formulas.  

•Calculate  labor  rates.    Pop  Quiz  –  How???  

•Build  a  “Standard  Cost”  database.    Price  out  cost  reducJons.  

•If  Jme  permits,  develop  relaJonships  with  mulJple  vendors  to  avoid  single  source  suppliers.    Leverage  is  a  beauJful  word.  

•When  manufacturing  in  volume  for  a  CE  product,  it  is  criJcal  to  understand  and  control  COGS.    Focus  here!    Because  of  the  volume,  every  penny  counts  ($10k  @  1M  units)

1

19

34

14

11

1328

20

221721

36

30

37

10

24

1812 23

5

25

2915

166

897

2

35

34

13

26

33

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ITEM NO. PART NUMBER DESCRIPTION QTY.

1 100132 Heatsink, Aavid 60520 12 PCB 1

100104 Circuit board blank 1 100015 LED, Luxeon LXHL-LW6C 1

3 GATE 1 100110 Film Gate 1 100011 Backgate 1 100024 Film Spacer 1

4 Bottom 1 100144 Bottom Plate 1 100029 Leaf Spring 2

5 Knobreel 2 100106 Cover Bush 1 100151 Dowel .125 dia 2.000 long 1 100009 Driver 1 100153 Gripring .125 dia 1 100149 Knob bush 1 100007 Clutch, one-way, Torrington RC-02 1 100152 Washer, ss .125 id, McMaster 98019A310 1 100017 Knob, plastic McMaster 7354K15 1 100045 Felt washer 1

6 Reel 27 condentube 1

100031 Condenser lens, small Fisher Price 1 100105 Condenser Tube 1 100154 O-ring Buna -120 1 100035 Retaining ring, internal 1.062 dia 1 100031b Condenser lens, large, Fisher-Price 2

8 100162 Spacer, condenser lens, short 19 100136 Spacer, condenser lens, long 1

10 100163 Spacer, projector, short 111 FHMS Phillips M4x20 812 PHMS Phillips M4x8 613 PHMS Phillips M4x6 514 PHMS Phillips M5x16 815 FHMS Phillips M4x12 616 PHMS Phillips M4x12 117 PHMS M4x8 618 100150 Endplate, Right 119 100160 Endplate, Left 120 100100 Front Plate 121 100138 Projector Lens Housing 122 100148 End Spacer 223 100145 Top Plate 124 100158 Window Edmund R39-773 125 100146 Handle 126 100161 M5 Acorn Nut 127 100147 Half Bridge 128 100012 Focus Screw McMaster 92558A170 129 100143 Spacer, .25 dia, .19 long 430 100156 Spacer, projector, long 131 FHMS Phillips M4x8 232 100150 Washer, Nylon, MSC 05401757 133 100159 Detent 134 100101 Bumper, rubber McMaster 9540K35 835 100039 Switch, SPST rocker Carlingswitch 136 100155 Projector lens, concave 137 100157 Projector lens, plano 1

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C

B

AA

B

C

D

12345678

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APPLICATION

DIMENSIONS ARE IN MILLIMETERSTOLERANCES: 0,1MM ANGULAR: 0 30'

MATERIAL

FINISH

DRAWN

APPROVED

DATENAME

TITLE:

SIZE

BDWG. NO. REV

SCALE 2:5

UNLESS OTHERWISE SPECIFIED:

KINKAJOU DELTA100141

DO NOT SCALE DRAWING

REMOVE ALL BURRS AND SHARP EDGES

allen 21july04

Anatomy of a BOM• Plastic • Purchased Parts • Electrical Components • Consigned Components • Deco • Packaging • Assembly Labor • CM Profit, Overhead and Scrap • Overland Transportation

• Does it matter that it is a gear???

• Components (3) 1.Material Cost = Part Weight * Resin Cost 2.Machine Overhead: = Hourly Cost * Cycle Time (sec) / (3,600 sec / hr) 3.Factory Mark-up, Scrap and Overhead (%)

• Total Part Cost: = (Material Cost + Overhead Cost) * (1+Factory M/U)

How to Calculate Plastic

HK Resin Prices (USD/Ton)

Reference: http://www.nhh.com.hk/eng/trading/price_trend.asp (you will need to create a login)

Item Cost (USD)

280 Ton / hr $15.48

220 Ton / hr $10.96

180 Ton / hr $8.38

140 Ton / hr $7.09

100 Ton / hr $5.80

80 Ton / hr $5.16

Example PRC

How to Calculate EE Costs

• Cost = Component * Usage • Separate high cost components over a certain

threshold. Apply a lower mark-up. • Apply Factory M/U

Typical PRC CM Margins (Profit, Scrap, Overhead)

PCBA 6–8%

Toys 12%

Consumer 15%

Medical >40%

Other BOM Costs

• Deco (Tampo, Paint, etc.) • Labor (PRC $2 – 6 / hr) • Packaging (Gift + Master)

Schedule

Schedule

•Many  consumer  products  are  driven  by  the  Christmas  (which  has  a  fixed  date).  Plan  conJngency  in  your  schedule.    Things  never  go  according  to  plan.  

Have  an  onsite  presence.  Track  schedule  carefully  and  take  correcJve  acJons  early.  Avoid:    “There  is  never  Jme  to  do  it  right  the  first  Jme,  but  there  is  always  Jme  to  do  it  again.  ”

The Road to Production

Detailed Milestones‣Hand  Over  /  Kick-­‐Off  

Form  CM  Team  Contact  Lists  /  Roles  and  ResponsibiliJes  

ME  and  EE  File  transfer  Works  Like  /  Looks  Like  Samples  CM  trip  to  the  US  if  possible  (access  to  models  and  team,  relaJonship  building).  

Factory  Input  Components  

Engineering  Quality  ProducJon  Planning  (interface  with  Sales)  

Sourcing  /  MA  /  CosJng  LogisJcs  Process  /  Procedure  Financial  (modeling  and  payments)  

Pre-­‐ProducJon  Milestones  Tool  Release  

Tool  Start  (TS)  First  Shots  (FS)  Engineering  Pilot  1  (EP1)  EP2  EP3  Final  Engineering  Pilot  (FEP)  ProducJon  Pilot  (PP)  

ProducJon  ProducJon  Start  (PS)  Ramp  

Engineering  Change  NoJce  (ECN)  Sustaining  (Quality  Up  /  Cost  Down)  Sunset

Quality

Quality•DefiniJons:  

•Quality  =  Customer  SaJsfacJon  =  Performance  –  ExpectaJons  •“Fitness  for  Use”  Incoming  Quality  Control:    Use  good  ingredients.  Build  and  test  along  the  way.    Use  sub-­‐components.  StaJsJcal  Process  Control  (SPC)  /  Yield.    Find  out  now,  not  later.  Sample  TesJng:    Temp/Humidity;  TransportaJon;  Drop;  T/T;  Small  Parts;  Heavy  Metals;  

Compliance;  FuncJonal;  Life.    How  do  tests  match  reality?    ISTA-­‐3A.  Final  InspecJon  /  Acceptable  Quality  Levels  (AQL)  Walk  the  line.    Get  your  hands  dirty.  It  is  much  easier  (and  less  expensive)  to  make  changes  before  ProducJon  Start.  What  happens  if  something  fails?  Will  make  or  break  a  product  …  and  a  Company!  Quality  is  rarely  considered  in  the  engineering  phase  by  startups  due  to  schedule,  cost  and  

technical  pressures.  Watch  out  for  the  Unknown  Unknowns.  Strong  indicator  of  long  term  success,  etc.  Can  you  answer  the  quesAon  “How  do  you  know  the  product  is  good”?

Recommended Reading

"Factory Girls", Leslie Chang:  W.S.J. Reporter Who Lived In China Interviewing Migrant Factory Workers In The Pearl River Delta.  Great Insight Into The Workforce.

"Poorly Made In China", Paul Midler:  Light, Humorous,

"Mr. China", Tim Clissold:  Older Humorous Memoir Of One Of The First Westerners

dragon@dragoninnovation.com