โ€ŠThe opinions and information shared on this podcast are for informational purposes only. We always recommend that you seek professional advice before taking any action related to your business or personal ventures. Thank you for listening, and I hope that you enjoy the episode Hello. On today's episode I have Scott Miller . Scott has a incredible background, uh, within manufacturing and hardware development, and today on the episode will be diving into topics such as, how to set up, your manufacturing and production, successfully. How to make insource versus outsourcing decisions. How to set up a contract manufacturer from a low leverage position and navigate your supply chain. And we will break for a fun segment , where our guests share some of the most outrageous or bizarre hardware development stories, , that they've either heard or experienced where things just went really wrong. , and usually they have a happy ending, but it's always fun to hear about what could go wrong and then we'll. Wrap up with how to, set up manufacturing agreements and some discussion around quality assurance and best practices there. As, per usual, the episode will have a too long, didn't listen, , segment at the end where we will get into all of the key takeaways and actionable pieces that were discussed in the episode. And when you have time, you can always come back and listen. Without further ado, I leave you with Scott. Welcome to the Builder Circle. I have today, Scott Miller on this episode where we're going to be discussing a lot about setting up manufacturing making decisions with a small team regarding your production and many other things. So Scott, thank you so much for coming. I'm so excited to have you. Oh a lot of fun. yes, for sure. And just so our listeners know who you are and what you specialize in and your background, could you give a a little elevator pitch of who you are? Of course. Yeah. So I trained as a mechanical engineer and was really lucky to be able to work on some cool robotic projects in graduate school, namely a robotic tuna fish for the Navy. Trying to find ways to swim more efficiently for autonomous undersea vehicles. After doing that, as at Walt Disney Engineering for a little while, building full-size walking dinosaurs. then I switched from working on one, kind of one-offs where you could file the corners and filed a. To getting into some higher volume stuff. Initially it was at iRobot with a project called My Real Baby, where we ended up building about a hundred thousand of them in partnership with Hasbro. And then I took that knowledge and applied it to helping to scale the Roomba for the first 4 million or so Roombas. So that was a great 10 years and I was 12 years at my last company, dragon Innovation, we had the observation that there was more and more hardware startups than ever before, but there just wasn't a good body of knowledge on how do you take one and make money. So having gone through it the hard way, we thought maybe there's an opportunity to help other companies. And that was the kind of the mission behind the Last Dragon Innovation. And now I'm at Dragon Ventures doing the same thing, just helping great hardware companies. That's really awesome. I've had the privilege of meeting a bunch of people from the Roomba program and it feels like the people the core team that worked on that gained so much knowledge around the scale up of hardware. And it's just it's a theme that I've seen that they're the people that really know how to get something from a prototype into the thousands or millions Products but super excited to have you your, what you are doing and what you've done in the past is very much in line with what the builder Circle is trying to do and educate and inform hardware entrepreneurs to be able to create a concept and then actually get it to be in the world. . So one of the I think common threads that come up in hardware development once you have a functioning prototype or you're getting there is getting ahead of setting up your manufacturing and usually companies add a depending on what product they're doing, there's this decision that comes up where it's like, how do you successfully make the decision to insource or outsource basically saying oh, I'm going to build this because I want to have all the institutional knowledge and everything that surrounds it. Or I don't have the cash right now and I don't have the capabilities to take on this challenge, which is a huge undertaking. Um, And go with a contract manufacturer to at least get me to a stage where maybe I can transfer to my own factory after a certain level of revenue. So I'd love to get your thoughts on that when we can like start a discussion on that. Sure. Yeah, so I think a lot of it depends on what you're building and how many of them you wanna build. Building one of them, I would absolutely just do it in house Yeah. it would take longer to train somebody else and then. You can imagine a spectrum that if you're building a million of them, you're probably gonna work with an outside factory at least for a while. So the trick is, where's that threshold or crossover point Yeah. Where's the cutoff? where's the cutoff? And for me, a lot of what I've done is consumer electronics, so I'm Mm-hmm. That lens. But you could apply it if you were building industrial or automotive or something else, the Right? This might be a little different. But the number I use is typically the first one to a hundred units. I like to build those in-house because I find a few things are going on. One, unless the product is really expensive, it's not gonna be very interesting for a factory They typically make their money on volume with such a low volume, if the cost of goods is a hundred dollars, like there's really no economic incentive, Mm-hmm. Them. The second thing, as you touched on, is domain knowledge. So as you're building it, like chances are the design does not very mature, that Right. and changing and you wanna capture. All of those lessons so that you can feed that BA back in and improve the design. thing is, at that low volume, it almost takes more time to go and find a factory that's gonna be the right fit and then train the people on how to do it rather than just doing it yourself. There does come a point when the design gets a bit more stable and maybe you get into the low thousands, that it's a lot easier to work with work with a factory. And hopefully you're, you've captured the key learnings. I'm a huge fan and I'm sure we'll touch on it later of having feet on the ground in the factory. So as you transition it to them, I think it's still important to capture that knowledge and bring it home. So it's not like you throw something over the wall or write a PO for 10,000 units and you get the perfect part. It's very much a team sport to get there. And when you say factory, you're talking about a contract manufacturer or your own, A cm or a contract manufacturer as opposed to an in-house, right? And the reason I think about this is running a factory is really hard. Yeah. There's a lot of knowledge you need to know. whereas if you work with a great CM or contract manufacturer, hopefully they have knowledge and process and procedure. They've hired the labor force and that they can add some value for that rather than trying to go through the learning curve of launching your own product. And like hardware is just insanely hard. For 25 Day I'm like, man, that is, it's just so hard. It's incredibly rewarding. There's nothing better than walking into a store or seeing somebody use a product you built. a sweet rush, but it is a lot of effort to get there. So if you take that and then you add on everything you gotta do to run a factory, I almost feel like it's biting off more than like a startup probably wants to chew on. Definitely, and I think it's you touched on a very important part of just design maturity because I feel like if you do it ear early, too early where your design is still in this kind of turbulent phase because design is like when, there's that I it's this like thought of how teams exist, where it's like, there's like the turbulent period and then the stabilization period and like the thriving period. I feel like design is very similar too, where the very beginning is incredibly turbulent. You're learning so much and you're iterating a bunch. And in that process, it's really important to actually not go into and doing it in at insourcing because change orders are a huge deal once you get to training up a contract manufacturer and then potentially changing a entire process or changing a, even a single piece of the puzzle could result in a huge lead time shift and having to train an entire group and also a lot of money. I feel like when making the risk assessment, that is a very important part to consider of where in the maturity cycle the design is actually at. Yeah, I think you're exactly right. And I like your analogy of teams. If I remember it, it's forming, storming, norming, and then performing. Thank you that's what I was thinking of. In my mind, I'm thinking turbulent. Yeah, I haven't, it's funny, I haven't thought about that analogy for a little while, but yeah, it's very true. When you do that and with the design, if I reflect back on what happened for the first Roomba, it was really five or six people in one room all in one spot, and they could iterate so quickly. There's one ME (Mechanical Engineer), one EE (Electrical Engineer), one software person, a couple R&D folks, and a business person. So a really high bandwidth communication. Everybody from a similar educational background and experience. But then the minute you bring other people to the party even if they're like an hour drive, like in Worcester, since we're in Boston or the Boston area, like it's not that far, but you've gotta get in the car, you've gotta deal with traffic and weather. And then you come just. Different experiences. So that adds complexity and introduces sources there. Whereas if you can just build it on your own proverbial kitchen table you can iterate much more quickly in the early stages. But you'll definitely know when you get to the point where you don't wanna build it anymore on your kitchen table, like after the pizza parties and your friends have all run away from all the free labor that they've been providing. So it's becomes I think the point becomes apparent after, at some point where it's time to go outside. Yeah, and I think it does differ per product or whatever hardware is being built. Like your example fits very well with consumer electronics There's, even in consumer electronics or consumer products, there's a huge spectrum, right? There's ones that the design is very straightforward and there are not that many components, in which case, I think the transition over to a contract manufacturer is quicker because of its lack of complexity. And then as the complexity gets the Roomba where I, I believe in the office at Bolt, they had a Roomba that was completely just all of the subs sub-components were yanked out of it and put on a I don't know, like a display where it was all of them. And there was maybe like a hundred something components, maybe even more when it gets to that level, and it's still a consumer electronic it I feel like at that point keeping the iteration in-house so that you can make it like somewhat perfect, which I don't like to use that word. It's always the good enough. Um, But uh, like at that point, I feel like the con the timeline of when the contract manufacturer handover happens is a little bit further along the product development cycle. Would you say that's true? Yeah, I agree. I think it's like volume dependent and then the or vertical that you're in. So if you are building a very large Like industrial 3D printer, Hard to have those that the know how in test machines and ability to assemble heavy things. Or, like part parts that come to mind is if you're building freight farms. Students at Oland is working over there, I think is their CTO (Chief Technology Officer). Like that's a huge shipping and container that you're not gonna put on your dining room Mm-hmm. At that point, like maybe it makes more sense to engage a CM (Contract Manufacturer) earlier in But if you're building a consumer electronic product with 3D printing and the ability to spin boards rapidly, that one you can probably make a little bit further progress into higher volume just doing it, on your own. It's probably like a way to think about it is when you start to get injection molded parts, Not so much from Protolabs, but more like need to get production worthy parts, then it's definitely good to have a factory to be able to help you with that. Yeah. Yeah, for sure. And I guess to go further down the chain of product development, when do you feel would be a good reason to transfer from a contract manufacturer back to internal? Because I know that kind of like cycle happens as well where the contract manufacturer gets you to maybe like thousands or tens of thousands, but then the price per unit, it doesn't decrease as much as you want. And there's some I guess a little bit of a conflict of interest where the contract manufacturer is making money off of how many units they're making. I guess depending on the contract that you have with them. But when do you feel like is a good time to reevaluate the decision to go to a outside factory or a contract manufacturer and bring it back in? Yeah, so what I've typically seen is when you're doing about 50 million of business with the cm, so that would be the cost of goods sold, which is how much you pay the factory times year volume, or the quantity you build on an annual basis Right. Million. Then you wanna start thinking about dual sourcing or maybe bringing it in-house. just as a few simple numbers, like if you have one unit and save a dollar, you save a dollar. Have a million units and save a penny, you save $10,000. So there's a lot of leverage as you get to those higher volumes. So I think that started would be, when I start to think about it. Other considerations are like finances are a big one, as you said to be able to get your margins more favorable. Also, if there's IP that you want to protect, potential. I'm, I've always had really good experiences with CMs, but potentially you have a little tighter controller over your IP if it's all, within your four walls. So you might wanna think about that, if there's specialized capital equipment, you need to build it or test it. most of what I've done on consumer electronics is all working with outside cms. I believe, and I could be wrong in this, but I believe companies like Dyson actually do own their own factories. And my understanding is that they do that because they've got a lot of IP around very high spinning fans, like a hundred thousand RPM And that they really want to protect that ip. So Yep. To do that in the house. But yeah, those are some of the things you weigh. But if you did that, you'd have to know how to run a factory, which brings on like additional staff and people in overhead and and knowledge. So like with anything, there's a trade off. Yeah, definitely. And I feel like even if you do go down the path of creating your own factory, you have to make that decision well in advance of moving away from your CM and have a pretty decent handover period. Because spinning up a factory takes time. You need to find a location. You need to uh, get all of your, flex sim models all set up so that, you know, like how much time it's going to take. And it's if it's actually improvement because I feel like if you don't do your due diligence early on, then what's gonna happen is you're gonna build a factory and then your price per unit is gonna shoot up the wall, and then you're gonna be like, why did I ever do this? Yeah. That's why it was thinking of it in terms of dual sourcing, because then Do is 80% would be from the primary 20% from the secondary. You could on an angle basis put it out for quote, with the understanding that whoever got the whoever was awarded the product would get 80% of it. But they always know there's another alternative, so it keeps everything in check. It gives you leverage in the situation, essentially. And then if you did, like it's never easy to switch factories, Did need to switch, it might be easier to work with outside CM cuz you're not stuck with all the infrastructure and building and that you would have if you owned it. For the products that I've built, I've always, if the decision is made to be in a cm, I've always seen 'em just stay with the cm um, and not, not come in house. But potentially if you get really high volume then it might make sense. Yeah. Or it's the opposite situation where the system is so complex , the best example for this is SpaceX where they are fully vertically integrated because they have a very complex system and they're, they have a lot of intersystem connections. And if one system outgrows the other, then that's a big issue. And so on and so forth. So they in-house everything. So that they have control over. And I think that's another thing that. When you said like 80 80% the contract manufacturer how do you keep your quality consistent? Yeah. But when you do that, you truly are building two separate products because much, they're, yeah, they're gonna come off a different set of tools. Every tool is a little bit different because atoms do that as opposed to bits. And, yeah. you wanna be able to track that. So in, in some ways it almost doubles the amount of work. Cuz if you had teams on the ground, you'd need two teams on the ground. Different partners to coordinate. So maybe it doesn't double it, but maybe it's one in, one in three quarters the amount of work, Definitely. I'd say typically don't dual source until you're doing 50 million or more. And you want to get that extra it gives you a few things potentially costing, leverage, but also geographic protection so that if God forbid there's something that takes out one factory, you at least have a backup plan. And not in a complete interruption to your business, which fortunately happens fairly infrequently, but it certainly does. It does. Yeah, for sure. You made a really good point about leverage, which is a big topic I think in startup land because contract manufacturers are generally used to working with. Bigger companies. And for example, if you go to a contract manufacturer and say, Hey, I'm from iRobot, or, Hey, I'm from like Hyundai, like big names, they're going to have the red carpet in front of you and really wanna work with you because they see dollar signs when they look at you. So when you are a startup and you're going to these companies, you're basically starting at you're losing two to zero where they see you as a huge risk. They feel like you're gonna fail any moment. And they use that as leverage towards you all the time being like, Hey, this is risky for us. We don't know if you're good for your money. And so especially at the early stages and also later stages, if you don't do a good job negotiating the in the early stages, There is this constant tango between the CMS and cms are, I feel like the ones that I've worked with in the past have been like notoriously bad at giving a startup a break, which is I understand it's business and they're trying to protect themselves. So I guess my question is for you, in your experience and we can discuss this, is how do you set up your contract manufacturing agreements coming from a very, like low leverage standpoint? Yeah. So you need a lot more finesse. It It's funny, I'm working with one company right now that's maybe a top like top hundred from revenue and we're doing an RFQ and yeah, it's more like, factories are really competing to work with this. The company sets the payment terms instead of the other way around. Oh. it's a very different experience, but but I think it's, from a startup, it's very doable, but you just have to be a little bit more clever. Yeah. the first thing is you've gotta get the right factories in your funnel. Like we call this the rfq or request for quote process which is basically how you pick the factory and how they pick you to go and build your product. And it's really a team sport, but if you don't have the right portfolio of factories in the top of your funnel, it's never gonna work. And generally for a startup, what you, and I love these factories, but they're just not the right fit, would be like a Flex Fox Gable and so on, factories that are maybe 15 to 20 billion plus in, in revenue Mm. A fundamental impedance mis mismatch. Yeah. tricky is, and those would be what we call tier ones. The tier is not like automotive, but just in consumer, like as a function of revenue. Yep. what I think you really need, and it's not a reflection on quality or anything, it's just a sizing. I think really the tier two and the tier three are better. I'd look at it. Tier two as more than a billion and a tier three is under a billion in terms of revenue. Where you're gonna be a much better fit in terms of fish and pond. So you don't wanna be like a little tiny fish in a huge pond, but you also don't wanna be a huge fish in a little pond because you can't Mm-hmm. And you'd have too much of an influence on the factory's business. You want them to be diversified. I know the numbers can be debated, but I think five to 10% of the factor's revenue in a couple years is a reasonable starting point or target. So as you think about factories, you could say, all right, in years from now, I'm gonna ship however many units at whatever cost of good sold. And you get a number and then say, multiply that by 10, and that's the size of the factory, that might be a good fit Now, Just as a rough rule of thumb, but the trick of course, is how do you find these factories? You could go to Alibaba, but, and like there are some good things in Alibaba, but there's also a lot of bad things. Yeah. The wild West. What I find is best is just talking with people. Within the ecosystem that have built products Yep. them, who are you working with? What are you building? Because often you wanna find factories that have built similar products and just have domain expertise in that. but yeah, so you've gotta build out that funnel of the right factories. I think of the factories in a sense, a lot like VCs, Yeah. A cash outlay in terms of opportunity cost, because we all know, like manufacturing or getting a product through the NPI or a new product introduction process takes a long time and it's always delayed. Everybody's optimistic and it takes longer. Definitely. that the factory spending cycles working with you. And they're really banking on the fact that your product is gonna take off and grow to higher volume. And they're weighing, if I work with this company versus the other one. What's the opportunity cost? Who is the highest probability, We work with at iRobot, they, we were about two or three years late, Mm-hmm. Is really bad. Like it's amazing that product came out at all. That's I'm, it's such a hard product, I guess it's Very they stuck with us the whole time and we're phenomenal partners. But as a result, it, I don't know how much revenue it created, but it's probably in the billions sure. that it like a portfolio VC approach. It paid off for them. There's plenty of other ones that have put their heart and soul, the factories have into a product and it's gone nowhere. So it really is finding that thing. And I think as one does the RFQ process a lot of it that's really important is sharing with the factory the bios of the founders, the opportunity, the VCs, if any, what are they what do they bring to the table Mm-hmm. Got some funding for the initial build. Like typically for hardware, you need at least five, 5 million to. To get out. So if you've only raised or have 150,000, it's probably not gonna be that interesting for a factory. Say, all right, we've raised this money from top tier partners we've got a team that's done this 10 times before with successful outcomes, then the factory's gonna be excited and they can see the upside. And if you don't have all of those things, then it's still a very doable but just a little bit heavier. I think that is an excellent point, and I feel like some, oftentimes entrepreneurs compartmentalize the way that they approach certain things that they need to do for their business, where they're like, okay, for VCs, I have like a pitch deck and I'm gonna, I'm gonna do the pitch. And I have all of this kind of storyline and then for manufacturers I'm going to have like my manufacturing engineer take care of that. And it's just gonna be this. And however, it's actually you're so absolutely spot on with that where it's really important to get contract manufacturers bought into the mission. Like when I was working at Commonwealth Fusion Systems, we would constantly eat, like we were a very well funded company. And that was, and almost known globally at that point because our raises were huge. However, it would, we still struggled with certain. Manufacturers because they wa still wanted to work with the big names and the stuff that we were building w was for like huge, huge quantities. And we had to do a lot of talking about the mission and about the founders and like how what our plan was to get to that mission. Because at the end of the day as you said, they look at the opportunity costs, they're like like I could just work with Phillips that like, has had a crazy track record. They've been around for a really long time. They're very well funded. They have a market, like all of this is public information and I'm gonna get my money and I'm gonna get it in buckets. Like, why would I ever work with you? But one thing I feel like, and if I have any contract manufacturers that are going to listen to this podcast, I think one thing is the true. Contract manufacturers that want to make a difference should see themselves as playing a very critical role in enabling the next generation of hardware because as much as VCs give money the makers are the actual main character here. And I think it's really important for contract manufacturers to also see themselves that way of just we're not just building for revenue and just money and the bottom line, but we're building for a better future where we are the enablers of all of these kind of audacious goals that entrepreneurs have. One, I think there needs to be like a little bit of a responsibility Acquiring responsibility for that. And then also on the entrepreneur side, treating contract manufacturers as those enablers. And not assuming that they know what you're up to or assuming they they carry on the passion that you will. And making sure that you have that storyline in the back of your pocket alongside with data where it's like fundraising data planning data product data, whatever you're willing to share, obviously with inbounds. But it's I think, really important to start the conversation off like that. And I think at the end of the day when you have this really well thought out product roadmap or market assessment where there is a. Understanding that the quantities will increase and the whatever you're buying or whatever you're getting built has a future, and the future is very lucrative for them. They will be more willing to potentially take on the risk because of the upside. But I think it's so important to tell the right story so that you enable that. Yes. Yeah, and I think it goes to the fact that the factory is your partner. very much a team support with shared risk as opposed to a vendor supplier relationship. and that's, it's a really important mindset to do that. I think also factories do look at it as a portfolio. So A big company, like they're probably gonna run really high volume, but it's probably not gonna double. Or it's just harder. Like for Apple to double in size is a tremendous amount of work. oh, good point. Yeah. Plant some seeds. One of the ones I love is one of our early customers. That Field Dragon is remarkable. Oh yeah. Product. So just a piece of E smart E ink. And it feels like a real pencil rubbing, but we brought it did an rfq. It ended up with a phenomenal factory, and the volume is just off the charts. So it's one of those where, apple would be it doable, but hard to double. But with this one, it went from zero to many. Gives them some really nice fresh growth. And I don't know that a factory would want to put all of their dreams and hopes and startups just because they're a lot riskier by the nature of it. But I think a portfolio of some established companies with predictable revenue and then planting the seeds for some younger ones that hopefully will grow, some obviously won't, will make it some. Yeah, so basically diversifying their portfolio it, it's, it's really great to see these examples because I feel like those examples also increase the likelihood of a contract manufacturer to accept the next startup that comes around because they, they have a great experience. There's also a little bit of responsibility on hardware entrepreneurs to not mess it up so much because the next guy's gonna suffer the consequences if you don't do so well. That's right. Yep. I think that's really important because yeah, there really is big shared risk on both sides and we don't wanna ๐Ÿ“ sour the punch bowl. Definitely. This podcast is presented to you by Pratik, a startup advising and coaching company that is geared to help hardware entrepreneurs get their ideas from a napkin sketch into a lab and out into the world. I like to call this segment the hardware horror stories where we just take a break to share some of the most, like outrageous or bizarre hardware development stories you've heard or experienced yourself, where things just went horribly wrong and it was just shocking and what happened after the fact. Cool. I've got a long list of these, but I'll, Amazing. You can tell me all of them. I was trying to figure out where to start. And I love to talk about the Roomba in that it was the product like I got to work on firsthand and it was a while ago, so it's there's not too many secrets that can't be shared now. Yeah. But I remember our first order was for about 15,000 units, which for us at the time seemed like a huge number. And it is, it is a lot of number. They'll fill up that be three shipping containers, three 40 foot HQ shipping containers, which is a lot of Roombas. As I noted, like working on this thing for three or four years, really hard. Like something where you'd sleep on the couch at work for three nights in a row. Like putting our whole heart into it. And we'd finally built these 15,000 units and we're feeling really good. I just remember so vividly sitting in China with my friend Elliot, who was the lead mechanical engineer, and actually the only mechanical engineer wow. And it was this like, yeah, he was a just phenomenal designer. a lot of responsibility. Yeah. Yeah, he, yeah, he went through the torture chamber, but yeah, he pulled it off and it's like this crazy restaurant in China. It's it's a hotel and a restaurant themed with all sorts of a safari thing. Full size stuffed drafts and things in the lobby and in the restaurant there's a glass atrium with white tigers running around, Only in China would you see things like this. Wow. watching the tigers talking about how excited we are, and in discussing it, we realized that we'd only tested the Roomba for about five hours. And this is a consumer product that has to last a lot longer than that. Yeah. both he and are like, huh. That seems not like it's long enough, so we should probably test it for a little bit more. And just keeping in mind, we'd already built the 15,000 of Yeah. We grabbed a bunch of them and started testing and I think when we got to eight hours about all of them failed, oh my God, what happened? Like we worked so hard to this point, like not just us, but like the whole team had put everything they, they had in it and we started taking apart the robots to figure out what was going on. And what happened is in the wheel module, we found there's all sorts of black which was I guess through some static force getting stuck on our optical encoder and Up the optics. So all the robots lost their odometry and were just out of their mind, like they had no idea where they were. And just like they, they were done. And it happened in a hundred percent of the robots after eight hours, they're like, oh my goodness. This is not good. And I just remember like the feeling of despair. Like all this worked for nothing. Like we, we blew it at the last minute, but after we shook that off, we're like, all right how can we fix this and what's going on? So we looked at it in more detail and what was going on is that on the motor there's a brass like the drive pulley. And when they machine the thing, they left it a little bit rough in the V groove. And just due to the nature of a V drive, it's gonna scrub the side of the the side of the the o ring that's driving It, that's what was creating all this dust, and that was screwing up the optical encoder. So we're like, all right, we know what's going on, but we've built 15,000 of them. The wheel modules are like very buried inside of the robot, and there just wouldn't be any time to redo the tooling or it'd be very difficult to fix. So we're like, all right. can we do that doesn't involve any tooling that can contain the problem and we can do in a day? And we ended up taking a film. So if you imagine like when we were in high school, a report binder, just the cover film and creating a dye cut, which you can do at about an hour and die cutting a len that was really thin and we could shove in between the gear housing and the main wheel body. And effectively what that did is just contain the dust to the non-op side. So it still created dust, but the belt was thick enough, it was like holding it in place. Yeah, like the belt wasn't going to we weren't gonna choose through the belt, but it just contained it. And then we reworked 15,000 of them shipp them, and we never had one return due to that. We had returns due to other issues, it's one of those where we just totally didn't pay attention to quality because we had so many other things to do Yeah, that we were already three years late. But that could have derailed the whole thing. totally I think through just dumb luck, we were able figure it out. figure it out and make it work. But it could have gone in any direction and we just got lucky. And it like you would assume that would've been called out earlier, right? It's just have we done lifecycle testing on this design? But when you're so in it, when you're nose deep in it, that sometimes the most obvious, like hindsight is 2020 all the time. It's just when you're nose deep you can miss very critical portions of it. Oh completely. And in our world we think of like cost, quality and schedule. Worried about the cost, especially for consumer to make sure they've got the margins they need. Yeah. most of consumers driven by the holiday season. So if you're late it's devastating, so then you're scrambling. And the thing that always gets put off as quality Yeah. And especially being a young company, we had no clue quality. Like we did some functional testing Did what it was supposed to, but we didn't understand reliability, life testing, abuse testing, Transportation, testing, it was the first of its generation. That kind of self cleaning robot vacuum cleaner was not a normal thing. It was completely new. It was completely uncharacterized and it was a very complex system where we would poke one thing and try to fix it and something else would break that we may or may not discover. So it's definitely if it's not broken, don't fix it type of thing. But yeah, it was a wild west. I think the thing that saved us, since we had amazing product market fit, that people absolutely love the product and we would be having people would call us like on their fifth return, be like, ah, broke again, can I get a new one? And we're like, yeah, of course. Like I can't imagine any other product that people would put up with five failures, Yeah. returns. Wow. for me, when something fails, once it's done, Yeah, and people just love this thing. So that, that that was a strength. That saved us. Absolutely. Wow. That is an excellent story. I feel like more of that happens more often than people would give credit too. Because it's like when you're working on a problem, it's so easy to get sucked into it and forget the whole picture and the kind of everything that you really need to do for it to exist in the world in a consistent manner. Yeah. Yeah. It's easy to lose the forest through the trees especially when you're like, so sleep deprived for years on end and like just worrying about the details, but you miss a big picture Definitely did, has Roomba released, like retrospectives or something along the lines of this. Interesting. I talk about it now and then, but I don't know if there's anything like a formal history. I believe they have a really cool robot museum at iRobot, which would be fun to see, like the progression of the Roomba from idea through where it is today. Yeah, I feel like, these are such valuable pieces of, lessons learned that I feel, that's the whole point of my podcast, just I feel like maybe not right away, but like five, 10 years after the fact, it's a good time to release like a retrospective book or something of the, I don't know, the catalog of failures or something along those lines. I feel like that would be a really informative piece of content that people would really latch onto. I don't know, maybe iRobot should consider that. Yeah. Oh, that would be awesome. There's so many great stories that came out of it. And like the plane was flying really close to the trees at times that, anything could have disrupted it. But but yeah we managed to, get really lucky and it worked out. That's awesome. Thank you so much for that story. That's excellent. Shifting gears back into what we were talking about before around kind of contract manufacturers and internal manufacturing and how to set up your supply chain with low leverage. I guess in terms of, so getting into a little bit of the nitty gritty when it comes to setting up contracts with contract manufacturers oftentimes because depending on the contract manufacturer, I've seen a lot of a lot of factories that would say, Hey we really want you to pay upfront which you should never do. But I guess what kind of contractual, agreements have you seen that have gone particularly well for both the startup and the contract manufacturer? It's like a, a win-win ish situation. Yeah, so typically what we think of this as the MSA or manufacturing service agreement, which is the contract between the company and the factory. I think the trick here is getting a really nice balanced understanding. of we build all around the world, but it certainly started building in China. And when we look at it, there's no just to ground yourself, there's no functioning legal system in China. Or said another way like startup is never gonna sue a No. If you get to that point, you've got so many other problems. Absolutely. With these contracts, I feel like that's a very important part to remember. It's that you, it's only as good as you can actually execute on it. If you can sue, great, but if you can't, then it's just a piece of paper with a bunch of words on it. That's right, and I see some companies spending a lot of money on lawyers and many lawyers. Proficient, like they're grade at other things, but they're not good at MSAs Something that's unenforceable and that's not really the point of it. With the disclaimer that I'm not a lawyer and one should talk to their lawyer to, to figure out what to do. Definitely. in my experience, the m MSA does two things. One is it tries to anticipate what could go wrong, and then if it does, it gives us a blueprint for how do we fix it. So if a shipment's late, this is what happens. There's a massive epidemic quality failure, then this is what happens. And we can all agree on, what's the definition of a massive epidemic quality failure? 3% or something like that. But it starts that conversation with the factory just to set expectations so that people agree on both sides that we're looking at the same thing. That's the first thing. And then the second is for companies that have investors ultimately the goal is to be acquired or go public. And as part of the due diligence process, they're gonna wanna see what's the M s A. So it's having something Reasonable in place. I know early on. The company I work for, there's one we downloaded a one sheet MSA off the web and literally filled it in two or three blanks and that was what it was for the first couple million products. Wow. say that's probably not, it needs to be a little more robust, but I think you don't want the pendulum to swing too far. So yeah, I would just have the key things which are typically like payment terms which you are getting at IP control liability and things like that. But not spend an excessive amount of time and use goodwill use up goodwill, negotiating it back and forth, but just get a reasonable thing in place and then focus on building the product. Definitely, and I think it is important in the only enforceable, like the most enforceable part of a manufacturing, the, an msa or any type of kind of agreement with a contract manufacturer is the payment terms. And if you have it be phase gated in a strategic way where you say pay a certain amount upfront because you will have to pay something upfront, usually if they are acquiring materials for you. ESP like I personally have seen this in if you're buying equipment for example, and it's like custom equipment that you're buying. They need to design stuff and get the supply chain in order. So they definitely need some money to start that project. But then afterwards, like you can withhold money if they are not delivering on what was agreed upon. So that is the only, in my mind, like the most enforceable part of an agreement. Yeah. Yep. And it's certainly something you negotiate back and forth, Mean. Typically what we see is for most factories in Asia, the NRE or non-reoccurring engineering is pretty reasonable. And that one is typically an hourly rate or a firm fixed price, so that's not a too big a deal. You've got the tooling, which can be quite expensive, Yep. it's 50% at tool start and then 50% at the it might be e p two or when the plastic comes out of the tool and Tool worked. that's the 50 15. Each one of those, actually the first one is usually due on delivery. The second 50% is net 30 would be standard terms. The other big expense you have is buying the materials. And before 2009 before the first bubble broke factories typically would give startups net 30, Could you describe Net 30 for listeners that don't know what that means? Sure, yes. So let's say I take delivery of my widget from a factory today. I don't actually need to pay the factory until 30 days later for that. This is a huge deal from cash flow because it means I might be able to sell the product to my customer That money to pay the factory. So that really lets you scale your hardware business quickly. But sadly, because so many factories got stuck holding the bag, they took much more conservative terms. And what I see now is it's typically 40. A hundred percent of payment for the materials upfront, where I think the average is probably 70%. A $10 processor, you'd have to pay $7 when the factory orders it, Be six months before you actually get it, given the whole supply chain problems. Yeah. ship it to you, you owe them net zero, everything else. So that would be, they're remaining $3 for that processor, the labor and their markup. but they really don't wanna be, they don't wanna have an overhang or they don't wanna have a lot of unsecured material. When you buy it, you're on the hook to use it. You own that, you own it at that time. I think for larger companies you can get, net 30 is table stakes. And then if they're big enough and the factory is sure that they're not gonna go bankrupt, you can get, net 60 to net 120, Is huge from a cash management standpoint. But there's no startup that's gonna get. Yeah, definitely because that would be too high of a risk for any factory or manufacturer to take on. . So with that what has been your experience with getting components from from Asia versus the US versus Europe? Yeah. And when you I'm thinking components, are you looking at an electrical processor or more like an injection molded part or a whole sub-assembly or assembly? I would say not assembly. So the actual components that would appear on a bill of materials that you would need to either source or like a manufacturer that's going to actually build it, would make it in-house, and then go and build it. Yeah, so we find right now a lot of parts mechanical parts. So injection molded, die casted stamp parts will come outta China and then support other parts of Asia and Mexico or the US at the component level. That craftsmanship in China is just amazing these days. Both from a, but also from a tool making standpoint. And if anybody's ever built a tool, like there's just so much knowledge and engineering, but also craft into doing that since China's been doing it since 1980, so I guess 43 years they've just built up a really strong expertise. Of course we have really strong tool making in the US too, but it seems like many molds come outta China. The. The, one of the key things is just lead times in how quickly can you get everything Cuz it's always a race Yeah. is to start up that you want to go as quick as possible. Maybe there's competitors, maybe you're trying to pull in the schedule and catch the holidays shopping season or things like that. So that the quality is obviously key. The lead time pricing is a really big consideration. So usually cost quality schedule I think would apply to all of that. And then sometimes there's just weird things like in China, typically they can do much thinner wall extrusion, which is harder. So for some reason you need it to have a thin wall extrusion, you might pick China. Japan does a lot of precision parts. It depends on what you wanna do to where you'd look to go and. And do you feel like the trade off that you make with, because a lot of times why people would potentially want to work with US companies is one, they're very reachable. You can always go to the factory floor and actually look at what parts are being done. Probably much easier to negotiate because of there isn't a language barrier or cultural difference. And. It's just if there is a a need for iteration, it's just easier because they're closer and not always quicker. But with with Asia. Asia do you feel like it's worth the trouble of the hurdle of kind of building that business relationship and uh, maintaining it and doing the negotiation and working through quality together? That would be a pretty big undertaking by startups where they're they're cash strapped, but they're also very time strapped. Yeah. I mean my strategy is it's always best to work local if you can Find a factory that would do what you need and they're right next door, you just can't beat that because the challenge is always communication and you hit the nail on the head that the minute you introduce time change, travel culture, language, it just, it's so hard to build a hardware product and then you've compounded all of that. So yeah, I'd always say look locally and if there's a great local mold shop or sheet metal shop or factory, that's your best. Just go with that. But if that doesn't exist, then you have to start looking for their field. Yet often for tools, I'll look to China. Taiwan has great exercise equipment, for example. Has their own little niche. But always if you can build a locally, that's your best bet. And did you learn through those niches through working, or is, are there resources available to learn more about it? I'm assuming not. That's the challenge there. At the old Dragon, we're trying to make this more accessible in building it into our software The best thing now is just to talk to people. Yeah. and with some of it maybe similar building on the factory, similar to a VC analogy, being able to get a warm intro to a factory from somebody that's already working there, I think is important as to just approaching them cold Definitely It's probably a little bit harder to make that work. But yeah, I think it's just a matter of networking right now. I don't know of any big database other than Alibaba where there's a lot of good and a lot of unknown. the signal to noise ratio with Alibaba is I feel like a little di difficult to work around. yeah. No, it's super unfavorable. Like you can get some, it's a great tool. But it's not a hundred percent. And I think it also goes to the fact that for any factory you're working with in any sort of serious fashion, you want to go visit them. You are so right. I actually fun, fun little story of a hardware failure on my part. I, when I was working with my team , at Commonwealth Fusion Systems, , we were looking to buy certain equipment and we were. Essentially looking at different types of shops, both in the US and Europe and Turkey and a bunch of different countries. And we found one that was local and we were like, excellent, like it's local. We can go there. We can keep the pulse on how it's being done and we will have more control over the quality and everything's great. And then we. Through a lot of conversation. The person that we were talking to was incredibly capable. He knew exactly what he was doing, he was answering the questions perfectly. He was telling us like, oh, you didn't ask me about this. This is super important, because we were all, it was the first time we were working with this very particular type of equipment. We didn't know what we were doing and we didn't know what to ask at times. And he was very helpful in educating us. So we were like, this is great. He's awesome. He knows exactly what he is doing. He gave us a quote, it was cheaper quote than the other places. And we were like, this is really great. Things are just really lining up for us. And then someone from the manufacturing team was like, we should probably go and visit the place just to see what it looks like. And it was the middle of Covid. There was a lot of issues with being able to be near people. So we said, Hey do you mind giving us a tour of your facilities? Via zoom, just so we see what it looks like. And it was a garage. It was tiny. It was not a factory, it was not anything sophisticated. This guy was just super passionate about this very particular type of equipment, very had worked in industries where they built this equipment, but the facility was not basically nonexistent. There was a car in there. It was just horrible. And we had already asked for the money from the executives and we had to really like backpedal and say, Hey, like we, we had a had a tour of this place. It's not gonna be a good fit. We had to put pictures of the place so that we were not just like making this up. It's just, it was truly a garage. So definitely go and visit the factories that you work with before signing any documents or asking your CEO for money for it. Don't do what I did. Yeah, that's something, yeah, it's, I think of picking a factory is a lot like getting married, that Yeah, get to know your partner and and build up that relationship over time just because it's really, if you've got a great partner, you can do anything you want, but if it's not quite the right fit, it's just it's very hard to succeed. definitely. I completely agree with that. Okay. And then I guess fi final topic I wanted to discuss with you is regarding quality assurance where I feel like in the minimum viable product realm quality usually ends up taking kind of a backseat. But and it's also because quality is something that not a lot of people are super interested in because it's not this like super exciting thing. It's like making something that's good. Great and. There's a lot of documentation involved and a lot of testing involved, and a lot of people find that very boring. I find it fascinating, but I'm definitely not a part of the majority. But I guess like in, in your experience what have been the common pitfalls when it comes to quality assurance early on when people are doing product design? If you have any fun stories, feel free to tell them. But also like what you would recommend for hardware startups and how they should approach quality. Yeah. So I think with these, a couple things early decisions cast along shadows. So the, what you decide now may stick with you for years to come. So you wanna get that right So true. quality. And then the unknown unknowns are really dangerous. If you know that you don't know something, you're gonna go figure it out. But it's just the things that you're blindsided by. And when I think of quality, there's a lot of different aspects to it. A lot of people just think of functional quality. So does the thing turn on? Does it make a noise? Does it do what it's supposed to? And that's important. It's gotta do that. But from there, there's things like, is it gonna survive the shipping from the factory to the customer? Cuz that's a pretty brutal world. You may be, if you're on a, like unpressurized, unheated plane, you might be hot somewhere and then you get really cold and dry and then you're back in hot again. Or maybe you're in the back of a truck on a bumpy road and you're Yeah. So something, there's a spec called ISTA 1A 2A and 3A so the International Safe Transit Authority. Will help you understand like the crush strength for your box, the drop test, stuff like that. Oh. there's abuse testing. So we think of like tension torque. You can imagine like some sit in the Disney toy story with his vice grips and a fish scale, like pulling on things to see if they can survive 21 pounds of force before they rip off. Pinch points, lead paint, or, heavy metals is a big deal. So there's a lot of things you can do. One of the toughest ones, I think is reliability. Yeah. if you want your product to last 2000 hours, like that's a long time. Really sit around and wait. So how do you get confidence that it's gonna last as long as it is? And I think also being engineers, many to just get the thing working and be like, all right, it works, we're done. But there's a long road to get from that one working thing to something that's gonna last. Like in the real world where people are brutal, it's gonna get dropped. It's gonna like just get beat up definitely. hours. And I feel like quality is something that is very interwoven with reputation of a company. And I like, whenever I'm mentoring the startups that I work with, I always say, you're building a product. You're building a company, and you're building a reputation. And those three things are very different problems that you need to address separately, but the kind of. The product that you're building it like at, they're all attached to each other at the same time. When it comes to quality, as you said, like Roomba was such a cutting edge and needed technology for so many people that are lazy and don't like doing vacuuming like myself. And so people were able to tolerate the lack of reliability that the first few were giving. But then again, what happens is not every product has that perfect product market fit. There is sometimes sometimes people don't know what they want or need, and oftentimes companies. Through reliable technology, you have to prove that a bit. There is like a period of proof. And I feel like if you put quality in a back burner, then what's going to happen there is people are going to buy this and it's not gonna work, and then they're gonna just throw it in the corner and not only does your company suffer and your product suffers from that, but also the technology. If it's something that's cutting edge and people are not used to it, but they actually do desperately need it, they just don't know, then you also lose that in that process. Yeah, no, I think you're exactly right. Yeah, the with quality, there's so many parts to it, but I think it's the most important. If we think of cost, quality in the schedule, it should be put first. And the thing that I came to learn too is it's one thing if a product breaks and it just doesn't work. Disappoints the customer and maybe you can make it up with great customer service and sending them a new one. Yeah. There's a whole way you can handle But also with anything with the battery or plugs in the wall, there's a chance you could catch on fire and Right. Hurt somebody in a devastating way, which it didn't occur to me until un until it did. Like the responsibility that hardware companies have inputting products in people's homes because the challenge is where tight on schedule the Yeah. soil has to be low. And you're using, components that aren't like going in SpaceX. Yeah. do you guarantee that you're not gonna hurt somebody? And that's again, it's one thing if it breaks and people are disappointed and go bankrupt, which seems horrible, but it's a thousand times worse if you actually hurt Hurt someone. And just knowing you can sleep at night, like building in whatever volume you build that your product is gonna be safe for humans. There's a lot of responsibility which might not be apparent cuz everybody's worried about running outta money or just getting the thing done. But there's this latent responsibility that goes there. Absolutely, especially I feel in that is such an important point. I feel like that is a engineering ethics mindset that everyone should employ. I have my my um, engineers order ring that I wear all the time. And for those who don't know what this is it's a trend that started, I think in Canadian universities and engineering schools where at the end of your engineering degree you would essentially take an oath saying that you will be an ethical engineer. And basically the reason that they put this in the first place was because there was a huge bridge failure that happened. And a lot of people died and it was due to an engineering oversight, so they decided to make rings out of the steel of the bridge. So that engineers would take this oath. Wow. uh, Amazing. My Canadian friends always have the ringing. You can see how old they are by how worn down it is. yeah, exactly. If it's like pretty smooth, which mine is like pretty smooth. It means that you've you've been in the ringer or worked at a machine shop a bunch. Yes. . Especially with safety, I feel like safety related products also have a huge responsibility because oftentimes people might take risks more because they have the product. And so if the product doesn't function properly whether it within its lifetime or just even if it's a one-off, like it functions and then you throw it out or something like it needs to work well, otherwise it could actually, instead of helping people, it could jeopardize people's health and wellness even more. Yeah, no. Safety and quality is just a huge topic that I wish there's more formal or practical education. Yeah. that I think is so cool is the HALT testing. So HALT For highly accelerated life test. So if we imagine our product that wants to last for 2000 hours, like nobody has time to sit around for 2000 hours, or at least most people. With the hu you basically shake and bake it. So it's an environmental chamber with a, like a paint shaker Yeah. that tends to create all sorts of failures and they're non will happen, but at least for me, they're non-intuitive. So one of the great ones, and there's a YouTube video of it out there, is a printed circuit board with just a capacitor, Stuck on there. Like it's a big tall cap. And ordinarily you'd be like, yeah, it is what it is. But when they shake it, that capacitor hits residence cuz they do a bunch of different frequencies Oh, all over the place and then it finally fatigues off it's lead it's leads and goes flying. I look at it, like even though I'm a mechanical engineer, it's not the first thing that pops to mind on what's gonna fail on upward. So it's yeah, so I like hall testing, especially with high frame rate capture video is just fascinating to see what breaks in ways that you just wouldn't anticipate. Yeah I think that's so true. I think some level of lifecycle testing is it should be a necessity. And I think one of the biggest issues with quality engineering right now is that the barrier of entry is pretty high in my opinion, because there's just so much documentation and oftentimes people have to pay attention to it, especially if they're in highly regulated product spaces like medical. But it's not something that is very clearly taught and it's usually You fly off the seat of your pants and do your best. But it is a really critical component and even if you are trying to get to market fast, I feel like there is like a minimum viable quality assurance that you should do. Whether it be just a destructive test, see what breaks the thing and like increasing the severity of the destruction. So you see like where it actually fails. Because if you just do a destructive test, you're gonna be like, Failed. But what, what made it fail? And any type of kind of I, I remember I worked at a company that was building this like electronic jewelry and I built a robot that was like slamming it against a metal table for days on end. And it was trying to simulate if someone put it down on a table when, at the end of the day in a more aggressive manner to see when it would stop working. So these are important things and people sometimes forget to do them and then they launch it and then it becomes a big issue later on. It tucks to the early decisions, cast long shadows cuz it's really Yeah. something in cad. more painful to change it once the tool's made and it's incredibly painful once it's in a customer's hands. So it's one of those you almost have to slow down before you can speed up, but once you've got it locked in, you know the product market fits there, you're at the right quality costs and schedule, then you can just pour gas on it and excel and scale quickly. But you just wanna have confide. Definitely. With that, I will end, end this podcast. This was such a informative conversation, Scott. Thank you so much. I feel like a lot of people would get a lot of value, and I wish that when I was working at these startups, I had someone like you to mentor me to do the right thing because I had to learn it the hard way. So thank you so much for being here and joining this podcast. Oh, thank you for having me. These were amazing questions and I'm grateful and thankful that you're hosting this to share knowledge with the next generation. Oh, thank you so much, and we'll definitely have you back if you'll come back. Oh, absolutely. I'd be honored. Oh, okay. Thank you so much. Thank you. Hello, welcome to The Too Long Didn't Listen segment where I will go through the general key takeaways and actionable pieces of the episode for those that did not have, , time to listen to the full episode. So let's dive right into it. So the decision to outsource or insource depends on a few metric. So here they are, , how many you wanna build, and the potential for its scalability, how much of the quality you want control over how novel the tech is, and how, , If the skillset outside of your organization will be able to take on the novel technology and has already existing skillsets to be able to, , start the production, your IP protection risk tolerance. So for example, Dyson had their own factories from the start because they were very concerned about their ip. This is something that's very personal to companies and should be thought about when making the decision to insource or outsource, obviously cost, comparing what it would cost to do in-house versus outsource. Just doing a, a pretty preliminary budget exercise will give you a, a sense of where you which one would just be a better fiscal decision to make. Capacity, comparing demand versus how much can be produced in-house versus outsourced and time to market. So how quickly you would be able to get to market. Usually outsourcing will be faster. So these are metrics, to think about when you're in the process of deciding if you're ready to outsource or you want to continue insourcing, , General rule of thumb is that the first hundred units should most of the time be built in-house to , build up institutional knowledge and really understand the product. This will enable you to be the expert of your product. Which in turn will give you leverage when working with contract manufacturers. So before you go to a contract manufacturer, it's, I think very critical for you to know what raw materials you're getting, having that entire supply chain set up, or at least something close to it so that you can offload that to a contract manufacturer to manage later on. But also really be the. Expert of the process of creating your product so that when, you are spinning up a contract manufacturer, you'd be able to articulate what it takes to build the product and also have estimations on , how long each of the processes actually take. Because contract manufacturers will estimate how long certain processes will take, and that will. Get you your price per unit. So if you know more, you'll be able to negotiate more. , make sure to always have people on the factory floor. And when you're even in the process of selecting which contract manufacturer or cm, , which cm , you're planning on choosing. It's really important to see their facilities, so make sure to definitely pay a visit before you sign any documents, and specifically, when starting off. But even when production, , continues , having regular visits is critical to improved domain knowledge. . It will enable you to continue to be the expert on your product, um, keeping the CM accountable and then, catching any quality issues early on. So definitely, , make sure to put it in your schedule and have dedicated staff members, that can visit the factory floor, , consistently throughout the course of your production. And when outsourcing, make sure that you're a good, you're at a good place with your design. If you anticipate that the design is going to change, or revisions need to be made in the first few months, , it's a good idea to wait until you're beyond that kind of turbulent design phase. So that. Your design can spin out to your production because design change orders are, uh, a hassle and require a lot of operational overhead. Getting to a point where you feel good about your design and small changes here and there are very reasonable, specifically as you do your testing and parallel, you'll find out and learn things, and that's a very reasonable, , request to make from a contract manufacturer. But make sure that you're. Coming at it from a balanced angle where you've already done some testing and you already know a little bit about your product before , going in and getting it produced in higher volumes. For. Complex products. Keeping the team relatively small keeps the bandwidth of communication high. So a tiger team has the ability to move faster and more efficiently. Uh, so when you're deciding on your hiring strategy, this is something to really consider. A good point for transitioning back to in-house. So once you made the decision, you're outsourcing, , your first. A few and you decide, okay, like I actually eventually want this to be in-house, then you have to have a point in which that transition needs to happen. So a good rule of thumb is when you have made 50 million, , of business with the cm, and once you hit that, you can either consider bringing it in-house or dual sourcing. , that's obviously just a number that is. , a reasonable target, but every business is different. So make sure to determine what that target, , business you wanna do with a CM is and plan accordingly. And if you have plans to return back to an in-house manufacturing, that decision needs to be made on your roadmap. And a handover period should stretch out to be at least eight months to a year, depending on the complexity of the product. If it's less complex, it could be potentially quicker. But making sure that you're setting yourself up and your internal. Manufacturing up for success, having a, a pretty overlapping, Transition period where you spin up your own production and you're already producing and getting product, , in the hands of consumers or you're deploying systems. While your contract manufacturer is also doing so and then slowly tapering off, is a good strategy there. , if you choose to do dual sourcing, it's a good method to keep everyone in check and have leverage in the price per unit negotiations. However, it is important to note that, when you have 2 contract manufacturers, you basically have to treat it as if you are producing two separate products because, the quality will vary and individual contract manufacturers will have their own, kind of management overhead. Internally, you'll probably have to have two program managers or a program manager will have to work on. Both. Accounts, since Atoms are different from bits, the, the quality and the out, , output of both of those are going to look different. So those are very reasonable, but just having that expectation in your mind, will set you up for success. , When you're a small business, you approach CMS from a low leverage standpoint because you don't have a reputation to back you usually no one knows of your name yet, because you're still in the process of slowly launching your company and your product. So, coming into the conversations, , in the highest position you can is very important, so you should consider doing the following when, engaging with contract manufacturers. Number one, make sure that you evaluate the factory startup fit. So what that means is, depending on the amount of business you're going to bring to the, , the contract manufacturer, that entire conversation is going to go very differently. So highly recommend not going for big players, but starting off with smaller players and have as many conversations as you can and really evaluate the landscape. So rule of thumb is to choose a factory that you make up approximately five to 10% of yearly revenue. At super, super early stages. That might sound like a very scary number, so don't be alarmed by that. It can be smaller than that. That will just be an easier conversation to have if you are the five to 10%. , if not, , still it's okay. , and do the following. To make sure that you are setting your, that entire conversation up well. So be technically prepared, know your product process and have very good doc documentation, so that they know that who they're dealing with is on top of it. Treat CMS like investors, get them bought into your product goals and your team and your mission. Share bios of founders, the opportunity, , so what the upside could be, and then also what VCs you have in your pipeline and who you have as supporters and partners, , because that can really change the conversation quite a bit. And then when trying to find these contract manufacturers, that's a pretty hard part too, right? Because , You're trying to really find this good fit, and most of the factories out there are huge. Their annual revenue is much more than what you would mean, to them. So, , talking with people in the startup ecosystem to be connected to the right CMS is a very good strategy where you could talk to. Founders, , or you could , talk to manufacturing experts like Scott himself. , actually Forge, uh, F o r g E out of Greentown Labs is also a really good nonprofit that helps startups and connect them to manufacturers. So just really, do a lot of networking there to find that good fit. And then next point of a key takeaway is that don't forget about lifecycle testing. If your product is supposed to work for eight hours on end, add a safety factor of two at least and test it for at least well 16 hours. So whatever your safety factor is, you multiply the amount of time that it's going to work, and then you. Do that, test and in a, for a few cycles. That depends on your risk tolerance. Every company works differently. , I have a lower risk tolerance when it comes to life cycle testing because, , Quality is really important. So, it's really up to you and, what other trade offs you're, uh, considering. But definitely do it, before you, you set off or get it into the hands of con uh, hands of whoever is going to use it. Because, , the hardware, hardware horror story segment. Scott tells us about how, uh, the Roomba project, uh, only tested the product for five hours and it stopped working at eight, and they had to do a very creative factory solution to fix it. They got very lucky, but you really shouldn't try your chances with that one. And then we talked about manufacturing service agreements, , manufacturing service agreements basically do two things. Uh, one, one it tries to anticipate what could go wrong, and then if it does, it gives a blueprint of how to fix it. , and it's also important to note that they're as strong as where you can actually. , execute on them, , where you can press charges. So it matters where the factory is located. If, if you're, outside of the US you might not have as much leverage. So, do not see it as a end all be all. , VCs also look into, , when your, when your fundraising venture capital , capitalists look into your manufacturing service agreements, sometimes when they're doing due diligence. So setting it up well is very critical. So standard terms can be 50% upfront so that the contract manufacturer can buy materials and start up the production, and then the next 50% is, , usually at a net 30. And net 30 means if you receive the parts from the factory, you have. About 30 days, , after you see them to actually pay, , for large equipment, good terms. Could be 50% at startup, 30% at, , factory acceptance testing, and then 20% at site. Acceptance. Acceptance. I've also seen kind of , 60, 30 10, , depending on, , who, how big of a company you're working with. , It will range from conservative to a little bit more Lai fair. , and then also , make sure to negotiate shipping conditions as well. Some CMS will be a little bit more conservative and sometimes they'll ask. For, , a hundred percent of the materials upfront, , while it's usually about 70% of the materials , and it can be up to six months before you actually get anything in hand due to supply chain problems. So, , setting yourself up for that expectation and ordering early and long lead items early is very critical. , and then the final two bullet points. That we discuss is that for injection molding components and tooling, China and Taiwan are very good options. Other components can be sourced from the US and Mexico as alternatives. , and again, we kind of finished off with quality is a very important piece of the system, , but especially for consumer electronics, the, the way that you're able to de-risk before it gets into consumer hands. , is critical and it's interwoven to the reputation of the company. Roomba was able to get away with a lot of failed units because they had a perfect product market fit. , however, that's not always the case. Sometimes you need to prove your pro product market fit, and sometimes people don't know what they need. So that might not work, every time. So doing lifecycle testing and buttoning up quality, , should be a critical part of your product development strategy. And with that, this was a very content heavy episode. I hope that some of those bullet points and some of those key takeaways really help you determine your next steps in your product development journey. Thank you so much for listening and feel free to share the podcast, share your comments and reviews of the podcast. If there were any pieces of this that you really wanted to hear, , more insight on and you didn't get answers to the questions that you had, please leave comments on either our LinkedIn posts or on, The reviews and I will make sure to cater our next episode so that we get some answers for you. Thank you so much. The music for this podcast was brought to you by my friend and incredible musician, Joel, Caffey. The Builder Circle is actively looking for people in the hardware industry and serving hardware entrepreneurs. Please reach out to sponsorships@pratikdev.com that is pratikdev.com to inquire about getting featured on this podcast. Thank you so much and I hope you enjoyed the episode.