Supply Chain: The Biggest Factor Hardware Startups Forget
What are the core components of a hardware startup? You might say a great product concept, strong leadership and vision, a design team dedicated to aesthetics as well as experience, or an excellent engineering team to build, iterate, test, and integrate flawless hardware and software. And while those are all crucial, one essential component that often falls by the wayside is supply chain.
What is supply chain?
Supply chain can encompass many areas, and because it covers so much, it often gets confused with logistics. So, what’s the difference? In general, logistics refers to the distribution process within the company, and only comprises a part of the total supply chain. Supply chain is concerned with planning, purchasing, and inventory management, and is a network of linked entities that move a product or service from the supplier to the customer. This network can include raw material or component suppliers, manufacturers, shipping companies (e.g. air, water, over the road), customs, warehousing, and retailers.
Why does supply chain matter?
When I was implementing Canary’s supply chain strategy and researching partners, I was surprised to find that we were something of an anomaly. Since most hardware startups don’t have a head of supply chain, our partners expected they would have to educate us about distribution from square one. They were relieved to discover that we already had awareness and experience, which significantly helped open up our options.
If you haven’t worked with supply chain before, you may wonder why it’s so important. Simply put, if the details of your distribution process aren’t ironed out well in advance of shipping, you could be stuck with lengthy delays, added expenses, or other serious problems. Consider the following:
- If you’re manufacturing overseas, importing to the US, and you have incomplete paperwork or issues with customs, your inventory could be grounded well past your shipping timeline. It doesn’t matter if the holiday rush is around the corner; without the proper US Customs documentation, your shipment isn’t going anywhere.
- If your product is packed and ready to go but doesn’t have a UPC code—a necessary element for retail—you’ll need take the time to get one, add the code to your final packaging, and cover the additional delays (along with freight and labor costs) necessary to get your goods ready for sale.
- While you might get along fine without a US Customs assessment for a while, at a later date, they could decide that you’ve been underpaying and that your item should be reclassified with a new duty rate. Let’s say you already received $5 million worth of goods at a 1.5% duty, and Customs determines the correct classification code actually has a 2.0% duty. Imagine being charged at a higher rate for all future shipments AND being on the hook for an additional $25,000—the difference in the added duty assessed for all previous shipments.
Again, while it’s great to focus your attention on creating an excellent product, losing sight of distribution can stop your company in its tracks and upend your business model.
Supply chain 101 for startups
There are some important supply chain milestones and steps that are essential to a successful product launch. It’s ideal to have a supply chain person on board before you approach your release date, but even if you don’t, here are some key issues to consider as a US-based startup:
Get your UPC
If you’re selling your product to retail stores, you’ll need a UPC, the barcode on packaging that scans at checkout. Without this, you won’t be able to sell to any retail location, which will significantly hamper your sales strategy. To get a UPC, you’ll need to apply at GS1, the governing body that assigns these types of codes. Typically, this process takes about a week, and can largely be done online.
Partner with a licensed U.S. customs broker
Assuming you’re manufacturing anywhere outside the US, unless someone on your staff is licensed to clear Customs, you’ll need to partner with a customs broker. Make sure your customs broker is full-service so they can arrange for air and sea shipments; if they’re not, you’ll need to find an additional partner to facilitate these moves. It’s also important to partner with a broker because, as a startup, you won’t have enough volume to negotiate directly with the carriers, which means your shipping rate will be through the roof.
Figure out your HTS (Harmonized Tariff Schedule)
Again, assuming you’re manufacturing overseas, you must have an HTS code—the code that determines how much duty will need to be paid to US Customs—to bring your product into the US. Also, if your product is in a completely new category, you should send samples to Customs to get a binding ruling on your HTS code at least 30 days in advance of shipping; this is key because, as I mentioned earlier, each category has it’s own cost and duties which can greatly affect your pricing structure. During the ruling process, US Customs will determine exactly what the HTS code of your item should be. Without a binding ruling, the duty that the product is classified as is at the mercy of the customs agent clearing the shipment, and is subject to their discretion.
Determine if you’ll be warehousing and shipping the finished goods yourself
If you already have warehousing and shipping resources at your disposal, it may make sense to use them. If you don’t, you need to decide if you’ll let a 3PL (or third-party logistics company) provide this service for you. 3PLs can run the gamut from simple receiving and shipping to complete strategies with pre-implemented inventory management systems and IT support. If you decide to use a 3PL, pre-assess which one best suits your company’s needs. Do your due diligence on any partner you choose, and be sure to:
- Talk with them about their ability to scale as your business grows.
- Find out if they offer services like round-the-clock shipping.
- Inquire about any rate changes they might levy or you might incur.
- Ask for current references.
- Visit their warehouse to make sure it’s clean and well-maintained.
Supply chain is crucial to the success of any hardware startup, but with so many other fires to put out, it’s easy for issues like distribution to get lost in the mix. If you bring on a knowledgeable head of supply chain or start having the conversations early, you’ll be able to avoid many of the distribution pitfalls hardware startups face.