What things did my startup CloviTek consider for our CloviFi product sourcing? There is no right or wrong solution to this question. However, putting the goal that CloviTek was trying to achieve and then looking at different options available for sourcing its product CloviFi Wi-Fi audio transmitter, it was a good start. As the result, CloviTek entered into a joint development agreement with ARTKB, a hardware development company in Ukraine, based on the following assessments: manufacturing in-house, the contract manufacturing and working with only one technology partner.
Option 1: R&D and Manufacturing in house
Ideally, CloviTek considered doing everything in one plant: R&D, produce the components, printed circuit boards and cases, and then assemble the finished products. Although this decision seems logical, it is unrealizable for CloviTek, without significant funding support. Instead, CloviTek will consider adopting a common sense and economical performance, by organizing its own R&D and production. To do this, CloviTek will need:
- An R&D team with technical expertise
- A line for assembling electronic components on printed circuit boards
- A shop for final assembly
- A technical inspection and testing department
Additionally, CloviTek could add a line for the production of plastic and/or metal components for the product. The specialized printed circuit boards (PCBs) and electronic components will be left to their production companies. Naturally, CloviTek’s own production imposes a number of requirements and restrictions:
- Huge one-time capital investments in fixed assets (buildings, equipment, technologies and workers)
- Adequate maintenance to preserve the equipment in working order, as well as updating it as technology advances
- Added cost to manufacture cases for the PCBs, which will impose additional requirements on the production line and equipment
In addition, CloviTek will have to buy or rent equipment for X-ray control, which can cost more than the machine installation components. Moreover, industrial activity requires the use of a special approach to the management and organization of internal processes, as well as places full responsibility for the result.
Not only the production is expensive and has a significant payback, but it also diverts resources and leads the company’s focus on the development and promotion of new products on the market. For these reasons, CloviTek’s own production line is not economically justified.
Option 2: Contract Manufacturing
The distinguishing feature of contract manufacturing is specialization, which provides technology and production efficiency in a given price range and the improving of its technology and industrial base. The main drawback is the risk of loss of responsibility center for the product and its quality. Indeed, in this case, the supervision engaged in by the contracted manufacturer must be responsible for the result. CloviTek has to answer all of the following questions:
- Selection of contract manufacturers and building a professional relationship
- Quality control of manufactured components
- Development of logistics
- Organization of timely delivery of manufactured components for the future devices at the assembly site
- Quality control of the finished product
- Storage, packing and shipping
To address these challenges, CloviTek will need a staff with relevant expertise in building and maintaining the optimum business processes. Unfortunately, the staff currently does not exist and will not be economical to create. For this reason, CloviTek has selected the following option.
Option 3: A Single Technology Partner
CloviTek has chosen to contract with a single technology partner, ARTKB, within the field of commercial electronics manufacturing, which will answer most of the questions on the project, including related tasks, such as development, testing, after-sales service, etc. Unlike contract developers, they specialize in design, as well as pre-production design to adapt the CloviFi device to mass production. In this case, the responsibility for the outcome goes to the technological partner, ARTKB. Initially, CloviTek will outsource the production to ARTKB (or any other well-researched plant in China) until funding is available to setup our own R&D lab and production.
ARTKB has the production site in Shenzhen (their offices are located at this location) and will optimize a bill of materials, monitor the product quality, develop logistics, etc. As a result, CloviTek can control the cost of the product and does not face a whole list of difficult startup issues associated with R&D and manufacturing. Most importantly, such a scheme of work allows CloviTek fully engage in promoting its product, developing marketing strategies, expanding the device functionality, and improving the product line. CloviTek will focus on the product rather than on the production; thus, reducing the potential risks and the delegation of responsibility for the product outcome, as well as optimization of the organization and launch of production costs. However, the term of the JDA and its termination, timeframes, scope of R&D projects, intellectual property protection, technology ownership (value of the investment contribution), exclusivity, costs and expenses, resource use and management committee, warranties and indemnifications must be addressed in the JDA and subsequently, when forming a joint venture legal entity in the JVA.
Another important aspect that CloviTek must consider is cultural differences, which may become more challenging to deal with when doing business in Ukraine. Thankfully, as the owner, I am originally from Ukraine, so I has established a healthy relationship with ARTKB and communicates CloviFi product’s requirements effectively.