Supply Chain Games

One of the most underappreciated aspects of making hardware is supply chain management. Many good startup ideas died due to failures, mostly by inexperienced entrepreneurs, trying to make a hardware product and failing miserably with supply chain. Often times, entrepreneurs can make a decent prototype, or product demo, but making that prototype into a design that can be manufactured at scale, cost effectively, is a rare trait at many companies in the market today.

I first got thinking about the supply chain game challenge when Andy Rubin was interviewed at the Code Conference, and he made a point about why his Essential Phone would be innovative. He said he didn’t have to worry about building a product that shipped 200 million devices in a year so he could use more innovative components and materials to make his phone stand out. The only problem is, at some point he will want to scale and at that point he will be locked out of getting the critical components he wants, and the market desire, at scale because the power to acquire those components and processes that scale belong to the companies that do sell north of 200 million units a year.

This is the fascinating element to supply chain most people don’t appreciate, or understand. If you are a company who sells a particular component which is needed, or in high demand, you are going to sell that component in bulk to the companies you know will ship in volume every year. Most of the highly sought after and critical components to have a competitive smartphone or tablet or PC are in very high demand and experience supply shortages themselves. After all, we can only make so much stuff every year given the global manufacturing capacity to make electronics today.

These companies sell just about all the components they can make to companies who will sell the most devices in a year. Thus bringing them the most money. They will prioritize a company selling 200 million smartphones a year over ones selling 50m a year every single time. To make it clear, companies like Apple and Samsung are the ones who secure these key component contracts and the rest of the brands need to wait in line or go find the parts from a range of other sources and try to get all their supply that way. Which in turn, creates a challenge of having to manage a more complicated supply chain thus leading to delays, and shortages as you try to sell into the market.

Of course, even Apple, a company who has one of the most efficient supply chains in the world can face shortages and delays. Often times this comes when they try to create something that is bleeding edge or want to use a component or manufacturing process that is not quite mature yet. A good example of this is the 3d sensing cameras, as well as the under display Touch ID sensor. Both examples of things we have already heard through the supply chain that will suffer from shortages or lower production yields.

Innovation often doesn’t scale right away and this is key to remember. As the industry looks to move beyond where we are today and shrink components, use new types of display technology, create faster devices, make our networks better and faster, etc., a slow moving supply chain which favors the big companies who are capable of shipping massive volumes will always get priority from the supply chain.

All of these challenges put together make it hard for smaller entrants, and even mid-size hardware companies to compete, but that is the reality of the supply chain game. Some play it well and some play it poorly.

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Ben Bajarin

Ben Bajarin is a Principal Analyst and the head of primary research at Creative Strategies, Inc - An industry analysis, market intelligence and research firm located in Silicon Valley. His primary focus is consumer technology and market trend research and he is responsible for studying over 30 countries. Full Bio

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