Product Strategy

IoT Hardware Development: Component Selection Pitfalls

Living the Dream

Developing a new product, especially an IoT hardware product, can be very exciting. The desire to start with a blank slate provides the opportunity to specify the optimal set of requirements to provide exceptional performance with robust reliability at the lowest possible cost.

And, then you wake up.

The harsh realization sets in that the new product’s requirements will be a soul-crushing, iterative exercise of compromises that, in the end, will only satisfy the most essential requirements.

Build vs Buy

Do you really need to design and build a custom IoT hardware product?

Really?

Are you sure?

If you can buy a product directly from a supplier today that meets most of the requirements, you should strongly consider this approach to reduce your time-to-market risk and to substantially lower your development costs.

However, sourcing an IoT hardware product from a 3rd party is not without its own risks as you invariably give up some element of control.

Unless you’re sourcing an industry-standard product, you will become highly dependent upon the product’s manufacturer, and potentially its distributors and resellers, too. The product quality, reliability, and cost, as well as post-sale service for support and warranty claims, should be key factors in your supplier selection criteria.

Another key consideration is the expected order delivery time. For example, if a supplier has limited stock or builds-to-order, long lead times can severely impair your ability to fulfill orders quickly for your customers.

In the worst case, the supplier may stop supplying the product at any time without advance notice which can be a nightmare.

Are You a Control Freak?

C’mon, admit it!

You’re never going to source an IoT hardware product when you can develop and build it yourself, right?

The impulse to control every minute detail of the product specification can be all-consuming. Clearly, you will have to moderate the desired level of customization to meet the timeline, the development budget, the target price, and the expected lifecycle maintenance cost goals. Unless you want to develop everything from scratch, you will need to use some off-the-shelf (“OTS”) components for your product.

Using OTS components reduces the development risk, time, and cost. However, the trade-off is that you will be dependent upon the component suppliers.

Risky Business

Ideally, you would prefer to deal with a reputable supplier with a long-established history. In theory, suppliers with brand name recognition should be ideal suppliers, but in a dynamic technology market even historically solid companies can have issues. The recent semiconductor consolidation activity will certainly drive product-line rationalization to prune similar product lines and to exit altogether ones in undesirable market segments.  Furthermore, even many established suppliers only provide new product announcements when they are released to avoid sales slowdown for existing versions.

Innovation creates not only new technologies and new components but also new suppliers.

Unfortunately, new suppliers are at high risk of going out of business rapidly. Additionally, they risk being acquired by a larger competitor who may discontinue the component lines unexpectedly with short or no advance notice.

To ameliorate the perceived risk, new suppliers will often offer long-term supply stock guarantees.

But just how good is a 10-year guarantee from a company that has only been in business for two years?

If you must use a new component supplier with a short history, you should develop a contingency plan to address what you would do if the new supplier closed its doors today.

Buyer Beware

There is an abundance of inexpensive hardware components available on the worldwide market from a bevy of discounters, brokers, liquidators, and even 2 guys in a garage in Elbonia who sell their wares on global online tech bazaars such as eBay or Alibaba.

Beware! Many low-cost components available on the global market are not sold through reputable channels. Unless they are authorized distributors any quality issues will not be covered by the manufacturer’s warranty. In the worst case, the components may even be counterfeit and may not meet the quality standards of the genuine manufacturer.

Finally, even if you obtain components through legitimate international suppliers, it is highly unlikely that agreements with foreign entities can be cost-effectively enforced in case of a dispute.

If you must source components through 3rd party channels, you need to ensure a much higher level of scrutiny of these suppliers in your contingency plan.

Target Market Matters

It is crucial that you select components that are targeted at your intended market. Similar performance parts may be available for a variety of application in consumer, industrial, automotive, military, or space markets. The cost difference can be 2x, 10x, or even 100x between different grade components. Although they may be similar in appearance and the part numbers may only vary by a single alphanumeric digit, lower grade components used for applications with harsher environmental requirements will likely fail in the field.

The Circle of Life

Component lifecycles are frequently driven by the lifecycles of the products for which they are marketed. Aerospace and military-grade components have the longest lifecycles, followed by automotive, medical, industrial, and consumer.

Consumer-grade parts are targeted at high volume products that have lifespans of less than one year such as consumer electronics products including PCs, smartphones, and tablets.

The long-term availability of these components is suspect. As soon as these products are no longer in production, the supply of the cheap components incorporated in these products will evaporate quickly. Savvy suppliers, who have already amortized their development costs, will offload components to liquidators who will acquire the remaining stock at fire-sale prices. Liquidators may or may not make these parts available to the public marketplace as they seek the best financial returns for their investment. Certainly, the component availability will decrease over time and prices may quickly escalate as the remaining stock is consumed.

While the lifecycle for components for the aerospace, medical, and automotive markets is generally longer than the industrial and consumer markets, the best approach to mitigate component availability risk is different. Usually, for these markets, the regulatory requirements and qualification procedures erect significant barriers to component substitution in terms of cost and time. To overcome these barriers, it is important to build a robust alternative material list early in the development process so that equivalent components can be qualified all at once. Because higher grade components typically have smaller volumes and longer lead times, you must vigilantly monitor the component markets to secure enough stock over the product lifetime.

The Dreaded EOL

Whether you decide to source an IoT hardware product from a supplier or decide to build your own, it is necessary to review the supplier’s End-of-Life (“EOL”) policy which specifies the period of availability and the subsequent support duration after the supplier has announced the discontinuation of the product or the component.

If the supplier does not include an EOL policy in its standard terms and conditions of sale, the supplier may stop providing the product or component at any time without advance notice. Moreover, it may discontinue providing any service or support, as well.

Even when an EOL notice is provided, the response time to place last time buy orders is limited. And, there is almost always some level of price increase.  While most EOL notices from reputable suppliers will be honored, be assured that in the fine print legalese of their EOL policies there are always escape clauses for the supplier. And, no sensible supplier will continue to provide a product or component at a loss over the long-term.

For IoT hardware products, you must either identify equivalent products or execute agreements with reputable, long-term partners to secure a stable product supply.

In order to mitigate EOL risk, these agreements should include:

  • A license to the intellectual property (“IP”) to produce the product should it be discontinued by the OEM.
  • Access the native design files so that you can continue to maintain the product.
  • An introduction to existing manufacturing partners and suppliers in order to negotiate with them directly should the OEM exit the market.

It is best to negotiate this agreement well in advance of the EOL notification by the supplier. For example, an escrow agreement provides a legal mechanism by which a 3rd party can provide access to the necessary product design information in the case of bankruptcy, the sale of the company, or some other trigger event that would affect availability and/or delivery of the product.

Dealing with Reality

Products and components will not be available forever. You must diligently plan for the day when they are no longer readily available.

To ensure that you create a sourcing strategy that avoids common component pitfalls.

  • Select components from vetted, reliable suppliers.
  • Build an alternative material list for as many components as possible to enable flexible sourcing options and competitive pricing, especially if your product requires rigorous regulatory testing or onerous qualification procedures.
  • Identify any unique or single-sourced components and create contingency plans for them.
  • Review suppliers’ EOL policies for their components.

You will need to continually monitor your suppliers and the components provided by them over your product’s entire lifecycle, so you can sleep soundly at night.

A third option is to outsource the entire process to a professional third party manufacturing company experienced in Supply Chain logistics, BOM rationalization, and Value Analysis Value engineering. They can manage it all for you for less than it would take for you to put the staff and capital in place to do it yourself. Most companies find this option is well worth looking into. Learn more today by reaching out to one of our professional Business Development team members.

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3 Tips to Keep Your PCB Development on Schedule

“In order to improve your game, you must study the endgame before everything else. For whereas the endings can be studied and mastered by themselves, the middle game and opening must be studied in relation to the end game.” 

—Jose Raul Capablanca, chess master

There has always been pressure on design teams to deliver on schedule. Nothing is more frustrating than pushing your team to release the design on schedule and then to find out that your first prototype build will be delayed due to several common, avoidable errors.

Here are some tips to help manage risk and to avoid unnecessary delays:

TIP #1 – Select a Supplier Early

Engage your potential suppliers early before your design package is ready for a quote. Ask them explicitly what would help them deliver your PCBA on time. By interacting with them early, you’ll get a feel for the level of support you’ll get in the future.

Setup payment in advance

If the supplier offers credit terms, fill out the credit application in advance. Once you have approved credit with the supplier, it will provide the flexibility to make changes quickly without having to re-authorize subsequent credit card charges, provide additional cash deposits, or send multiple wire transfers. And, of course, make sure you pay your invoices on time to prevent delays on subsequent orders that are held up for delinquent payments.

Provide a preferred shipping carrier

If possible, set up your preferred carrier in the supplier’s system. Then there will be no delays waiting for shipping instructions. I know that this seems obvious, but double check that the billing and shipping addresses are entered correctly as well.

TIP #2 – Plan for Parts Management

Long Part Lead Times

During the design phase, it is important to browse online distributors and take a cursory look at the current stock and standard lead times, especially for single-sourced or unique parts. Begin securing parts as soon as the architecture is stable. Don’t wait until the BOM is finalized before ordering parts. Otherwise you may be in for an unpleasant surprise when parts that were available weeks ago will not be back in stock for several months.

Parts Procurement

Clearly, you will want to avoid paying for additional markup on parts if the supplier orders them, right? However, if you decide to manage the parts yourself, realize that you will be paying for shipping twice: once from the distributor and once to your supplier which may actually cost you more in shipping charges for low cost parts. Also, you’ll assume the handling liability if your supplier discovers problems during the incoming inspection and you will be responsible for handling any warranty claims with component vendors. However, most suppliers order parts daily from distributors so they are able to amortize shipping costs among multiple orders and they likely get better pricing than you can due to their order volume. IMHO, the best approach is to have your supplier secure parts so that the liability rests with them.

Permit substitution for common components

Large suppliers have an existing inventory of common parts, especially passives. If you permit them to substitute for common parts you will save additional costs and reduce the risk that your specified parts will delay your build.

Quote PCB fabrication early

Once the layout is mostly complete, prepare a design package for quoting purposes. This enables the PCB supplier to provide preliminary feedback on your the design. This may include highlighting missing information or identifying errors that would hold prevent the supplier from fabricating the PCB. The longer the turnaround time, the less expensive the PCB fabrication should be. If you can plan for a four-week turn PCB fab, you will get the best pricing possible. Also, components can be ordered concurrently so that all the material will arrive at the same time.

TIP #3 – Plan for Test

Except for the first pass PCBs, you will likely want some level of test for subsequent builds to ensure basic quality.

Provide a Basic Test Procedure

Yes, it will cost extra. BUT, how disappointing will it be when you discover that 6 out of 10 boards don’t work! Either you’ll have to debug them yourself or send them back for warranty. Most warranties are only going to cover workmanship defects anyways. However, if you provide a test, you provide the supplier an opportunity to detect defects and possibly rework the PCBs to correct the defects which will yield more working boards delivered to you.

Test Software

If your PCB design has programmable parts, create a basic test firmware image that can be programmed into the unit. The test software should provide a simple indication to the test technician that confirms that the device is operating properly.

Test Equipment

If your device requires specialized test equipment, check if your supplier can rent it for your project. You should only invest in more advanced test strategies such as flying probe, ICT/MDA, and JTAG boundary scan once your design is finalized. Otherwise, you’ll end up paying NREs multiple times which may hundreds or thousands of dollars.

Summary

Remember, that the first build of your design is just the initial step toward the goal of producing a cost-effective, reliable, and quality product.

Don’t be short-sighted and plan ahead for the end game.

Minimize Launch Risk for New Electronic Products Without an Established Order History

New Electronic Products

For new electronic products that are just being introduced to the market without an established order history, it can be daunting to forecast the initial order quantities and the related timeline.

You’ll need to develop a high confidence plan that minimizes the risk of building too many units, too soon versus not building enough units. If you build too many units, you’ll have a ton of cash tied up in inventory. If you build too few, you may lose potential orders since you won’t be able to fulfill orders fast enough for anxious customers.

The basic business goal is to minimize finished goods sitting in inventory while having the ability to rapidly respond to new orders.

You’re optimistic that the orders will come rolling in…

The product will sell itself, right?

BUILDING A FORECAST

If you have customer pre-orders booked, you can establish a minimum quantity for the first build.

You may also need:

  • Marketing units for press reviews
  • Sales units for product demonstrations
  • Trial units for early customer evaluations
  • Replacement units for warranty claims

For subsequent builds, you will need to answer some not-so-simple questions such as:

  • How many units are expected to be built per lot? 10, 50, 200, or more?
  • How many units are expected to be built per month or per quarter?
  • How many units should be kept in stock to quickly fulfill orders?
  • At what minimum inventory threshold should another lot of units be built?
  • Will customers order units one-at-a-time or in 100 unit quantities?
  • How many warranty returns are expected?
  • Will the orders be bursty?

You’ll have to answer these questions carefully and plan accordingly.

STANDARD APPROACH

The standard approach is to engage a traditional contract manufacturer (“CM”) with the necessary equipment and services to build your new electronic product. The CM will generate a quote to build your product using an internal financial modeling process based on the expected annual unit volume with the number of builds at a certain lot size.

The CM will expect you to provide a rolling forecast so that the production plan can be updated frequently in order to make the necessary adjustments to outstanding material orders and staffing plans. Unanticipated delays, canceled orders, and/or order shortfalls (or spikes) can have negative financial consequences for you depending on the terms of your agreement with the CM.

If your actual orders do not match the forecast, you may have to pay for material in inventory in advance of units being built or you may be charged expediting fees for material to meet unplanned demand.

Additionally, not meeting your order volume and timeline commitments can sour your business relationship with the CM.

For a new product without an established order history, it is very difficult to predict the size and the timing of the early orders. Therefore, the likelihood of not meeting expectations is relatively high.

ALTERNATIVE APPROACH

Instead of engaging a CM to launch a new electronic product, you should consider using a rapid prototyping provider initially until your orders stabilize.

A provider’s business is structured to build products in small lots in just a few days or weeks. This capability can help you swiftly fulfill new orders while minimizing unit inventories and reducing the corresponding working capital requirements. Also, because there is no ongoing commitment beyond the current order, you’ll have the flexibility to change the timing or size of future orders as necessary.

While the provider’s business model works well for early prototype development, it has some shortcomings for production runs. For example, a CM will inventory and manage excess parts between builds. Therefore, you will likely only pay for parts consumed per build. However, the provider will build in the total cost of all the parts, including the excess parts, per build. Most significantly, you will pay a premium per unit price using a rapid prototyping service.

PARTS MANAGEMENT

Often providers will not hold excess material between builds unless there is a subsequent build planned in the near future. Any excess parts are either discarded or shipped back to you.

While it might seem appealing to store the parts at your location, you will be responsible for inspecting the parts upon arrival, counting the remaining parts, and ensuring that they are handled and stored properly.

You have three options for ordering and managing parts:

  1. Have the provider order and manage the parts. Most providers do not directly charge the shipping costs of parts, but they will usually add a material handling fee based on a percentage of the total parts’ cost.
  2. Order the parts from suppliers and distributors to be shipped directly to the provider. You pay for shipping charges for parts once.
  3. Order the parts and them shipped to your location. Then kit all the parts and ship them to the provider. You pay for shipping charges for parts twice.

If you choose to have the provider return the excess parts to you, then you will pay shipping charges for parts once again!

Sometimes you will need to order and manage the parts directly for a variety of reasons, however, IMHO Option 1 is almost always the best choice. Although you’ll pay a slight premium on the parts versus ordering them directly, the provider will be responsible for resolving any problems.

Remember. It only takes one missing part to prevent a build from being completed and delaying your orders.

OPTIMIZE FOR LOT SIZE

Ideally, you should calculate an optimal build lot size during the design phase so that excess material can be minimized. The smaller the optimal build lot size, the better since it will provide you the flexibility to incrementally adjust the build sizes as needed.

However, there is one financial constraint that you should consider when attempting to minimize the lot size. Every build has setup charges. As the lot size shrinks, the portion of the setup charges that are amortized into the unit cost may become a more significant factor than excess material. Ask the provider to break out setup charges on a per build basis so that the impact on the total unit cost can be evaluated.

PART SELECTION PROCESS

Start with focusing on the high-cost components such as ICs (“Integrated Circuits”) that tend to be unique parts. Seriously consider whether the design requires a unique part, especially if it is non-stocked with long lead times, or is only available from a single distributor or directly from the manufacturer. It is advantageous to have multiple options from several vendors, not only for cost considerations but also for lifecycle and availability reasons. Select as many parts as possible that are stocked and available from multiple distributors. Finally, be aware of large MOQs (“Minimum Order Quantity”) for high-cost components if there is no option to re-reel parts to obtain smaller quantities.

For many other parts, it is possible to select alternates with the same package and similar performance characteristics. Strive to build a large AML (“Alternate Material List”) for each of these components and to identify the ones with the smallest MOQs.

Clearly, you shouldn’t spend time optimizing for sub-penny parts. For example, if a single SMD resistor only comes in reels of 10,000 pcs @ $0.002 each, the total cost will still be $20 even though only a couple of hundred parts will be used. Unless your product design requires specialized parts with unique characteristics or high-performance requirements, a better strategy is to allow open substitution for passives since these are the least expensive commonly available parts.

YIELD CONSIDERATIONS

Realize that 500 parts sets will not yield 500 working units. There will be attrition of parts during the build process.

How many parts do you need for PCB assembly?

Plan for lower yields when using a provider instead of a CM. In general, a provider’s process is not as refined as a CM’s process. A CM will iteratively improve the product’s manufacturability over multiple builds which will increase the yield over time.

Providers may provide informal feedback or even a post-build report on the manufacturability of the product. It’s important for you to review this feedback and to remedy any deficiencies in the product design before the next build.

Always attempt to select parts that are reeled or in trays to optimize for automated assembly. Loose parts or those packaged in tubes will increase the risk of loss, mishandling, damage, and unnecessary wastage.

Even with careful packaging and handling, some components will be discarded during setup of the equipment and possibly lost during assembly. Check with the provider on the what percentage of component loss per setup should be expected and plan accordingly.

Don’t despair! There are ways to help your provider increase the yield.

While test options offered by the provider are typically more limited than those offered by CMs, many suppliers offer AOI (“Automated Optical Inspection”), x-ray inspection, and flying probe test. Each of these test and inspection services requires some level of programming or setup charges, but they don’t require any investment in custom test fixtures.

If possible, provide a basic functional test procedure with specific instructions and objective pass/fail criteria. Preferably, the procedure should not require any specialized test equipment. However, it is fine to require commonly available test equipment such as oscilloscopes and multi-meters.

These inspection and test processes facilitate identifying defective units during the build process which will give the provider an opportunity to rework them thereby increasing the yield.

SUMMARY

As your orders stabilize for your new electronic product, you’ll be in a better position to select a CM partner that can the optimize cost, quality, and delivery of your product for its remaining lifecycle. But, in the short-term, you may be well served by leveraging the flexibility of a rapid prototyping provider.

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