– Read Part 1: When Will Issues From 2020 Normalize?
– Read Part 3: Tips for Sellers to Keep Up With Demand
This is a conversation between Andre Neumann-Loreck, Founder and Managing Partner of On Tap Consulting, and Brian Tu, Chief Revenue Officer at DCL Logistics. They discuss how the pandemic has impacted hardware supply, how hardware companies have adapted, and tips on how to mitigate supply risks moving forward.
The TL;DR: How Startups are Managing the Component Shortage
- Is it possible for startups to get parts even if big companies can’t? Yes.
- Suppliers are struggling to allocate parts.
- Tips to work with suppliers—be empathetic, know how they are making decisions.
What are the Best Ways To Mitigate These Shortages?
What I want to know is, what are some proven approaches to mitigate these component shortages? If I’m an entrepreneur or a growing hardware company, what are the three things you could tell me that might help me in this sort of situation?
Let me unpack that a bit. Before I get to the three tips, I want to speak to the first part of the question: approaches to mitigating the shortages.
Some clients come to us and they’ll ask us if there’s anything that can be done. It’s hard to wrap your head around it when even the really big companies, like automobile companies, with massive resources and staff, are getting shut down. How can a startup possibly get parts if the big guys can’t even get parts? The answer is: it is possible. It is possible to get parts as a startup, even in this environment. It is possible to work with these shortage issues.
It starts by thinking about the problem differently. The first approach that we take is to try to get our clients to think empathetically about the supplier situation. A little empathy goes a long way. Step back and ask, “What does your shortage mean to your supplier?” You’re going to realize it’s an allocation nightmare for them. What I mean by that is that all their customers are yelling at them, they’re not able to fill their orders, they’re not meeting their commitments. They’ve got lots of angry customers, sending them angry emails and berating them on phone calls and badgering them. Being in that situation is very uncomfortable for them. It’s stressful. They have to decide from week-to-week as the products become available, as they manufacture the chips or LCDs, or whatever it is that they’re producing, who gets that product. And, that’s what I mean by allocation. They have a limited supply, they’ve got a large number of customers, all of whom are going to be unhappy. And regardless of how they allocate it, they’re still going to be unhappy. And yet they have to figure out how to navigate that and protect their business for the long term. They have to establish an allocation process, you know, just derived from supply and demand planning. And they have to do that on top of their day jobs, because all of the normal day-to-day hasn’t changed. That’s the situation, and what I mean when I say it’s an allocation nightmare for them.
I’m totally with you, and I don’t think there’s like a silver bullet. This is definitely a supply issue, but I never quite thought about how it’s also an allocation issue. We’re all human, and personally I’d rather work with the person who appreciates the service they’re getting for me, or the product in this case. It’s so important to appreciate the relationship and treat it like a long term partnership. We can’t commoditize human feelings. It’s so often overlooked.
Yes, and you immediately intuited the implications. As soon as you adopt the empathetic mindset, you intuit what that means for approaching these shortages. You said it in terms of your business. You want to support those clients who are going to be appreciative, the ones where it’s going to make a difference, the ones that value your long term relationship, the ones that are going to be with you for the long haul. Those are the customers that you’re going to take care of. That’s true for these suppliers as well.
So when you start thinking about this as an allocation problem, then it leads you to reason a few things. First, learn who the decision makers are in their allocation process. If you don’t know who the decision makers are, you don’t even know if you’re talking to the right people.
The next question becomes, how are they deciding? Ask – they might just tell you, but if they don’t you can begin to imagine how they are deciding. They’re going to care about the customers that are important to their long term future, the customers that are strategic for them. It might be customers who have a product that represents a broadening of the application of their component. Maybe they want their product to be used in IoT, for example. If your company represents a way for them to get into the IoT market, or the medical device market or a sector that’s valuable to them, that might be a reason they will allocate product to you rather than somebody else.
How are These Challenges Changing the Industry
Are these tactics working now? I know there’s always an ebb and flow of the industry. How have the component shortages and allocation issues started shaping how business is done? What is the impact, even post Q4 2021?
I think it’s changing the industry in a number of ways. One thing is that we’re relearning. Startups are relearning what some of the big technology leaders had already figured out. For example, understanding their single points of failure, not necessarily removing all of them, but at least understanding them. Also answering the question, “How do I track what’s happening there?” and “How can I mitigate risk in the supply chain?”. Companies are thinking more about when to bring up a second CM (contract manufacturer) to reduce risk. These are fundamentals that the hardware startup ecosystem didn’t really have to worry about when things were running smoothly. But when you run into a crisis like last year it’s forcing some of those lessons to be relearned.
Are the manufacturers having to make changes too?
Yes. Chinese manufacturers are using more video calls with their customers, just like the rest of us. In the past there might have been a manufacturing engineer on the floor of the factory in Shenzhen, but now we’ll video conference them into the manufacturing environment and diagnose problems that way.
Another one that we touched on earlier, is that startups and even midsize companies have been looking at alternatives to China. Other regions have realized that there’s an opportunity so companies with manufacturing in Malaysia and Taiwan and even in the US are much more aggressive in courting business. That’s another change that I think is going to continue.