In this interactive talk, we covered key takeaways from visiting 5 engineering and manufacturing facilities in the Shenzhen/Dongguan area in Southern China.

1. MIT Entrepreneurship and
Maker Skills Integrator
Factory Tour Debrief
January 13, 2017
Elaine Chen

2. Topics to discuss
• Alphabet soup
• Typical process from product development to mass production
(MP)
• Scale of client v scale of CM and why not everyone likes startups
• How CMs make (or lose) money: The Open BOM
• How the process of contracting works / how to work with CM
• IP protection in China
• Country-to-country variability in how CM works
• Automation killing jobs…
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3. Alphabet soup – in no particular order
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• EMS – Electronic Manufacturing Services
• CM – Contract Manufacturing
• CAD – computer aided design
• CAM – computer aided machining
• BOM – Bill of materials
• Labor standard - #hours X $ per hour for assembly workers
• Test standard - #hours X $$$ per hour for test engineers
• Profit – typically 10-15% off the BOM+labor+test
• COGS – Cost of goods sold = *BOM cost + Labor standard + Test
standard) * Profit (SIMPLIFIED – based on negotiations)
• MOQ – Minimum order quantity
• PCBA – Printed Circuit Board Assembly
• IQC – Incoming Quality Control (when they inspect part or all of a
batch of incoming components to be included in an assembly)
• AQL – Acceptable quality limit – the worst acceptable quality to pass
QC. Usually people sample-test finished goods to the AQL.
• APAC - Asia Pacific
• AVL – Accepted Vendor List
• ROI – Return on investment
• RMA – Return Merchandise Authorization – process with which returns
from end customers are received and dealt with by the manufacturer
• EVT, DVT, PVT, MP – see http://hardwareproduct.info
• ECO – Engineering Change Order (the process with which engineering
changes, such as moving a feature like a through hole to another
location – or the tolerance of this hole – are validated and
implemented. Applies to both engineering teams and manufacturing
teams.
• RFQ / RFP – Request for Quote / Request for Proposal. Typically,
APAC manufacturers prefer the term “RFQ”.
• LOI – Letter of Intent
• PO – Purchase order
• Stuff covered in Ashcloud software
• ERP – Enterprise Resource Planning (software system – e.g.
SAP, Oracle – or you can roll your own, like AQS and Ashcloud)
• CMS – Customer Management System
• MES – Manufacturing Execution System (software to coordinate
smooth running of the entire facility -
• PMS – Production management system (same as MES)
• SCM – Supply Chain Management System (software to manage
relationships and transactions with vendors)
• WMS – Warehouse management system
• HR – Human. Resources
• HCM – Human Capital Management System (e.g. clocking hours
in and out, vacation requests, salary reviews etc)
• SCADA – Supervisory Control and Data Acquisition – industrial
automation control system architecture / protocol

4. What are the steps to get to mass production (MP)?
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http://hardwareproduct.info

5. Scale of client v scale of CM
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Viable
You
Small
CM
Not Viable
You
Huge CM… but
there is strategic
value in taking
your project (e.g.
helps them move
into a new area,
like healthcare IT).
Proceed with
caution.
You
Huge CM…
and your
peanut-
sized deal is
a distraction.

6. Your CM is your partner, not your enemy.
The success of this partnership is on you.
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You
Small
CM
It has to be a good
deal for both sides
Help make the
relationship
successful by
understanding
how CMs work
– and give
them what they
need to
succeed
Fulfill their
commitment to
you to make
high quality
products on
time

7. What is an ”open BOM?”
• COGS = (BOM cost + Labor Standard + Test Standard) * Profit… where:
• BOM (Bill of Materials) cost = component cost at a particular order quantity (the bigger
the order, the cheaper the component cost – simple economy of scales)
• Labor standard = # hours to put product together * $$ per hour
• Test standard = # hours to test your product * $$ per hour
• Profit = 10-15% at scale (higher to start – e.g. 20-30%)
• Always ask for “Open BOM” in the quotation process… or you could get
inferior components
• Now you know why an order of 1,000 units where each one costs $6.5 is not
interesting to most CMs at scale
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8. Process of engaging a CM
(assuming you are going for mass production at scale)
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Write a giant
system spec
Put together a
competitive
RFQ process
Distribute RFQ
to multiple CMs
Review RFQ
responses, back
and forth
Select CM
Execute LOI
(Letter of
Intent)
Sign CM
contract
Kickoff project

9. Typical issues for newly designed product?
(From AQS presentation)
• No DFM implemented before mass production thus design defects
found in production.
• Underestimate Sales/Marketing thus product can not be sold well after
first build, even though product is good.
• ID designer has no manufacturing background thus ID is not
manufacturable.
• No IP, logo/website Registration thus product is vulnerable.
• Over commit thus product can not be delivered on time.
• Lack of understanding on manufacturing process thus production starts
without finalizing design, material spec, and testing requirement.

10. Key takeaways from the group
• How manufacturing works 0- that whole process
• The fact that CM’s (Contract manufacturers) somes provide
design services for free to help customers succeed
• The fact that there is so much IT/IS system support to help run
a manufacturing business (ERP… SCM… alphabet soup)
• Different ways for CMs to have a competitive advantage
• What it takes to bring a product to mass production (not as
simple as building a prototype and then making lots of it!)
• How does the contracting process work – cost breakdown
• So many steps to bring something to mass production!
• The fact that some CMs can make $ out of nothing (cell phone
cases, cordless phones) – and have a profitable business
• At Ashcloud, the importance of human learning to agility
• How streamlined and efficient Ashcloud was
• Amazed things like PCBAs can be made in such a ghetto way
• Vertical integration at Johnson Electric for a basic product like
an electrical motor
• Hardware is different from software to bring to market!
• Johnson Electric Ecoline – the increase of productivity via
Automation (v the value of human klabior)
• Ashcloud – how they use software tools – QR code is cool
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• Amazed how manual everything still is! Expected more automation
• What is the future for uneducated people with automation coming in?
• Scale of companies – no idea they are so huge
• Surprised at how Johnson Electric can do so much fundamental
research in such a basic research lab facility
• Salary of workers is better than expected
• DJI – culture is great – company values innovation. Brand&science.
• AQS – surprised at how eng and mfg is an ongoing partnership, not
just throwing something over the wall
• Working conditions of operators is very monotonous and humans are
competing with automation
• Interesting to see how 1-off prototype parts we buy (e.g. a motor) is
made
• Interesting how the scale of the business affects how much funding is
available for R&D: Johnson Electric, DJI can afford large R&D staff,
others cannot
• Interesting how specialized things are – a soldiering fixture and
specialized equipment just for 1 PCBA
• Importance of trust and confidence between client and CM – AQS is
investing in the long term health of startups

11. What might we do differently next time?
• Not a lot of time between visits – next time, schedule a half
hour debrief session between visits
• Would love to see where / how employees live
• Would have loved to go to Huaqiangbei!
• Might make more sense to visit after we have a prototype
• Would have helped if we were told what to learn before the
trip - as it was, it felt like just a field trip
• Smaller tour groups! Hard to hear what the guides were
saying at Vtech
• Need biographies of speakers (TODO: Upload their
names/bios or Biz cards)
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