Supply Chains

What I’ve learned about supply chain for hardware startups

Hello from 39,000 feet. I’ve been thinking a lot about supply chains recently, especially on this >30 hour door to door trip. Given all of the changes with tariffs, the rapid deglobalization led by the US, and the interdependence of companies like Base Power with the global supply chain, I felt this was important to write about this week. Below, I attempt to make sense of it all, and hopefully offer some thoughts for other hardware-oriented startups in a similar boat.

What is a “Supply Chain”?

Simply: it's the set of companies that make the goods and services that you use to ultimately make your products. There are essentially no products produced that don’t require raw material inputs, energy, or services to be built. Even mining, where the input is under your feet, requires some of the most complex machines in the world to operate, engineering and geological services to explore, and specialty chemicals to process ore. Essentially everything produced at any level has a chain of supply behind it.

When building complex products with relatively complex inputs (like batteries, drones, etc.), the supply chain can make or break the hardware startup. Even the most vertically-integrated hardware startups (Anduril being an example close to my experience) typically have several components or subsystems that are entirely designed, manufactured, and supported by another company. Sensors like infrared cameras were typically procured as a “black box” item - i.e. it was designed and built by someone else. This fact is largely underappreciated, especially in today’s discourse about reshoring manufacturing. Yes, we desperately need to do it. No, it doesn’t happen overnight.

Building a Supply Chain Function for your startup

Below I lay out the segments of work I’ve found to be required to build a supply chain capability at a startup, noting that my experience primarily surrounds integrated assemblies for rockets, defense equipment, and batteries + power electronics. This is certainly not comprehensive for every industry.

Sourcing

Sourcing is just a fancy way of saying finding vendors and parts. I typically break this into a few buckets, with the specific items that matter, below:

Dealmaking and Contracting

One of the more intellectually interesting aspects of building a supply chain function is getting parts at a great price and with great terms. Both of these are particularly hard for under-resourced startups with low volumes or purchases.

For expensive or hard to source parts from the section above, you’ll want to spend a good bit of time here, and oftentimes have an experienced person doing this work. A few thorough conversations with vendors can save tons of cost, time and pain later if done correctly. Also of note, if the component is a large portion of the BOM (Bill of Materials) cost, you should spend more time on price, perhaps stating the obvious.

Oftentimes at a startup you’re - counterintuitively - going to need to convince the vendor to work with you, not the other way around. This can feel strange (after all, you are trying to give them money), but is a critical step to building a long term relationship with a supplier that can scale to your future (hopefully large) volumes. It's not always the case, but working with a larger supplier that can scale with you as opposed to a small one that you have to drag along for the ride as volumes increase (especially if it's a critical and hard to source component) will yield better results.

You’ll likely be working to sell your company’s long term mission, why you think you can succeed in your market, and how you’re unique to their other customers. Being well-backed financially helps, as a lot of the larger contract manufacturers and electronic manufacturing services (EMS) shops have a standard financial profile evaluation before even engaging with you. When you’re talking to them, use specific volume numbers and translate those to dollars of revenue for them - a key metric that I find that they don’t automatically do themselves. If applicable, hint at experiences you’ve had at other companies where the volumes started small and became meaningful for the vendor.

Once you’ve got the vendor selected, and they are interested in working with you, now it's time to get it in writing.

If you’re looking to start “production” orders (ie: more than just one delivery), you likely want a contract in place to manage that relationship. Often, I’ve seen these start as Master Service Agreements (a.k.a Master Purchasing Agreements) that define a mutual understanding of the following items:

• Price

• Quantity over time

  • Not individual delivery dates, but instead the broader commitment of volume from the startup to the vendor

• Payment terms

  • This matters a ton and I’ve found it is generally underappreciated. This sets when you pay, typically as a function of one or both of: a) order and b) delivery. You obviously want to pay as late as possible - I’ve seen in some cases where the majority of the payment for the part is not paid until 90 days after you’ve received it.

• Penalties for late deliveries and/or faulty hardware

• Scope of work if the procurement involves a service like some R&D, or non recurring engineering or tooling design work

• Warranties

• Delivery terms, typically called Incoterms

  • These can be on the PO (next section), but especially for expensive-to-deliver parts, or international procurements, its best practice to lock in these terms on the MSA

After the MSA/MPA is drafted and signed, then typically a Purchase Order (PO) is used to signify a specific order, which can be broken out to one or more deliveries of parts. These are much simpler documents, just highlighting dates, quantities, delivery terms (who pays duties and shipping costs), etc.

Material Planning

This is perhaps the most-overlooked part of the supply chain: figuring out how much you buy and when. Seems easy, right? Figure out your demand, subtract your current inventory and that’s how much you need to order. If you were ordering and selling a single unit, with no internal manufacturing, maybe - but essentially no hardware startup is doing this. Instead, if you’re in production or close to it, utilizing a Material Requirements Planning software (oftentimes a module inside of an ERP) is a great place to start. MRP’s require accurate input data, so make sure that you have correct and updated bills of material, alternate and substitute parts, and part metadata like preferred vendor, standard costs, and lead times. These lead times are what are used to calculate when you need to order how many parts, and so are important to get right.

Organizationally, I’ve seen the material planning function both be separate from the Sourcing and Contracting functions (often called a ‘buyer’ role) or together: planner/buyer. There’s no one right way to do it, and I’ve seen it done both well and poorly in both. Generally speaking, having separate buyers tends to work well when the component or assembly is a large portion of the BOM cost, has many possible suppliers, and has frequent repricing’s, like in the case of a cast part. Planner/buyer’s often do well for integrated assemblies where a lot of the work associated with the purchase is making sure that the contract manufacturer can secure the parts from their suppliers.

Done right, for some hardware startups, material planning has one of the largest financial levers on the business.

Logistics and Warehousing

Reviewing this one quickly, logistics’ importance is highly dependent on the company. At Base Power, it's extremely important - we have a physically large volume and mass of product that moves quickly, and has a last mile delivery component. We’ve moved ~1.5 million pounds of batteries throughout the state of Texas to date! The skill-sets associated with logistics tend to be rather specific in my experience, and an excellent or not-so-excellent team here can totally make or break the operation. Similar to the material planning section, having an ERP or similar digital tool to track inter and intra-warehouse moves, field returns, and receipt of material is critical. Highly sophisticated companies build their own software infrastructure here - but that’s typically out of scope for startups.

Tariffs and International Supply Chain

This is not an opinion or political piece, but I’ll just state up front: I’m generally a fan of the intent, but not the method, of what the current administration is doing. We 100% need to reshore the American industry - see like half of my prior posts if you’re curious on the thinking there. But, blanket high tariffs on countries that oftentimes supply the raw material inputs for American production is not the way to solve that problem. While I don’t think the exceedingly high tariffs end up lasting long term, the bet that tariffs are higher in 2025 than they were in 2024 is probably a solid one to make.

Ok, with that out of the way, how should hardware startups respond?

The short answer is: it's tough. If you can source (see above) parts or some assemblies in the US instead of outside, you should unequivocally, definitely do it. Especially for products with relatively inelastic demand (defense, some commercial products, some medical device, etc.) that added cost of a North American supply chain is, in my view, usually worth the added security of supply, saved headache, faster communication, and potential avoidance of regulatory issues. If you can’t, then it gets tricky…

While this is all so situational that it's hard to generalize, what I can say is that given all of the recent news, there are a number of companies looking to build production of previously-internationally produced goods in the US. Battery cells for example, especially LFP chemistry, are essentially exclusively built in China today. Over the last year or two, both Chinese companies and non Chinese companies have begun the steps to build huge LFP plants in the US. Aggressively pursue options like this if you can.

As I wrote about here, the reason to have a supply chain with some components coming from China is not cost of labor - in fact there are many other countries now that have significantly lower labor costs than China. It's because of their internal supply chain, pace of execution, and general culture surrounding manufacturing - Chinese suppliers generally deliver high quality parts, on time, and at reasonable cost. However, given the current environment, if you can find a non-China alternative, you definitely should, even if you pay a little bit more for it and need to hold the hand of the supplier a little bit more than you otherwise would have in China.

If done right, a well-built supply chain function at a startup can be a huge differentiator for any hardware company, startup or not. Hope this was a helpful overview.