Five Must-Do Nuggets When Choosing a Supplier: A Conversation with Lunar Energy’s VP of Operations, Mark Rohan
NextGen Co-Founder Dennis Arnow sat down with Mark Rohan, VP of Operations at Lunar Energy, to get his thoughts and reflections on some of the decisions Lunar has made around selecting their Contract Manufacturing (CM) partners. Lunar is building a home energy storage system that helps produce, store and control energy from solar and is benefiting from Mark’s deep manufacturing operational experience. Mark trained as a mechanical engineer and began his career as a manufacturing engineer developing weapons systems for the Navy. Since then, he's helped launch and scale products at Apple and Tesla including the iPhone, Powerwall and the Tesla Model 3 Battery System.
Throughout the interview, Mark highlighted several key takeaways that apply to any advanced manufacturing company making a CM selection decision:
Visit the site as part of your selection process. Don’t skip this. There is no substitute for seeing the site.
Proximity to HQ reduces execution risk. The more time zone differences, language differences, cultural differences, and time spent traveling, the more execution risk. A low cost but distant factory likely increases your execution and ramp risk.
Set and manage expectations with your manufacturing partner. If you significantly reduce your forecast you’ll create a problem with your partner. Set expectations well and you can avoid a problem.
Secure sufficient credit limit. If your 90 day forecast pipeline of goods exceeds your credit limit, you’re not getting the benefit of your CM! Negotiate credit limits so that you don't revert to 100% before shipment when you need the credit most.
Two suppliers is not always better. Two CMs requires more resources internally. More time, more negotiating, more overhead, more material movement, more planning, and more travel. All of this at a time when, as a startup, you can least afford it. Long term, a second CM reduces supply chain risk. But when you start, focusing on one CM has benefits.
Check out the full interview below!
Mark Rohan, VP of Operations at Lunar Energy celebrates a battery shipment with his team
The following interview has been edited and condensed.
Hey, Mark, thanks for the time and sharing your experiences at Lunar, both in the selection and ongoing relationship with your CMs. First, looking back, what’s one thing you got right that many people seem to miss?
Hi Dennis, happy to share. It's been quite a journey to select, onboard and maintain the relationships with our CMs. We've learned a lot – both timeless wisdom and current insights.
First right out of the gate, when you're selecting a CM, it's extremely important to go and see them in person. Perhaps this seems obvious and not worth mentioning but let me elaborate.
You cannot understand the true capabilities of the CM remotely. You have to go to the site and see things firsthand. If you personally don't have experience selecting a CM, maybe someone on your staff has experience in process management or manufacturing engineering and has spent a lot of time in factories – those are the people you want to come with you. Because any CM can tell you anything in a conference room, but until you go see the operation you will be dealing with, you can't really understand their capabilities. And you can’t understand the dynamics of the site, how the site interacts with the corporate headquarters of the CM. And of particular interest to you are the technical capabilities on the ground, and what types of products that they're currently manufacturing, and how do those products compare to the products that you're planning to bring to manufacturing? You can't really get a sense of that by just looking at slide decks and having conversations. You just have to go and see. I think that's something we did well.
That’s a great insight. What did your site visit process look like?
I visited a dozen sites across the United States and Mexico, both small and large, and it quickly became evident which sites were viable candidates.
And more generally, if you're planning overseas manufacturing — you should go and see as well, because there have been times when my team has reached the ground and said, “Hey, we thought this was going to be really good, and turns out, it's not the capability we're looking for.” And conversely, a couple of times, we've been surprised in a good way where perhaps they didn't sell it very well and didn't seem very capable. But then we showed up and saw – wow, actually, these guys are pretty capable and they just don't have a very good business development team that properly describes their skill set. But you can uncover both of those errors when you go and see yourself.
I agree with all those points. And I would also add that one visit isn't sufficient because things change over time. Specifically, you can't assume, “Oh, I visited these guys a few years ago so I know what they're like today.”
Absolutely, yes, I think that businesses and factories and really all organizations are always evolving. Sites that were extremely capable five years ago – you don’t know what they are like today. So I totally agree, if you have a previously held belief of like, hey, the CM worked for me well, a decade ago? Sure, reach out to them and check in but it may be a different story today.
Another thing we did right was finding a flexible CM. While many CMs claim flexibility, it's rare in practice. Smaller CMs oriented towards early startup engagement can be highly beneficial. We partnered with a smaller CM who adapted to our product iterations, supporting low-volume, high-change products for compliance testing and engineering validation. This flexibility was key to our progress. And I think this is especially relevant today, given the increasing pace of change and the trend of reshoring manufacturing to North America. A truly flexible manufacturing partner is essential in this fast-paced environment
Flexibility sounds great, but what are some questions you can ask to really test their true flexibility?
For example, “What has happened when customers have had delays or massive rates of change?” “How do you handle it, when we only need 10 units early on, and then we maybe need six more months of validation?” “How do we engage in those interactions?” If they can give a specific example of how they accommodated a customer, possibly even waiving their policies or minimum order requirements – those are likely good examples of being flexible.
How did you balance finding a nearby CM and the right CM?
I realize this isn't always possible, but if you can find a CM location that's close to your engineering workforce, or your headquarters, it’s really beneficial. There's a lot of CMs that have very small and flexible sites in the Bay Area but then you have to transfer the product when you ramp. We went a little bit of a different route where our CM is not as close, but is on the East Coast of the US. So we do need to travel, but it's still in North America. And fortunately, that site that we're working with can actually scale up to reasonable volume. So we're not facing a major site transfer from NPI to a whole brand new site. And again, I think that's a little bit of luck, but was one of the key elements we were looking for early on.
Yeah, I agree. I am very skeptical about places that say, “Oh, just start here in Silicon Valley, and then we'll transfer it.”
Exactly. I want to tell them that I know you're from the same company, but every factory transfer is still a factory transfer filled with risk. There are timezone differences, culture differences, language and more. I believe picking a place a little bit less convenient but which has the ability to scale reduces overall execution risk.
The element that I think is timeless is the value of being somewhat close to your CM, particularly for a startup or a new product launch. The timezone and logistic challenges to manage a CM on the other side of the world in Asia 12+ time zones away are very real. And if you're a startup, you're usually understaffed and you don't really want to have your engineering team and others needing to spend so much of their time on planes and readjusting to timezones. There's always opportunity, once your product is stable, to bring on additional CMs when you have more headcount to be able to support it. But for us, especially at launch, locating our manufacturing in North America really helped us in many regards.
How should a startup be thinking about credit? Sometimes worrying about credit seems secondary for a company just trying to build their first product.
Yes, credit might seem a little bit in the details and not strategic but it is extremely important for early stage companies to really manage their balance sheet and cash flow. We had some initial conversations with a CM who we pivoted away from because they were unwilling to provide sufficient credit to cover the forecasted pipeline of inventory 90 days in advance of converting to finished goods. You need to count on your CM being able to place orders and to manage pipeline inventory. And, you want to ensure that your ramp will never be limited by credit.
So, you’re talking not just about the importance of payment terms, net 30 or net 60, but of the credit limit extended by the CM?
Exactly. Payment terms are important, but look closely, and do the math of your build plan or ramp plan. When the cost of your inventory over a 90 day period exceeds the credit limit that the CM is willing to grant you, you're going to be in a situation where, regardless of whatever terms you’ve negotiated, the CM is going to say, “Well, you need to pay us immediately for all the inventory we bring on board before we even order it.” You’ll essentially have net 0 terms, and this can definitely impact your cash flow and can impact all your financial models. So that was something that I'm highlighting, because it kind of came up far later in the discussion than it should have when we were evaluating different CMs. And so this was a CM that we looked at the site and they seemed good, they seemed capable, and everything seemed to be a good fit. And then we were a little bit surprised by their low credit limit and inflexibility on this point. And then we spoke to a different CM who had a completely different willingness to provide credit to an earlier stage company and, and it's working out super well now. So I think we really learned something here about the importance of thinking through the financial details even as an early stage company.
That’s a great example of a hard won lesson learned! You just shared some great examples of things that went well, anything you’d do differently next time?
Yup, we definitely have those examples, too. For example, we chose to startup with two CMs, and If I were to do it over I would have worked with and focused on just one CM. Why? Because as soon as you're managing two CMs you have two different teams supporting them, two different cultures, and two different travel schedules and it’s just a lot of overhead. It is more expensive, and it does take more time. And again, if you're needing flexibility and changes, you're finding yourself negotiating and having additional conversations with multiple CMs and multiple teams. In addition, with every CM, there's overhead. Each CM has their own material planner and their own procurement person and warehousing person and their quality engineer, their manufacturing engineer, and the list goes on. As a result you end up having some inefficiencies when managing more than one CM. In the long term you’ll want to have two CMs, but if you're just starting out early on your first product as a company, I would recommend focusing on one CM to make sure you are being efficient with your resources.
Thanks so much for sharing all these nuggets of wisdom with us. At NextGen, we believe it is necessary for all of us building advanced manufacturing facilities to learn from each other so we can build a strong ecosystem. This is a great set of takeaways everyone can learn from when it comes to selecting a CM.
You bet! I’m happy to share and look forward to seeing what everyone is building next.
