Juggling Curve Balls: Electronics Manufacturing in China – Part 2

This is a continuation on last month’s article, Juggling Curve Balls: Electronics Manufacturing in China – Part 1.

Surprise problem delivers blow to plans

Word comes back from our engineering team that there was a miscommunication between the head engineer and the project manager. The PCBA (this is the internal ‘electronics’ part of the product) is missing 2 small components that regulate the electric current of the USB port and screen – both of which are crucial functions.  To put this in simple terms the product wasn’t functioning properly due to a manufacturing error. The problems don’t appear all the time, which is why they weren’t found on all of the units, but without these 2 components, serious problems are inevitable. Fortunately, the 2 primary suppliers (of the 5 we worked with) did their own engineering check before producing the products and, in spite of our mistake, used the correct components. The 3 backup factories which manufactured according to our faulty BOM accounted for 80k units.  BOM is a manufacturing term which means Bill of Materials. All electronics from complex custom Android smart phones and tablets to simple MP3 players use a BOM. Even non-electronics use a BOM to list out all components that go into making the final product, like a recipe for cooking.

Crisis control begins. No precedent existed for handling a situation like this. Every decision was based on limited information thus the results of my decisions were uncertain and costs were high. There was absolutely zero doubt in my mind that my friend, Bill’s, faith in Hatch would be rewarded no matter what it took. The problem was discovered on a Wednesday. 3 shipping containers with 30k defective units had already been shipped out from the factories and were sitting on a boat in the Kowloon, Hong Kong harbor, waiting to set sail. We figured out how to get those containers off the cargo ship, identify and pull out the individual cartons with defective units (there were more good units in those containers than defective ones), and send them back to China to rework. Nothing from this series of requests Hatch made followed standard protocol. Some of the services we asked for hadn’t been done before by our logistics partners or weren’t offered.  To find the right service provider I remember racing through last minute evening interviews with random sketchy logistics companies who all promised the world, at different price points.

Problem Solving – Shenzhen Style

Once we figured out how to pull the containers off the cargo ships and remove the defective units we needed to figure out what to do with them. Mainland China has a blanket 17% tax (Hong Kong has no import tax) on all imported goods, plus additional import taxes on specific products, so bringing the products back to the original factories in mainland China to get repaired, the ideal situation, wasn’t the economically favorable option. Setting up a repair facility in Hong Kong, which is where the goods were located, also wasn’t practical since all the devices and human capital needed for the repair were in Shenzhen, and going back and forth to Hong Kong was not viable for several reasons.

The closest thing we could do to bringing the goods back to Shenzhen was to use space in a nearby Free Trade Zone (‘FTZ’), which is a designated area, in Mainland China, where goods can stay tax-free before official importation into the Mainland.  There are FTZ’s all over China, the city of Shenzhen has multiple nearby. On Thursday, Hatch’s logistics staff started contacting companies in the Futian FTZ to find somewhere we could setup a makeshift work space to store thousands of units and station 30 laborers to cut open sealed retail packaging of each unit, open the case each MP3 player, pull out the electronics and hand solder two baby ant size components on the PCB (usually done by a precision SMT machine), re-assemble the MP3 players, and repackage them which required a heat sealing machine for sealing the plastic. Success required overcoming unique challenges and needed to begin on Monday, giving Hatch 4 short days to put together.

The first unique challenge was finding a warehouse facility which had the means of supporting this kind of operation with both the space available and license to allow re-working (most warehouses don’t allow or have permission to allow this kind of work). After finding a location, we needed to send the goods into the FTZ warehouse before customs closed on the weekend, find a phone booth size heat sealing machine to ‘import’ into the FTZ, and arrange soldering irons, seats, and an assembly line for the workers. On Friday, we set out to find a freelance supervisor for hire to manage the project, pull together 30 workers who could dedicate 2 weeks of their lives to fix this mess, housing for the workers, their transportation, and 2 meals a day. When there’s no choice about what needs to happen obstacles become less visible.

My team and I called everyone we knew looking for someone to fill this role. One of our industry friends was able to introduce a guy who used to manage a production line in an electronics factory. Why he wasn’t employed during September, the busiest time of the year for consumer electronics manufacturers, remains a mystery, but the chance of finding someone to manage this operation overshadowed any questions I had. We didn’t have the luxury of reviewing resumes; fairy dust and empty promises would have gotten anyone a job at that point. I don’t remember the supervisor’s name, so let’s call him Charlie. Charlie became the foundation this task force developed around. Over the course of a weekend Charlie, along with help from all 5 assembly plants producing for this order, put together the Baddest News Bears line up of mission critical workers I’ve ever seen. It looked like the most important positions, component soldering, were filled by ex-convict gang members with weird tattoos and shaved heads. The group of unskilled laborers consisted of farm girls who appeared completely lost by the notion of indoor work. Everyone in between doing the semi-skilled work like opening and closing cases were experienced factory workers who knew it was their time to shine. I had faith this beautiful collage of Chinese humanity.

When Monday arrived, the team showed up to the warehouse to prepare the space for magic to happen. They swept away the dust, created a production line, and a work area. For 2 weeks straight, my key staff and I averaged 16 hour work days filled with stressful high pressure problem-solving, dealing with the repair team, resolving unforeseen logistics and supply chain issues, and whatever else was thrown our way. The 50k defective units which hadn’t gotten shipped to HK were still at the factories and needed the same treatment as those in the FTZ, but in a factory, this was much easier to manage. Fixing this mistake cost Hatch over $200k USD in reverse logistics, forward air freight, material, warehouse, labor, and whatever other costs there were. A few weeks after this happened, when all the goods had already been shipped out via sea and air, I traveled from Shenzhen to Oklahoma for a surprise visit to see Bill and his team. I wanted to explain in person what had happened, what we did about it, and to come up with a solution for handling customer service issues that would come as a result of some faulty units making their way onto store shelves.

In typical Mach Speed style, Bill and his team acknowledged the problem and stayed focused on solutions. Rumor is that the 300k units sold out nationwide about 5 minutes after doors opened on Black Friday. Reality is that the defect rate and amount of customer inquiries on these products were lower than average for this model from the other supplier (clearly the right decision to go with Hatch 😉 ) and the following year Mach Speed earned several long term spots on the shelves of WM.

Note on where Mach Speed is now: Mach Speed doesn’t exist anymore.  The downfall of Mach Speed is a case study in the impact of company culture on related parties, from suppliers to customers to employees, and ultimately the fate of a company.  A private equity firm bought majority ownership in 2011 and changed management in 2014, bringing in Douglas Lane to manage operations and purchasing. He quickly changed the company culture from a supportive community to an authoritative hierarchy.  Doug’s style didn’t work well in the past based on the results of the companies he’s held management positions in (TheWiz – Bankrupt, CompUSA – Bankrupt, Haier Digital USA – Failed/Closed, Radio Shack – Bankrupt, Mach Speed – Bankrupt) and Mach Speed was no exception.  Doug lead operations and purchasing for about one year before Mach Speed declared bankruptcy, owing tens of millions to their suppliers, creditors, and other constituents. This story about how Hatch supported their client and the unfortunate demise of Mach Speed about 2 years later highlight the value of relationships between business partners and within companies.  While Hatch takes responsibility to deliver on commitments (as in the case of the WM order) often it’s the intangible value that drives people to make the difference between success and failure. Bill is now restlessly enjoying retirement and relishes the good memories of popping champagne bottles each time Mach Speed received a record breaking deal, company trips to Cancun, and babies running around the office.  All of which contributed to Mach Speed’s years of success.