Jeff Chapin recommends tactical steps to build a fantastic supply chain from the ground up.
Casper oversold on its first day and was unable to deliver the product from day one. It took months for their supply to catch up to their orders.
The issue didn’t set the mattress brand back too far: Casper made $1m in revenue its first month and received $70m in Series B funding. Years later, it is now valued at more than $1B.
But co-founder Jeff Chapin would still have done things differently to prevent Casper from being so far behind on orders in its early days. At Hustle Con 2016, Chapin revealed strategies that he wishes he had used and that you can use to build a better supply chain for a new company.
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Just a raise of hands: how many people have heard of Casper? Hey, that’s pretty good. So, for the ones that haven’t, I’ll give a little explanation. For those that have, this is probably how you know us: as a fairly well-marketed company focused on sleep. We sell one single mattress. We sell one pillow. We sell one set of sheets.
I’m one of the co-founders: there were five of us. Background in product design and development, which I’ll get into in a sec. I spent a lot of my time in places much more like this than in the fancier world of marketing. This is a factory where we manufacture the covers. It’s a cut and sew facility in South Carolina. I’ve spent a lot of time here and in other factories today.
I want to talk about eight things that I wish I knew about building a supply chain. So you’ll see in a sec that my background is not in supply chain or operations. I don’t know how many folks in the audience think they’ll start a company or have started a company that involves any physical object, but building a solid operations platform is critically important.
So, quick background: I actually studied civil engineering at Princeton as an undergrad. But I’m old enough that I didn’t have a digital camera, so I don’t have photos from that time. I am technical but I don’t know how to program, so I’m maybe halfway fit for this presentation. I went on and studied product design, which is a mixture of art and mechanical engineering at Stanford. From there I moved to IDEO. For a decade, I did a lot of work in consumer products, a lot of work in medical devices. I left IDEO.
I started my own company called CommonMade. I spent a couple of years working in East Africa and Southeast Asia in clean water and sanitation, working with World Bank and Gates Foundation. Oddly enough, through that world I came across a company… Sorry, this thing is finicky. …called WATER WALA, which was doing clean-water access in Salem and Mumbai.
It was started by the guy in the back left, Neil Parikh, who’s one of the co-founders of Casper. He’ll be featured, bless him, later on in the presentation. These other guys were all friends in New York; I only knew Neil. And for folks who aren’t familiar with the New York start-up scene, a lot more of the consumer-focus, single vertical-branded companies, Warby Parker, Bonobos, come out of New York, not out of San Francisco; and just some out of LA. So they were working together doing different start-ups.
All right. And they noticed a couple of things: one, amongst their peers and the people in the incubator they were working within, that people weren’t sleeping very much. Statistics are kind of sad. In 1942, we were amidst a World War and people slept more than they do now, when in the grand scheme of civilization, things are really peaceful. The fact that you have your child laying in bed reading an iPad is not good for their sleep. It’s not good for our sleep when we do the same thing.
And so that’s the general thing which Casper was started to address. We needed to start somewhere by selling a product to get into the sleep space, and we started with the foundational product. And from a consumer experience, purchasing a mattress is one of the worst things you could imagine, in terms of what you get for the dollar; the actual shopping experience; there’s way too much choice; you’re ill informed to actually know what you should be buying and if you’re getting a good product for your money. So we boiled it all down through a process of product development, iteration, testing many different types of mattresses on the market, developing our own. It had the idea that we would sell a single product to the market.
We needed to convince somebody to fund us to start this company because it’s a very expensive product and you’ll see it caused us some problems. When you’re starting a company, it’s hundreds of thousands of dollars to millions of dollars just to build initial inventory. So, as we were doing our fundraising round, we actually gave away a lot of beds to venture capitalists to try to get them to give us money, and nobody would give us money until they could sleep on our product.
So in the picture here, Ben Lerer and Lerer Hippeau Venture partners led our seed round. And the right picture here is the mattress that Ben Lerer had in his apartment. In the left is Philip, our CEO, and Luke, or CMO, delivering our mattress to his house. So we had to go in when he wasn’t there with his personal assistant, put in the new mattress, take out his old mattress, and actually store the old mattress until he was convinced that he wanted to keep the new one. And he still sleeps on that prototype to this day, which is amazing. And I’m pretty sure it was… He has a child now, and it was the first child ever conceived on a Casper.
So, this is the product we sell. My talk’s not meant to be about product design, so I won’t talk much about it. But just so you get a sense for those who haven’t experienced it or aren’t familiar with it, that mattress gets compressed and rolled up and goes in a box. It’s about 20-inches, by 20-inches, by 40-inches. It’s delivered via UPS. In some cities, it’s delivered via courier. This is a bike courier in New York delivering it. You get it to your house, you unpack it, and then you instantly turn into a stud. That’s our sales message.
So just to recap, we launched to the public in April, 2014 and it was amazingly successful from day one. We did $1 million in revenue in our first month. We’ve raised $70 million through a Series B. In 2015, we did over a hundred million dollars in revenue. We’re at about 150 people. We have our headquarters in New York. We have a Design and Supply Chain Office here in San Francisco. We have an office in LA, and an office in Berlin.
Why were we successful? Three things. One, I think the product’s great, but I’m biased because I’m the one that designed it. We’ve had really creative marketing. Folks may have seen some of this marketing on the BART. This one’s my favorite. It was “Sleep like a narcissist because you’re dreaming of yourself.” And then this, which just blows my mind. There’s an incredible amount of social sharing of the Casper mattress and the unboxing experience online. There’s actually a video associated with this, which I won’t show.
But we had a problem: we grew so fast that we couldn’t meet our sales demands. And everyone says it’s a good problem to have, but it’s an incredibly stressful problem. So to put numbers to it, we sold 139 beds on our first day. We had a hundred beds in stock. Beds have a four to eight-week lead time to get made. We reached 35 days of backlog by October. We promised in our marketing message that you would get a mattress the next day or the day after. Some people had to wait five, six weeks to get a mattress. We actually stayed in backlog for 18 months and we’ve only been around for 25 months. And still today, on some individual products we run into backlogs. This is huge problem. It actually slowed our growth. We had to pull back on our spend in order to allow our supply chain to grow.
So I think we nailed product, we nailed marketing, we nailed brand, we nailed the value proposition, but we totally missed on supply chain. And it goes back to what our original team was. Five co-founders is a large co-founding team. Our first employees were in marketing and consumer support. We did not hire an operations person for a year. So we went a year with just me and Neil running our supply chain and we didn’t know what we were doing.
So, for those that have an ops or supply chain background, hopefully this will be obvious. But I’m just going to run through eight stories and eight quick learnings and some things that, if I were to do it again, I would hopefully do better. And some are low-level points; some are high-level points.
First story. When we went to what ended up being our main mattress supplier in Georgia, Neil and I flew down there. We shared a room in a Days Inn, and that was $30 a night. We went to Rent-A-Car online, we could have rented a Chevy Aveo for $40. Or through Sixt, which is a German rental car company, we could have rented a BMW for $40. Clearly, we rented the BMW. But then we pulled up into the factory driving a really nice BMW, which is a terrible thing to do when you’re about to go into a negotiation about what you want to pay for a product.
On the same trip to the southeast, we showed up at the sewing factory, which I showed before, and Neil’s wearing that shirt amongst people that are working their butts off to get $12 an hour sewing. They thought it was funny, but it was not a great first impression.
So my advice: be deliberate in how you dress, how you arrive, and what you talk about. We all have very great indulgent, luxurious lives. The people you work with on a supply chain probably don’t get $15 martinis. They probably don’t talk about going bowling, and ping pong indoors, and indoor mini golf. So when you’re at a supply chain site or you have people in your supply chain visiting you, remember that we live a very different life than most of these people that will be supplying products to us. Some of these are more serious.
Everyone will say they can do everything, but it’s not true. This is the factory where we pulled in with a BMW. They make, from our opinion based on having visited tons and tons of foam factories in the US and overseas, probably the best quality raw material that we can find. They’re really good at it. They also said that they could fabricate mattresses.
It turns out they had never really done it before, but we were in a rush to launch; we were burning money. And it turned out that we went through a huge amount of pain getting them up to speed to learn how to do this step in the process, which is convert this raw foam as it comes off of a production line into a finished mattress. It’s a really simple process: you cut the pieces to size, and you glue them together, and you put a cover on it. It shouldn’t be hard, but it’s very hard.
So, if you’re going to work in a manufacturing environment and hire a company, one of the things we learned is that you need to go step by step, and make sure that they can actually, and already are actually doing everything that you’re asking them to do. Almost every supplier will tell you they can do far more than they can actually do, and you need to figure out what they’re actually really good at, what their core competency is versus what yours are, and if you need to start bringing together multiple suppliers.
This supplier, we also relied on them to do eCommerce distribution. Moving those large mattresses to a third party logistics firm, which is where most eCommerce products are distributed from, is very expensive because they’re so large. If we’re going to sell shirts, I could fit thousands in a truck. We can only fit 200 beds in a truck, so it’s very expensive to move them from the factory to a distribution center, just to get shipped again. So we had them do it. We estimate that they cost us around 30-40 thousand dollars a month in lost product or mis-shipped product, because we were relying on them to do something which they were not good at doing.
So if you’re on the factory floor, there’s a couple basic things to look for:
Standard operating procedures. Force them to bring them out and show them to you.
QA checks. Do they have stations where they’re monitoring quality? Do they actually have dedicated staff that’s focused on continuous improvement and quality? If you don’t see people walking the floor doing quality work, it means they’re not doing it at all in the factory.
Inventory management tools and methods. I think depending on the industry you’re in, they’ll have different levels of sophistication of how they track the raw materials and the finished goods. We consigned covers and boxes on a couple of products that we purchase and give to our suppliers. Some of them maintain records through Excel spreadsheets, which is terrible because we have no access to their Excel spreadsheets. They’re not currently updated. So finding a supplier that has a good ERT, Enterprise Resource Tool, is important from day one.
And a small last thing: just as we should be careful what we dress like, look at how they dress; look at how their floor workers dress. There is, in our experience, a really strong correlation between how neat the people are and the quality of work they produce. So if the management gives everybody a polo shirt or a t-shirt that matches and people look clean, the odds are that the management cares more about the quality of what they’re going to produce.
Join good company. So, there’s a step in the manufacturing process for our product where you apply a water-based glue to a layer of foam, and then you put another layer of foam on top of it. If you put too little or too much, it causes problems. And so, there’s a small step you see going on here, where they put a sample piece every 10, or 20, or 30 beds, they put a small piece of foam through. You weigh it before, you weigh it after, and you weigh the difference. And that tells you what the concentration of glue you’re putting on the mattress is.
We have worked with factories that have done this and we worked with factories that haven’t. And one of the things we saw is that, particularly for small companies like us, in the grand scheme still small, you guys, small companies: find suppliers that are working for very reputable, established big companies. In our industry, the very best is Ikea. If we find a company that’s working for Ikea, we know that all of these things which have caused us problems before are taken care of. So when you show up at a new factory, ask for their list of clients. If they’re working for somebody that you thinks reputable… So they get some flack, but Ikea, Nike, Nokia, they’re good. Generally, European companies are better than American companies, in terms of what they force their supply chain to do. So get the list of clients.
Via Getty Images
Ask for testing and inspection criteria. As a new company, you’re going to have to create a lot of processes and a lot of documents. If you can just borrow and adapt stuff that large companies have already created, you’ll be in a much better place. They won’t always share this with you, because I don’t think Ikea would have been happy that our suppliers shared their test document with us. But our supplier did do that.
Same with product specifications. Writing a solid product specification document takes a huge amount of work and that defines what you’re actually going to pay the supplier to make. So you want to make sure that it’s of utmost thoroughness in detail. Getting a good template to start with is hugely valuable.
If you want to be green, start green. The reason I bring this up is, we as a company, we found that selling an ecological story is not very marketable. It doesn’t make you sell more product. But it’s important to us, so what we’ve done is, on the quiet side, gotten certification around components. So if we look at the raw materials that go in, any off-gassing that comes off the product, the harvesting of any of those raw materials, we look for certification around those individual things.
We ran into a little bit of problem because we will be expanding into Europe. And in Europe, particularly in the German speaking countries, a finished product and ecological certification is far more important to the consumer. So we were like, “Okay, we’re good. We have all the certifications.” This is specifically for a pillow. I didn’t reference the picture, but it’s a weaving machine: weaving cotton shells for pillows. We thought we would be good, and so we thought we could use the same supply chain and supply that product for Germany.
The problem is, the certification required for Germany requires certified finished product and the factory that produces a finished product has to be certified. So we’re in the process of onboarding a totally new factory and totally new supply chain just to make a product for Germany because we didn’t think ahead enough to get this whole thing right for that market.
So get finished-goods certifications, get factory-level certifications. Again, follow industry leaders. If you follow a Nike or an Ikea or a Nokia into a factory, the odds are that they’re already going to be compliant with ecological or environmental certifications and restrictions.
And then we’re going through this right now. Some companies have done it. Doing a B Corp assessment or using it as a tool when you’re starting up, is… For those that don’t know, it’s a Benefit Corporation. Pretty self explanatory on their website, but it gives you a tool around community conditions, social conditions, environmental conditions. It’s a really nice checklist to start with.
Suppliers are not your friends. This one’s hard to remember. I hate to pick on Neil, but this is Neil again. I think we were drunk in a basement bar in Arkansas. So my advice to you on this with suppliers: buy your own dinner, don’t get drunk, and if you’re going to Asia, don’t go to karaoke because it’s not really karaoke like it is back home. And for the guys in the audience, the girls there don’t actually think you’re attractive.
So there’s a couple things here. One, and I’m going to jump ahead one slide and then go back. Read this book if you haven’t. This explains all the reasons why you should do none of these things. But unless you have spent 10 years in sales or you’re a really gifted natural salesman, you are definitely outgunned by your supplier’s sales people.
They use all the tools and they’re innate to them. They love closing the deal. They use all the tools at disposal to make you think that they’re your friend. I got invited to Las Vegas for free. They’re going to put me up in a suite in the Cosmopolitan. One guy invited me to his family’s house on the coast of Georgia to meet his wife. He wanted to go backpacking.
And I don’t mean to be negative, but they’ve all disappeared when we stopped doing business with them, so they’re not real friendships. They’re friendships of convenience for the supplier. And it’s really hard, when a supplier is willing to spend 100 bucks or 200 bucks on dinner, for you to not take it. My feeling is, you’re better off buying them dinner because they’ll then become indebted to you.
Vendor agreements. Again, this is like a really sticky legal document. The mattress shown on the left is our mattress made in a factory. The mattress shown on the right is a competitor mattress. When we started we were, in our opinion, the first branded eCommerce company to enter this space. By last count, there’s 41 companies doing what Casper does here domestically. There’s some in China, some in India, some in Mexico, some in Australia. They pop up all the time. It’s super frustrating, as we’ve worked with our suppliers to improve their processes, to see small competitor companies come in and gather the knowledge that we’ve helped them build and we’ve built ourselves.
A vendor agreement, for people that don’t know, is a legal contract between your company and your supply chain that governs how you guys work together, and has all of these things:
Who owns IP? Meaning, if you’re sitting, talking with the supplier about how to improve your product or how to improve your manufacturing process and a new idea comes up, do you own it or do they own it?
Exclusivity. Are they allowed to make the exact same thing for a different company? Are they allowed to make anything in your category of products?
Data sharing. This one’s important for us. We closely monitor the quality of the raw materials that go into the product. We want to know on a day-over-day basis the test data they’re getting back, but unless they are contractually obligated to send it to us, they’re less inclined to do it.
Inventory management. This gets back to what I mentioned before. Do they regularly report this? And you can tie all this into a document that forces them.
Change of control. Three of our main suppliers were purchased two weeks ago by a single private equity firm in New York city. That’s a change of control. It allows us to renegotiate the contract and there’s some clauses in there, which allow us to change our relationship with them.
Charge backs. You’re going to get poor quality products sometimes; every business does. Who pays for those? Who pays for the consequences of those? Warranty. You definitely have to negotiate. And pricing transparency, which I’ll get into on the next slide.
This is very sad for us, these two charts. Price to an index. There are two major commodities that make a mattress. You can see the pricing trends of those two major commodities from when we launched until now: one’s down 16%; one’s down 31%. How much of that money do you think Casper saved? Zero.
Two things we didn’t negotiate in because we were in a rush: we didn’t negotiate in volume discounts, and we didn’t negotiate in any automated pricing changes. For our particular product, and it’s going to be different for different products, it’s very easy to know what the raw material costs are going in, because they’re commodities you can purchase that you can track on the market. If we had been smarter in the beginning, we would have had priced to the index. We won’t capture all the savings, but we should have captured half of it. I think in the first talk, I talked about gross margins and if we had captured these, it would make our business two things: one, we’d be more profitable; or two, we could pass the savings onto our customers. We didn’t capture it, so the only people benefiting from this are our suppliers, which is now a private equity firm.
And then last, summing all this up: if I had had, or somebody else on our team had had experience in operations, I wouldn’t have had to learn the previous seven things on my own. So my advice is, if you’re going to have a physical product company, you’re going to distribute something, hire Internal Ops expertise early. It will pay for itself.
And as an example, we obviously ship a lot of stuff through UPS. We spend millions of dollars a year because it’s not cheap to ship that box through UPS. We just paid the bills, because they’d come into accounting. We had an outsourced firm, I forget what it was called, Propeller, doing our accounting. They paid the bills.
We went back recently, because we’ve recently hired a guy who came out of Amazon, and Google Express, and Black & Decker to run our Ops Team. He started digging back through the bills. There was a mattress that got shipped to Fiji for like $1,400 of shipping. There’s no way we shipped a mattress to Fiji, but it was buried in our UPS bill. We hired an analyst just to look at this. We anticipate, based on initial numbers, that we’ll save probably two to three hundred thousand dollars, just by digging back through old bills and reverse charging UPS on those bills.
So, of the things to look at, the main things:
Sourcing. Having a dedicated person just out there looking for multiple suppliers. When you’re in a rush like we were, you go to a smaller number because you got to make a decision to move fast.
Logistics. Keeping track of how your product moves around.
Warehousing. You got to know what’s in inventory where.
Planning. You got to know particularly things that are long lead time. If you’re going to be bringing anything in from China or Taiwan, you’re 90 days on the water just to get it here. So you’ve got to plan four, five, six months out. You’ve got to anticipate, and it’s impossible when you’re in a new company to get it right, but you could do it much better than we did.
An analyst. Just to watch your bills.
All these people, you can think about as being free because they will save you money. Or you can do it the way we did it.
So I’ll just leave with one message. If you make a promise… We make a promise to our customers, in terms of the quality of the product, the speed with which we want to deliver it. …you actually have to deliver on that promise. As a start-up, you get a lot of grace. People will forgive you for a while. We think at the scale and the time we’ve been in the market, people are no longer going to forgive Casper for messing things up. And so, you have a little bit of a free time there and then it runs out, for you to have to actually deliver on the promise. So I’ll leave you with that. And then, I think I’m going to take some Q&A.
Host: Thank you, Jeff.
Audience: Hey, Jeff. Thank you for your time. Just wanted to ask: you mentioned you should hire an Internal Ops person early; is that the title of that person inside of another organization? Internal Operations?
Jeff Chapin: Yeah, the guy we hired is VP of Operations. We have a Director of Supply Chain. Each of these things that I had here. And again, we’re larger so we can afford more people. We have people under each of these tasks. Probably by the end of summer, we’ll have four people just doing sourcing. So operations is the general thing, and then there’s the sub tasks underneath that.
Audience: Got it. All right, thank you.
Jeff Chapin: Yeah, for sure.
Audience: Can you talk a little bit about your product development process, and how you work with your customers to decide what that next product’s going to be?
Jeff Chapin: Yeah, for sure. So that’s actually what my background’s in; not in supply chain. I spent a long time at IDEO. So if you’re familiar with that methodology, it’s what we practice. We spend a lot of time talking to consumers.
So if we know we want to make a pillow, we’re going to go purchase all the things that are on the market, dissect them, do sleep trials. We’re very fortunate to have an exceedingly large group of dedicated customers in this kind of virtual entity we’ve created called Casper Labs. I think there’s like 15,000 members, and if we want it to do survey work or product-testing work, or at-home interviews, we’ll reach out to that group and see if we can find participants.
But we combine that user research, product analysis, and then a business analysis of: where do we think the holes in the market are? How much value or dollar volume can we get through a product category? And then, we just follow the paths through that process to figure out what we want to make.