Outsourcing Product Development

Dec. 9, 1999
Outsourcing special projects can save time and money.

General Manager
Mitchell Engineering
Springfield, Mass.

Communication is key to successful outsourcing. People from the company, subcontractors, and suppliers should openly exchange information on a formal and informal basis.

The economic slowdown in the late 80s encouraged many companies to downsize or eliminate manufacturing and engineering departments. In place of a full-time staff, these firms turned to outsourcing for the design and manufacture of their special or customized equipment.

Now, nearly a full decade later, the trend has only accelerated. Outsourcing new-product development lets OEMs keep pace with increasing global competition while addressing shareholder concerns over continuous improvement and cost control.

A whole new legion of consultants and contractors has sprung up to help downsized manufacturers improve their processes and develop products as economically as possible. Thus, one of the toughest challenges faced by manufacturers is choosing and managing these resources.

Manufacturers who have been outsourcing for the last decade or more have realized at least four significant benefits. First, they maintain a more stable employee base, thus improving morale and retaining company-specific knowledge. In addition, recruitment slows down, letting managers focus on projects at hand and long-term planning.

Second, subcontractors bring a broader technical base to the table. Special machine manufacturers are continuously exposed to new and different technologies to support their customer's needs. Many special machine manufacturers service a variety of industries, allowing them to share technologies and techniques which ultimately benefit the customer. The nature of the special machinery business inherently spurs creativity.

Third, flexibility in scheduling projects and capital expenditures improves. Outsourcing reduces the need to delay projects based on availability of resources or to start projects to keep employees busy. This improved scheduling flexibility gives manufacturers the time to more fully evaluate the desired goals and priority of each project.

Fourth, production losses can be minimized. Well-equipped special-machine companies have complete manufacturing, assembly, and testing facilities in-house, which permits performance evaluation prior to installing equipment in the manufacturing environment. Equipment hits the production floor ready to operate without startup problems and installation difficulties. In many cases, this leads to savings in production equal to or even greater than the actual value of the equipment. And, the savings are more than monetary. Employees will view the equipment more favorably and be more committed to the continued success of the project.

Although there are several advantages to outsourcing, there are also pitfalls to avoid and challenges to meet. Probably the most seemingly insurmountable challenge for manufacturers is locating and selecting reliable resources.

Second, the project must be clearly defined. It is essential to be specific about the goals of an automation or development project. Project requirements must be developed along with an understanding of the associated costs. Manufacturers must define the allowable capital investments and the necessary returns on investment to justify the expense. A strong understanding of the product life cycle, sales projections, and personnel savings through process automation is necessary.

Third, confidentiality must be taken seriously. It can be the Achilles' heel for a manufacturer. Special equipment can provide manufacturers with a significant competitive edge. Companies are willing to put forth a large capital investment for processes and equipment that improves their competitive position. If a contracted resource provides the same (or similar) equipment to a competitor, not only has the company lost the advantages, they financed the equipment development for the competitor as well.

Fourth, quality and performance can be difficult to guarantee. Reputable special-machinery manufacturers strive to provide the best quality and performance possible. However, they have only one chance to get it right. With any new development work, regardless of the industry, it is virtually impossible to produce ideal results the first time. Human error, miscommunication, and a host of unforeseen circumstances can cause disappointing results.

Finally, future support should not be over-looked. Poor selection of resources can lead to a lack of complete follow through or the need to reinvent the wheel for future enhancements. Developing a long-term, stable relationship will provide many rewards, including assurance of confidentiality, elimination of repeat learning curves, and an understanding of each other's needs and preferences.

Successful outsourcing can be secured through proper planning, selection of resources, and project management. The following is a guideline for successful outsourcing.

Project definition. The first step in project definition is to precisely define the goals, such as higher production rates or improved quality. Keep goals simple. And avoid confusing goals with methods. Methods state the preferred approach to achieving a goal.

Budget evaluation. How much can be spent to meet the goal? What is the required return on investment? Many factors govern ROI including product life cycles, impact on production rates, quality improvements, reduced scrap rates, and so on. Understanding the allowable budget will save you and the contractor much time and energy. Once established, the ROI evaluation and budget should be reviewed by those who approve expenses.

Project specification. The specification is key to getting the desired result. It will also en-sure that you receive meaningful quotes. Vague specifications invariably result in greatly varying quotations. Write a project specification which, as a minimum, provides a definition of the goal, the recommended or required methods, production rates, tolerances, and other necessary requirements. Stringent or extensive requirements have a way of unexpectedly driving up project costs. Review the specification with your manufacturing team. Does it support the required goal? Does it seem reasonable in consideration of the budget? Are the recommended methods acceptable?

Locating resources. Most special equipment manufacturers and contract engineering companies don't have full-time sales staffs or significant marketing, making them difficult to find. Product distributors are one of the best sources for leads. They also supply special equipment manufacturers and can have significant knowledge of them. Of course, there are also the traditional means of locating suppliers, such as the yellow pages, Thomas Register, industrial magazines, trade shows, and professional associations. The Internet can also provide a global list of sources which may have to be refined.

Experience. Once a list of suppliers has been identified, evaluate their credentials. The most important credential is experience. Typically, the longer a company has been in the business of manufacturing special machinery, the more versatile and quality oriented the company will be.

Confidentiality. Suppliers must respect the confidentiality of your project. Ask them specifically how they handle confidentiality. They should not disclose the nature of projects done for specific customers or display customer names on documentation around their office. It is acceptable for them to talk about customers and projects, but never to associate the two. They should never attempt to sell your technology. Confidentiality agreements are a good way to eliminate these concerns and a supplier should be willing to sign a reasonable one.

Financial status. Often overlooked is the financial capability of suppliers. Does the supplier have the financial capability to stand behind their work? Do they have the cash flow to support the project? Do they have significant assets? It is possible that the net worth of some suppliers will be less than the value of your project. This can be an issue if things do not work out as expected and the supplier requires additional work. For a minimal expense, a Dunn and Bradstreet report can provide a clear picture of the supplier's financial position.

Manufacturing capabilities. Does the supplier have sufficient manufacturing capability? How much of your project will they have to subcontract? The quality and timely delivery of your equipment is jeopardized every time any portion of it is subcontracted. Avoid suppliers who subcontract all manufacturing. If you get involved in subcontracting the design to one supplier and manufacture to another, be prepared to act as the referee when corrections need to be made.

Assembly and testing. Does the supplier have an assembly area and services to support testing? It is preferable to test, debug, and conduct an acceptance runoff of machinery at the supplier's facility prior to shipping.

References. Obtain a list of supplier references once you are down to your final choices. Questions to ask include: How was the supplier to work with? How well has the machinery performed? Do they complete their projects in a timely fashion? Have they provided any post-project support? How many projects have they completed for you? What was the approximate value of these projects?

Reputable suppliers will not require a lot of time to manage. They are in business to handle the burden of special machinery or product development projects for you. The supplier should be able to work independently, provided you have properly planned the project and written sufficient specifications.

Once the purchase order is issued, conduct a kick-off meeting at your facility. It should include key individuals involved in the project from both your organization and the suppliers. The kick-off meeting, as a minimum, should re-view specifications, look at any similar existing equipment or processes, and develop a project schedule. The project schedule should include design and assembly reviews.

Treat the supplier as an extension of your company. Creating a team environment will help to ensure communication between key players. The better the communication, the better the end result.

Maintain reasonable expectations. Realize that schedules may slip and that suppliers can make mistakes just like anyone else. A good supplier will do their best to correct mistakes.

Expect changes in the scope of the contract. Unforeseen problems often change machinery specifications and design. Reputable suppliers provide their quotes in good faith and should not be held responsible for absorbing added costs for such changes.

Due to the nature of some projects, it's not always possible to provide firm pricing. In product development, for example, the customer often has changes the supplier can't anticipate. In these cases, it's best to contract at an hourly rate and require weekly time reports. In other cases it may be necessary to incur research and development expenses to establish concepts, processes, or the economics of a proposed project. Do not expect the supplier to provide these services free of charge.

Outsourcing has become standard practice for many companies over the past decade and, with continued competitive pressures, this trend will certainly become standard practice for many more. With proper planning, realistic expectations, and selection and management of resources, the economics of outsourcing can be significant.

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