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How Strategic OEM/CM Partnerships Can Win the Race-to-market
December 31, 1969 |Estimated reading time: 10 minutes
Products that come to market on budget but six months late will earn 33 percent less profit over five years. In contrast, coming out on time and 50 percent over budget cuts profits by only four percent.
By Kirk Douglass
Constant innovation and changing market conditions have positioned the electronics industry for explosive growth in the world economy. No other business sector can address the unique combination of forces that has propelled OEMs into a high-speed "race-to-market." In fact, getting a product to market has become the most important factor in determining an OEM's prospects for ultimate profitability.
However, if "speed" was the watchword for manufacturers in the '90s, then "warp speed" is the critical phrase for the new Millennium. Virtually every OEM is racing to find tools and techniques that will slash the time-to-market factor. As a solution, partnering with a contract manufacturer (CM) is emerging as a preferred method for crossing the finish line first.
Meeting the Demand
There are several factors driving race-to-market. Constantly changing customer demand is important. As the marketplace becomes more technologically savvy, consumers develop a hunger for new products. And as they become available, consumers are more than willing to discard the old in favor of the new.
One key effect of the market's ever-changing demand is the continued shortening of product life cycles. As devices and systems increasingly become commodity items, manufacturers are forced to develop new products on a regular basis to command a premium price, sustain profits and preserve market share. Similarly, new products are being introduced constantly and older products redesigned to use components with enhanced functionality. All of this occurs in an environment of consumer demand that is extremely difficult to predict.
Figure 1. In the traditional process, a product concept moves through a serial or sequential development phase in which many changes are inherent and serve to slow the race-to-market.
Pressure from retailers and resellers to supply products at the right place and time also places a great strain on OEMs. Although it is not always possible to provide the products exactly according to demand, it is critical to set the right expectations. Retailers and resellers need the manufacturer to commit to firm delivery dates to avoid failed promotions. Increased competition and fragmentation of markets plus the escalating cost to bring products to market, including salaries, overhead and prototypes, results in profitability depending on being the first to develop and deliver new products to the marketplace.
Building a Better Race Kit
New technologies are available to help OEM/CM partnerships shorten times to market: 3-D solid modeling is among the timesaving design tools software companies provide engineers. In essence, the technology permits designers to change component designs in 3-D using less steps than required by older technology. Such capabilities enhance a designer's ability to uncover interference conflicts and to resolve problems and other errors early on when they are easier to fix.
Rapid prototyping (RP) is another CM technique that has become a key tool in the market race. When developed more than a decade ago, RP was considered little more than a laboratory curiosity. Today, it is an estimated $295 million business used by virtually every major manufacturer of automobiles, airplanes, medical equipment and computers. In application, computer-aided design (CAD) models on a computer screen can help engineers check for interferences and glitches, but a physical model is necessary to find other problems. RP systems make physical models directly from 3-D CAD data. They eliminate the need for hand-crafted mock-ups or expensive tooling while taking several weeks less to produce. As a result, companies commonly shave 10 to 50 percent from overall product development time.
As with all innovations, RP technology is evolving to target the earliest stages in the design process. New desktop systems are aimed at making it as easy to generate a 3-D concept model as a 2-D plot. These systems offer less accuracy than conventional RP, but the resulting model is faster, easier and less expensive to produce.
Figure 2. With the parallel or concurrent development process, designers, engineers, purchasers and manufacturing work together to cut as much as a full year from new product development.
Software is not the only tool that can speed products to market. Rethinking processes that move a product to market can also cut time. Most OEMs move a concept through a sequential development process that is fraught with changes, causing delays while new designs are completed and specs rewritten (Figure 1). However, by re-engineering this process and bringing together designers, engineers, purchasers and production to work concurrently, a CM can move a product much faster from conception to production (Figure 2).
Outsourcing
Outsourcing is the modern term for the time-tested practice of getting someone else to do the job. It emerged in the '90s as a corporate strategy to permit companies to focus on core competencies and to hire outsiders to perform non-core tasks. Early successes by companies such as Nike, which outsourced 100 percent of its athletic shoe production, and Apple, which farmed out 70 percent of its manufacturing costs and components, indicated that this strategy had significant profit potential.
Outsourcing certainly can help manufacturers maximize their assets, including capital, people and other resources. However, the real push behind the technique is its ability to accelerate time-to-market. And it is here where the CM shines. Typically, these companies have facilities scattered around the world; hence, time-to-market is almost instantaneous. In the process, costs are reduced because plants can run at higher capacity and buyers can achieve economies of scale because of substantial supply-chain efficiencies.
Just how big is the outsourcing trend? A survey by Purchasing Magazine suggests that with computer, peripheral, communications, automotive, medical and industrial control equipment, 54 percent of OEMs outsource some or all of their manufacturing. In another survey, 66 percent of organizations polled said spending on outsourcing has increased by 10 to 1,000 percent in the last five years.
Still, some myths about outsourcing remain. For example, confidentiality persists as an issue for some OEMs. Competitive product lines often are run in the same plant. While the CMs strive to safeguard customer secrets, the reality is that the advantage of the practice - pooling resources to maximize capacity - is powerfully persuasive. In practice, however, the secrecy issue is not as significant for companies who have realized that manufacturing is a commodity process. While outsourcing may still make some OEMs uncomfortable, most see their outsource supplier as a "backroom" resource for specific areas of expertise and knowledge that can make a company more resourceful and profitable.
Partnering for Market Success
Outsourcing should not be confused with hiring consultants or using so-called "body shops" to get the job done. These are high-risk, less cost-effective alternatives. For companies that consider outsourcing as a component of an overall strategy and not an incremental decision, creating strategic partnerships with CMs/suppliers is the process' foundation. Strong partnerships can help an OEM bring a new product to market without diluting focus or over-extending resources because the partner has staff and procedures already in place and operating. Therefore, an outsourced supplier usually can start to work quicker than its OEM counterparts. Additionally, a strategic partner can bring fresh perspective to design projects as well as technical expertise, manufacturing resources and market knowledge.
Obviously, selecting a strategic partner is crucial. It is not easy to replace a supplier, and it is harder still to replace a strategic partner. For a CM to best position itself to be selected, it should be visible in industry publications and directories, which are primary reference sources for OEMs. In some cases, the CM also may want to be represented at major trade shows where making the initial contact is simple, cost-effective and convenient. But once an OEM has developed a list of potential partners, the field will begin to narrow. There are several criteria some use to weed out potential partners:
- ISO 9000 certification. Lack of certification can remove a CM from consideration in many cases.
- Specific experience/knowledge. The OEM wants a partner with considerable background in the specific areas that are important to the success of the project.
- State-of-the-art technology. New technology is like a beacon for OEMs.
- References. Cultivating "raving fans" among current customers will cause no concern when the OEM asks for references.
After checking references, the OEM may want to schedule a meeting to discuss the project. At this time, a tour of company operations and a display of examples of similar projects completed will hold the CM in good stead.
Achieving Best Speed-to-market
Once a strategic partner is selected, the challenge to provide the service expected is created. A good beginning is to make certain a "product champion" is assigned to the project. This should be someone who has access to key OEM people and will personally be responsible for meeting deadlines and staying within the budget. Next, clearly establish project specifications with the client. When a decision is made to outsource, both parties typically are eager to get underway. However, it is not uncommon that the partners could have profitably spent more time developing the specs. Establishing and drafting effective specifications is especially important in the electronics industry. In fact, it has been proven that the cost of writing realistic specifications in the first place will greatly increase the probability of success.
Each specification must be clearly defined for every stage, from product design and engineering through manufacturing and field maintenance. Inaccurate or ambiguous specifications can lead to time-consuming and costly problems. Even when the specs seem relatively clear and straightforward, problems can arise in methods of measurement and in interpretations that are too "tight" or unrealistic relative to design or manufacturing process limitations.
Lastly, before work starts, are matters concerning the contract. Because of the nature of outsourcing, the greatest benefits are realized over the longer rather than the shorter term. Crafting a flexible contract in the beginning to allow for changes in business objectives, technologies and economic conditions is in both companies' best interest. A flexible contract will include the ability to change service levels, increase or decrease the scope of the project, and retarget all elements of the relationship on a regular basis. It should also spell out client expectations and call for periodic performance reviews by the OEM.
Conclusion
OEMs are facing unprecedented levels of pressure. Global competition continues to increase. Consumer demand for newer, better products is exploding. Product life cycles are decreasing and the downward pressure of pricing continues. Additionally, manufacturers are facing increasing capital expenditures to achieve new levels of technological sophistication, plus the time it takes to find, hire and train seasoned professionals is growing longer.
To succeed, OEMs are doing everything they can to accelerate the entire process. The age-old adage "haste makes waste" no longer seems to apply. In fact, when a product is late to market, development costs increase while market share and price erode.
Although it requires changes in strategic thinking, OEMs are finding that the fastest track to market is to outsource new product development, redesign and manufacture with an independent CM. Manufacturers who partner with fast-track, new product development companies will have the advantage today and in the future.
KIRK DOUGLASS is president of Pivot International, 14125 W. 95th Street, Lenexa, KS 66215; (913) 438-5200; Fax: (913) 438-5201; Web site: www.pivotint.com.
Patterns in Outsourcing
The Outsourcing Institute annually conducts an assessment of outsourcing activity in the United States. Findings indicate that as the market for outsourcing continues to experience rapid growth, other patterns have emerged as well:
- Nine percent of the respondent companies are new users of outsourcing.
- Companies using outsourcing services are financially more stable than U.S. companies as a whole.
- The number of projects in the planning stage is nearly twice the number presently being administered.
- Companies that have been involved previously with outsourcing account for more than 90 percent of the projects being planned.
Top 10 Factors for Successful Outsourcing
- Understanding company goals and objectives.
- A strategic vision and plan.
- Selecting the right partner.
- Ongoing management of the relationship.
- A properly structured contract.
- Open communication with affected individuals/groups.
- Senior executive support and involvement.
- Careful attention to personnel issues.
- Near-term financial justification.
- Use of outside expertise.