Situation: A company uses outsourced manufacturing but is concerned about inventory damage by the manufacturer. Tests have been established to assure both visual compliance and functional performance, overseen by a company employee. Still the company is receiving too many unacceptable parts. How do you minimize inventory damage by an outsourced manufacturer?
Advice from the CEOs:
It is perfectly acceptable for a vendor of consigned materials to bear the risk of product that is not to specification.
In any contract for manufacturing, require that the vendor carry insurance to cover the full cost of materials and processing in case of damage either during manufacturing or shipping.
It sounds like this is a new opportunity and situation for the company. In the process they have not guaranteed that both cost and risk are covered.
There is no point in assuming all this risk.
For future opportunities like this, take on the work as a time and materials project at an appropriate hourly rate for the market, and with a significant mark-up to cover risk as the project is transferred to a contract manufacturer.
Another option is to take on the project under a project management contract, and to bill engineering separately.
This situation sounds familiar for an evolving project. In the future try to unhitch the manufacturing piece from the engineering. Engineering should be more profitable, which will allow the company to more successfully manage the project into early manufacturing.
Strategically, this could be a good move for the company provided they partner with a reliable vendor to facilitate early stage manufacturing. One option for paying sub-vendors is to pay for yield – particularly if early stage work has a high failure rate.
If the market opportunity is there do two things:
Set up an organization with professionals who know early stage manufacturing.
Be aware this group will have a different culture and approach compared to design engineers.
Situation: A company wants to reduce their cost of engineering. They are considering outsource options, both domestic and overseas, as well as remote offices in lower cost regions domestically. How can you best reduce costs?
Advice from the CEOs:
An emphasis on cost may be misplaced. Consider instead of where you can offer the best value to your customers or clients. Focus on and compete in best part of your market – the place where you possess the strongest advantage; then worry about cost.
Outsource companies can be dangerous partners. Assume you only profit from the first job that you give them and that they may be your competitor the next time around.
We’ve learned from the last decade of experience in Asia that cost advantages are often temporary. Salaries for top talent in India and China now approach those in the US. This experience is likely to be repeated in Southeast Asia.
Focus on high dollar services and opportunities.
There are limitations to offshore talent – especially in complex, multi-step development projects. Keep high dollar projects in-house because they justify higher prices and margins.
When you outsource, negotiate retainer contracts with additional charges for work above and beyond the scope specified in the retainer.
What do you want to be? Consider your options:
Become a project management company and outsource development.
Be a development company and just look for cost effective sources of labor.
Start your own outsource company – a split-off staffed by your own employees – and feed them work.
Before you invest substantial time or money, do a test.
Situation: An early stage company needs to move from an engineering/R&D focus to a production focus. Cash availability and business plans dictate that this must happen very rapidly – within 4 months. How do you coordinate a rapid cultural shift from R&D to production?
Advice from the CEOs:
You will need an experienced VP of Operations.
Operations and production engineers are a different personality type than R&D engineers. The latter are creative and seek new and more effective ways to solve problems, while production engineers thrive on perfecting a process and getting it right every time. You will likely have to adjust the team to assure that you have both types.
Reorganize the current engineering team into R&D and Production engineering teams.
A core R&D team reports to the CTO.
Another team reports to VP Ops and will cover product manufacturing, process improvement and logistics and QA.
What are the most important steps to take first?
Have a heart-to-heart conversation with the individuals who you have assigned to production responsibilities.
Get back together in small groups or one-on-one with your production group and explain that to meet the company’s objectives – and everyone’s long-term financial objectives – there must be a change. Explain the cost in stark dollars of what the failure to make this change means to the company and to the team. Challenge them to assist you in developing solutions that will allow you to meet your corporate objectives.
Allow some learning opportunities to arise. Let team members make the occasional mistake and use these as coaching opportunities for the group to show what happened, why it happened, and why it can’t be repeated.
Separate standard and special order production into two groups. Each group will have to meet their own performance objectives and metrics – but all objectives and metrics must support the company’s objectives.
Early on you may want to require CEO sign-off on production sheet changes, but within a system that allows you to easily determine material from non-material changes.
Situation: A company has an engineering structure which emphasizes function over cost. As a result, there is little collaboration between design and manufacturing, and little design for manufacturability or cost control. This contributes to a last-minute mindset and expensive solutions. How do you shift design engineering and manufacturing from a craft to a lean mindset?
Advice from the CEOs:
Changing how people think and act may also mean changing people. Are you prepared for this? If not, then it may be difficult to achieve the change that you desire.
Let’s use a mindset change in another area – sales compensation – as an example. In this case, the sales team had previously focused primarily on revenue, with no incentive to drive margin. This impact was continuously eroding margins, though the company realized revenue goals. The mindset was changed by introducing a new system with dual incentives: to retain their position, a sales person had to hit at least 85% of their revenue target, however commission was based completely on the gross margin from their sales, with a bump in commissions when they hit 100% of their revenue target. This system drove both revenue and margin targets and was very successful; however, the company lost a few sales reps who couldn’t make the adjustment.
Transferring this lesson to the engineering situation, design an incentive structure that drives both function and low cost manufacturability to achieve both targets simultaneously.
Task your VPs of Operations and Manufacturing – and the key managers of your design and manufacturing teams – to create a dual incentive system that meets both function and manufacturability objectives. Measurements may include:
Actual vs. initial estimated manufacturing costs.
Margin on final product.
Once the parameters are developed, clearly communicate these to all affected employees up front to set clear expectations for the future.
Incentivize your VPs and key managers jointly on collaborative efforts and their ability to develop joint solutions.
Another solution which will speed the process – put design and manufacturing engineering in the same work space instead of separating them. This encourages the teams to work together.