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: The CEO of a company is wrestling with issues concerning change orders and high labor and materials cost. To get back into good financial shape, they are considering options including reduction in estimator time and selling equipment; however, either of these could gut the business. How do you manage through a difficult period?
Advice from the CEOs:
It is critical to get on top of change orders. This is potentially a big profit-loss swing for the business.
Does everyone understand what’s happening?
If the answer is yes, teach them more about the business nuts and bolts so that they can help develop solutions? Share a portion of the savings in the form of spot bonuses for those who develop solutions.
Take a lesson from The Great Game of Business. Let employees know about the challenges and challenge them to help develop solutions.
As an example, look at change orders and the percent of change orders that are not correctly completed, approved and invoiced as a critical number. Let’s say that 50% of change orders are not completed, approved and/or invoiced correctly. The objective for the year is to reduce this to 25%. Calculate the value of lost billings from the past year. If this can be reduced by half, the value will be $X. If the company can meet this objective, consider making half of $X available for distribution as gifts or prizes.
To support this, allow each new project to design its own minigame to reduce the number of incomplete and uninvoiced change orders.
The idea is to have the project and inside teams design the minigames and come up with ways to reduce incomplete and uninvoiced change orders. They will learn new ways of being more efficient from this process. This is the long-term benefit to the company.
If it is necessary to reduce staff, cut early instead of later. This is painful but laid-off employees can be hired back on a contract basis as necessary.
A common solution during a difficult period is to cut back to core, reducing overhead as a survival strategy, and focus on winning as may bids as possible to rebuild the business.
Look at all departments and the gross margin that each produces minus the overhead that each requires. Focus cutbacks on those that are not positive.
Increase annuity contracts – contracts with major companies that are growing and frequently require the company’s services.
Transfer equipment to a separate corporation. Lease it back as business requires. This increases cash flow flexibility – for example, don’t make lease payments when cash is tight.
Interview with Eric Bauswell, President, SurfaceInk
Situation: For a domestic engineering solutions company, one of the challenges is engaging potential customers with the idea that a domestic solution can cost-effectively meet their needs. If you can combine a manufacturing solution to the service solution, this helps. What have you done to effectively communicate your solution to potential clients?
Know your clients. Clients have expertise of their own. However, they may lack expertise in all the disciplines necessary to create a full product. How will you fill the gap?
Know your strengths.
Design is an iterative development process. If you increase process efficiency you can complete more process cycles in a given timeframe, advancing to final product more quickly.
Identify your key differentiators. Target clients for whom your differentiator is a critical need. For example, we do not encourage all of our clients to manufacture overseas, but if they insist and lack experience managing overseas vendors, we can handle this for them.
Consistency of personnel across the life of a project is important, particularly the core team.
“Invention & Innovation” require a plan to mitigate the risk they represent. Develop the design along parallel paths, stage higher risk components or pieces of the design that represent critical path inventions such that they are proven prior to moving forward, or even take that feature out of the current design in order to develop it to a production ready solution for the next product on the client roadmap. Sometimes an invention or innovation is THE reason for the new product. In these cases the key is managing the client’s expectations regarding the significantly elevated risks that come with invention and proceeding with the understanding that the phase gates and even the production dates will slide according to the progress against developing that critical path invention or innovation.
Expertise in material selection and understanding what can be done with materials in the manufacturing process is non-trivial, as is vendor qualification, particularly with new materials.
Know your competitors. How do they handle similar challenges to those that you face?
Know your vendors. “Right-sizing” your contract manufacturer to your client’s product is important. Things will go wrong, and you must assure that the contract manufacturer will give you the priority to get things back on track to meet your launch date.