Original-equipment manufacturers have always had difficulty in finding the time and resources to keep their current products viable while ensuring enough investment in new product development. As OEMs face increasing global competition from low-cost challengers, the pressure to put engineering resources into developing new technologies, new functions, and new products can be overwhelming. Competition is placing pressure on OEMs to lower product prices and speed product introduction — all while reducing research and development costs.
As USA Today reported earlier this year, technology companies continue to trim R&D budgets to save money and the federal government isn’t stepping up to fill the void. According to the U.S. Congressional Research Service, the Bush Administration requested $132.2 billion in federal R&D funding, and for the first time since 1996, total federal R&D funding declined. Furthermore, federal R&D funding is expected to decline 6.8 percent in 2006. Although R&D resources such as federal funding continue to shrink, consumers continue to demand the most innovative products and expect to have the latest technology faster and at a lower cost. This creates a void — the need to focus on new product innovation while sustaining current and new versions of existing products under a trimmed budget. As a result, many OEMs try to protect their new product development investments over sustaining engineering efforts of their current products. However, with so much intellectual property and financial resources invested in existing products, this is not a viable business strategy. What’s A Company To Do?One solution some forward-looking companies are exploring is a concept called product stewardship. Product stewardship is a partnership between an OEM and an electronics manufacturing services (EMS) and supply chain partner that looks at the entire life of existing products — design and engineering, manufacturing, and aftermarket service. These services include product design, new product introduction, sustaining engineering, volume production, and after sales support. With an effective product stewardship model in place, OEMs can focus limited engineering resources on new product innovation to enhance brand and improve future revenue performance while allowing an outsource partner to provide new product design revs, improve quality, speed time-to-market, and reduce lead times while lowering costs on proven successful families of products. By combining internal resources with outsource partnerships, OEMs are able to better plan projects based on resource availability and also accelerate time to market. OEMs are also able to take advantage of the lower cost of these activities when they are supplied by an EMS supplier. This is because those suppliers have a lower overhead and margin expectation due to their lower risk (they do not have to try to develop new technologies or new markets). They also are a natural choice for executing much of the product sustaining activities since those activities are closely related to manufacturing and they are often the manufacturing source for the OEM. For example, in order to achieve its business goals, a medical device startup firm sought to bring a diabetes treatment device to market faster and more cost-effectively. Using an EMS provider for design for manufacturability and design for test services, the OEM was able to accelerate its time to market schedule by six months. Another example is a large company that was able to completely refresh an aging, but still useful, patient surgery medical device by using an EMS provider’s engineering capability to redesign an updated version. When considering an outsourcing partner, the first thing an OEM should do is assess its needs and identify which product or department requires assistance. Once identified, the OEM should determine the outsourcing services that the product or department needs, such as product design, prototyping, or sustaining engineering. In some cases, OEMs may realize that they need outsourcing assistance for complete product design and engineering support to augment limited engineering resources. Doing this effectively requires that OEMs work carefully with the outsourcing partner to develop a roadmap of product transition, while also clearly establishing roles and responsibilities of each company. In other cases OEMs may find that they desire support solely for one aspect of the manufacturing supply chain, such as sustaining engineering efforts. OEMs that implement sustaining engineering practices to extend the life of current products will maximize the return-on-investment (ROI) of the legacy product. Specifically, an OEM might have an existing product family that requires a product to be refreshed. In many cases an outsourcing partner can take over the execution of that line, providing the services faster and more economically than if the OEM keeps the practice in house. For some products OEMs may want the basic architecture to last a couple of years but perhaps want to introduce variations of the architecture every three months. By extending the life of current products and keeping product in the market longer, OEMs promote better financial success because for most manufacturing companies, current products generate the cash flow needed to fund future product investments. Of course, one risk an OEM takes in implementing this business model is the level of capability and knowledge their supplier partner will acquire over time. The partner will be exposed to the latest OEM technology and will become well versed in applying that technology to the OEM’s products. There are, unfortunately, examples in the market place where an OEM helped to create a future competitor. The area of laptops and desktop computers, for example, has seen the introduction of low cost competitors that got their start by providing extensive product design services to OEMs. It is essential, therefore, that OEMs take special care in their choice of partners. The product stewardship model is a new approach to delivering proven services offered by outsourcing providers that can reduce time to market, speed product development, and achieve quality standards at the lowest total landed costs. If done correctly OEMs can achieve greater business objectives with fewer resources while ensuring their intellectual property investment is protected.
Dave Purvis is executive vice president and chief technical officer at Solectron Corp., a global electronics manufacturing and supply chain services company.
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