Managing development projects in a contract manufacturing environment
“The future of gadget-making is not about making gadgets; it's about imagining them. Someone else makes the imaginary real.”—Jeffrey M. O'Brien, Senior Editor, Wired; November, 2001.
Coca-Cola, Xbox, Hewlett-Packard, Baskin-Robbins, Ericsson, Samuel Adams, Calvin Klein Jeans, Mattel, Cisco Systems, Compaq, Kodak. What do all of these trademarked, famous-brand consumer products companies have in common? Most or all of the products sold at retail by these household names are made by companies you have probably never heard of. Their sourcing, manufacturing, distribution, and even website maintenance are handled by contractors. Many brand-name companies are shy about the fact that they do so little touching of their products (Dolan & Meredith, 2001, p. 110). The perception for market is total life cycle ownership, but the reality may be much different.
Vertical Integration is Disintegrating
What has changed since the days when Henry Ford created the totally vertically integrated River Rouge complex in Dearborn, MI to build Model A Fords? Mr. Ford invested enormous capital in a facility that took iron ore, sand, and rubber in at one end, and sent complete automobiles out the other. Now, vertical integration is disintegrating. Where IBM once built circuit boards for boxes and boxes for mainframes, today's personal computer industry is one giant triumph of disintegration: Intel makes the chips, Dell the boxes, and Microsoft the software (Dolan & Meredith, 2001, p. 108). The next level of disintegration is to have the idea created by the brand owner, but all of the design, manufacturing, distribution, and marketing done by others. The label only tells you who owns the intellectual property. Vertical integration has become virtual integration (Dolan & Meredith, 2001, p. 106).
Why is this disintegration becoming the standard rather than the exception? Not surprisingly, the answer is profit. “All that money that used to go to fund infrastructure is going into design and innovation. The companies that thought they were being competitive by having manufacturing, well, now all of their factories are half full, and they're getting cranky,” says Flextronics CEO Michael Marks (O'Brien, 2001, p. 151). Flextronics, the number one contract manufacturer in revenue and run rate (1Q2002), was selected to build the Xbox for Microsoft. Says Marks, “Microsoft has a ton of money; but if they had to build factories, they wouldn't have done this project. If guys like us didn't exist, guys like Microsoft wouldn't do a hardware product. The risk would be too high (O'Brien, 2001, p. 148).” By the time of publication of this paper, another major network and software company will be well into preparation to launch a high-profile product as important to their market as the Xbox is to Microsoft. They are using contract hardware design and contract manufacturing services.
Who Benefits from Electronic Manufacturing Services?
Manufacturing is not the only benefit of contracting. The industrial downturn and economic slowdown of 2000-2001 caused a strengthening and lengthening of the relationships between original equipment manufacturers (OEMs) and their contract manufacturing services (CMS):
“In fact, so integrated are the contract manufacturers becoming in their customers' value chain that most people now refer to the business as electronic manufacturing services (EMS), rather than contract manufacturing. Harsh economic conditions have forced OEMs to begin outsourcing services earlier and conclude them later. By whatever name, the services at the front end of the product life cycle include preliminary system design and logistics planning. At the other end of the spectrum, the industry offers packaging and delivery, post-sales services such as reverse logistics, repair and warranty services, all the way to end-of life product recycling.” The key word is service.—Kador, 2001, pp. 54, 56.
Electronics services are only one business for outsourcing, although this paper will reference that industry as its primary source for examples and advice. The pharmaceutical industry sends out for about $30 billion each year in assistance from outsiders, for chemical development, manufacturing and packaging, analytic services like toxicology and pharmacology, and clinical trials (Dolan & Meredith, 2001, p. 110). “The money is in the brands, not in the machinery. Wall Street is saying that engineering, brand recognition, and other intangibles are together worth three times as much as assets you can see and touch” (Dolan & Meredith, 2001, p. 108).
John Todd, of SonicBlue, “makers” of all kinds of products such as ReplayTV and Rio, uses several contractors. “Our focus is on creating unique technologies—100% of our manufacturing is done by other people. If you don't have to tie up our cash assets and people, it enables us to be creative” (O'Brien, 2001, p. 152).
Project Management is Changing, as Outsourcing Grows
As a Project Manager for a new product, be aware that if you are accustomed to having complete control as an OEM, your methodology is about to change. If your company will be outsourcing part or all of its future, there are benefits and pitfalls to your project. Some of the tangible benefits:
• Improved time-to-market, because the EMS can probably concentrate more resources on the task at hand than all but the largest OEMs. This amounts to a reduction in the need for fixed assets within the creating organization. “As an example, Handspring brought in contract manufacturers while designing the Visor PDA. This breakthrough product hit the market only 15 months after the company was founded” (Dolan & Meredith, p. 110).
• In high volumes, product cost will almost certainly be lower with an EMS than doing the manufacturing in-house. Economies of scale from common component sourcing mean that the EMS can get a better price deal. On top of that, an EMS can cut nearly in half the added OEM costs of overhead from maintaining a factory and equipment, freight charges for distribution, SG&A costs, and inventory carrying costs, thanks to multiple clients and efficient operations. Even after the profit to the EMS is added back in, it wouldn't be unusual to see an additional 10–15 points of margin from the collective result of these savings (O'Brien, 2001, p. 152). Your finance people like those numbers.
• Supply chain management by the EMS will reduce the risk of over- and under-buying components to forecasts that can change quickly. In their multiple-client world, an EMS has a built-in buffer across customers, especially in common parts.
• Obtaining regulatory approval is something an EMS does as a matter of routine. If your new product needs UL, FCC, or FDA certification as in the case of pharmaceuticals, chances are that the contractor has more experience, and possibly more agency leverage, than you.
• The main benefit: you can focus on what you do best. When Ericsson outsourced its mobile handset manufacturing to Flextronics in 2001, it was able to focus on the market and the competitive advantage of providing the best product instead of worrying about the cost and learning curves inherent in OEM.
The Lessons Learned
In collaboration with a former colleague, David Netterstrom of Sony-Ericsson mobile phones, we have compiled our list of suggestions, cautions, and avoidable potholes for the Project Manager who is given a charter to transfer an existing product or develop a new one with contract manufacturing in the plan. From our collective lessons learned, the topics covered will be:
• Selecting your Electronic Manufacturing Service
• Transferring an existing OEM product to an EMS, for shared or replaced capacity
• Starting a new product development cycle
• Sustaining the relationship
• Ensuring Project success.
Selecting Your Electronic Manufacturing Service
• Have a Plan. Know what you're looking for. There is no substitute at this point for a Statement of Work (SOW) that details every step and the deliverable from each step. As part of the contractual effort, leave no gray areas, especially in production yields. Agree up-front on acceptable yields and the allowable causes. Clear test specifications are crucial to yield definition and quality planning.
• Be commercially responsible. Try not to tell the contractor how to run his business, but make sure they're motivated to meet your requirements by having mutually agreed-upon targets. We suggest going for more of a fixed cost, volume and yield based contract. If the yield is higher, the CMS makes more money by having less rework and repair. [Author's Note: High yields indicate an in-control process. Six-sigma initiatives can play a big role in defining the process control. Not only does it mean more profit for the EMS, but you have more assurance from a high yield process that only good product is shipped.]
• Look for, and get commitments for, stability in the manufacturing location(s). There is a huge, continuing consolidation in the EMS world. Make sure that the contractor you select will lock your product into a fixed location for its product life cycle, or that they have documented success in transferring past products between locations. Don't take their word for the successes they tout. Ask for and contact references. My experience in transferring products between locations of the same contractor has shown that it's like starting over. Equipment setups and calibrations change in transit, the quirks you tried so hard to minimize prior to startup at the first location resurface at the new one, and operator learning curves frustratingly fall back nearly to the beginning.
• Make sure your EMS of choice has a recent history of delivering on time. One of my projects was ready for launch (that meant, in this case, that the hardware design was mature and the commercial software was released), but delays in the contractor's test equipment and test software readiness required creation of a recovery plan that involved unplanned use of our resources. Again, monitor everything, and audit the facts as they are presented to you. Be from Missouri: “Show Me!” In a survey of 500 manufacturers conducted in 2001 by Cahners Research, a division of the parent company that publishes Electronic Business, “83% ranked ability to meet delivery schedules as the most important criterion for selecting an EMS partner” (Kador, 2001, p. 55). Delivery ranked just ahead of manufacturing expertise and communication in that survey.
• EMS sales and management tend to overstate their existing capability. Be sure they're telling the present truth, and not the future truth. Weigh the risks. If your product is important to your company's future, you as Project Manager are responsible for identifying, quantifying, and controlling the risks to a successful launch.
• The EMS model becomes much more complicated with multiple locations and markets. Be aware of the political “good corporate citizen rules,” which dictate what can be manufactured, and in what proportion it can be exported, in a specific country or region. As an example, there are large tax implications for product made outside the Mercosur countries (the Latin American analogy to NAFTA, that includes growth markets such as Brazil), and shipped in. To ship to a Mercosur country, you must be producing in a member country.
Transferring an Existing OEM Product to an EMS, for Shared or Replaced Capacity
• Have a Plan. With project software or a spreadsheet, quantify every step at the micro level.
• If the transfer is done to maintain a total production rate, the ramp-down of the OEM location and the ramp-up of the EMS location must happen without missing deliveries. This will typically require temporary excess capacity at the lead end, and temporary material overdrive at the receiving end.
• Allow about four weeks for equipment transfers or receipt and installation of new, duplicate equipment. Make sure the utilities at the receiving end are compatible with the equipment, and prepare for the differences. Shipping, clearance through customs, installation and debug, and line startup don't happen automatically—be prepared to hand-hold through every step. Absolutely nothing happens by chance. Use your Plan. Have a project manager and materials person, and your circuit board, test and verification, quality assurance, and systems technicians and engineers on location at the receiving end, working closely with their counterparts. This will feel like smothering the operation at the beginning, but the experience transfer is even more important than the equipment transfer. The more crucial it is to maintain delivery rates (and it is always important), the greater the necessity to have the knowledge transferred in person. [Author's Note: different cultures acknowledge communications and make commitments in different ways. As examples, be aware that Spanish “manana” doesn't necessarily mean “tomorrow,” and Japanese “Hai” means acknowledgment but not necessarily compliance. These nuances are much better understood in person than by phone or email.]
• Perhaps the most important, gating item is material. Interaction between the MRP systems is critical. Driving material at the old location during the ramp-down and transitioning the same material to the new location for ramp-up requires accurate inventory management and total coordination with the material supplier. At least a three-way call with the old location, new location, and the supplier is recommended, for all material. Even then it's not a transparent handoff. The probability is nearly 100% that the new EMS uses different part numbers than your OEM house and the supplier, so the cross-reference must be very clear. The material drives must be aligned. [Author's Note: MRP systems and contract manufacturers are much more sophisticated now than just a couple of years ago in the translation of material drive; but even if both locations are using common Enterprise Resource Planning (ERP) software such as SAP, slight variations in methodologies can still make the transition difficult. There must be a proven bridge between systems.]
• Make sure the IT systems are compatible. There can be a long setup time, but this has improved to about four weeks recently. As mentioned above, even the same base ERP software will have variations. As an example, if you receive an order at your end, will it be translated into production and distribution at the CMS? Again, there must be a bridge.
• As part of the transfer Plan, have a Qualification Plan, to make sure the new location is statistically as good as the old location.
Starting a New Product Development Cycle
• Have a Plan. All the above suggestions apply to new product development as well as transfers.
• Remember your Project Management basics: in most cases, there's nothing wrong with an early start. Bring your material suppliers into the discussions early. The sooner the Supply Solution Plan is laid out, the more accurately the schedule plan can be developed. As in transferring existing products, the potential for project management pain is greatest in the area of material supply.
• Many EMSs want to do turnkey contracts, from involvement in the design cycle (where they can save you money by advising on producibility) or actually doing the detailed design work, through the conventional manufacturing service, and including logistics and transportation for both incoming supplies and finished products. The best EMSs can handle everything—you might not ever own any inventory at any level. You take customer orders, although the EMS can do that for you too, and receive a check. Everything else can be handled by your contractor. Just consider how much control you want to maintain.
• If you're the design agent for the new product, allow your CMS to attend all the design reviews. Often they can contribute to savings by helping reduce parts count and thus the manufacturing expense (O'Brien, 2001, p. 152). Design with “producibility” in mind. This term grew from the rocket industry in the former Soviet Union. The Russians “handed off designs early in the process to the engineers who were actually going to build the stuff” (Martin, 2001, p. 193). With the advice of your CMS, design around existing processes as much as is practical. After all, one of the reasons for the success of contract manufacturing is digitization. Where OEMs used to have pride in their ability to manufacture complex products as an advantage against the competition, that's changed. Now “many of the electronic gadgets in our lives, from PDAs to inkjet printers to cell phones and digital cameras, share the same DNA connectors: circuit board, processor, some plastic, and sheet metal” (O'Brien, 2001, p. 151). Let your EMS do what they do best, through collaborative design.
Sustaining the Relationship
Chances are, once you have established a relationship with an EMS, they will want to continue it. As in the case of Flextronics, working with Microsoft to build the Xbox, your EMS may accept the significant risk of starting your first project with them, recognizing that it is the first of a generation of follow-ons. As Flex CEO Michael Marks says without hesitation, “Once we have a customer, we want all of their projects” (O'Brien, 2001, p. 151). A continuing relationship like this is no different from the old OEM principal of keeping the same product lines in their own factories; it's only a partnership between companies with different stock market symbols. In the OEM world, there would be a single bottom line added from the separate functions of creation, design, manufacturing, and distribution. In the new business model of Contract Services, the sum of the parts can be greater by utilizing specialized expertise.
Ensuring Project Success
As the Project Manager, how can you survive developing a new product while maintaining the inter-business relationship between your company, which is the intellectual property and brand owner, and your now-detached manufacturing and distribution arms? Here are some keywords to live by, based on bruises, both visible and invisible, from the author's experience. By now, this should sound familiar:
• Have a Plan. There's no substitute for a thoroughly detailed analysis of the activities needed to reach your goal. And the Master Plan must beget all the Sub-Plans and Specifications.
• Communicate. With your sponsor, with your stakeholders, and with your EMS. Early and often.
• Monitor. Everything. Trust nothing until you've heard it from independent sources. The best independent sources are the eyes, ears, and experts you have around you, that form your own team. Put your experts in the EMS building for the startup.
• Communicate. Collaborate with your EMS. The two of you are in this project together, for the same reason, and that's to make money for your companies.
• Design for success. Work toward producibility.
• Communicate. Remember the different time zones and cultural interfaces.
In some ways, managing a development project with a contract manufacturer is not much different than managing it internally. The major difference is simply an external partnership. CMS is everywhere: it's the growing wave for chemicals, pharmaceuticals, automobiles, and motorcycles, not just electronics. Knowing how to ride this wave will ensure the success of your development project.
Special thanks for his contributions to the lessons learned sections of this paper to Mr. David Netterstrom of Sony Ericsson. Dave managed Ericsson's first venture into contract manufacturing in 1999, transferring a labor-intensive mobile phone production operation to CMS Solectron in Mexico, to reduce the manufacturing cost and clear the Ericsson factory for automated assembly and test of another, new phone platform. His contributions are the result of an interview on March 15, 2002.
Dolan, Kerry A., and Meredith, Robyn. April 30, 2001. Ghost Cars, Ghost Brands. Forbes, pp. 106–112.
O'Brien, Jeffrey. November, 2001. The Making of the Xbox. Wired, pp. 142–153.
Martin, Richard. December, 2001. From Russia, With 1 Million Pounds of Thrust. Wired, pp. 190–193.
Kador, John. September 2001. Contract Manufacturing Grows Up. Electronic Business, pp. 54–66.
Proceedings of the Project Management Institute Annual Seminars & Symposium
October 3–10, 2002 · San Antonio, Texas, USA