Electronics Production | March 09, 2009
Outsourcing of product development in recession
Is it possible to find quick savings by outsourcing product development? Nicolette Lakemond, doctor for outsourcing and product development at Linköping University was interviewed to take a view on the subject matter.
While in recession all costs of businesses are questioned, including those for product development. Development plans are reviewed and projects are placed on hold or are abandoned, which often leads to a waste of resources and non-renewal as a result. But cost reduction has no immediate effect on corporate profitability. This is, because a large proportion of costs are fixed costs for offices, laboratories and staff. When cuts are made – the reduction of these costs are related to staff dismissal and the termination of leasing contracts – with a timeframe of between 6 months to about three years. In the worst case, this can coincide with the period when the economic cycle has already turned. A rough rule of thumb is that approximately 50% of the total R&D budget is related to expenditure in development projects that provide direct saving effects. But you will often find penalty clauses that provide for fines when deliveries to suppliers and customers stop. This reduces the impact of the cost cuts – with what in financial statements is called one-off costs. Here you can read that companies seem to be happy if they reach a net 25% of the total reduction potential during the first year. Are there alternatives? Is there no alternative to closure and cuts? An interesting alternative could be the outsourcing of product development. To get perspective on this, Jonas Hjelm, product strategist at Oxyma Innovation, talked to Nicolette Lakemond at Linköping University. Ms Lakemond has a doctorate in outsourcing of product development in Industrial Organization. She believes that there are several reasons which motivate the outsourcing of product development and cost reduction is only one of those. As it only has a limited effect – only under certain circumstances - means that you cannot take it as a short term miracle cure. It is difficult to generalize, but if companies are looking for cost reduction, the highest ratio of outsourcing is with more standardized products and peripherals, and through stronger cooperation with component suppliers. An important reason for outsourcing of product development is an increased innovation. The driving force is that businesses need access to knowledge from component suppliers, research institutions or specialist consultants. Ms Lakemond emphasizes that it is important to be aware of the differences in the driving forces and the need to manage them differently. The degree of integration is important You cannot say that the conditions for outsourcing differ between different stages of product development or in the different phases of the product life cycle. Ms Lakemond says that it is a matter of product complexity and if there are clear modular interfaces that can part-supply under the product development time. “A technically complex product is often knowledge-intensive, which gives a coordination complexity, which in turn creates a favourable environment for communication problems and delays in development”, says Ms Lakemond. This gives of course no productivity gains. But in cases where you work is the development of complex components – which have a high level of integration in the final product - supplier will link closely with the client. Here are different degrees of organisational integration and Ms Lakemond says that you can vie it as a grey-scale – going from "black box" through "grey box" to "white box". Where you have the lowest level of integration - black box is a customer-supplier relationship, where the purchasing department is the customer. Grey box represents different degrees of common interest between the development departments of the supplier and customer. An interest in the outcome of product development is good. White box means that the supplier only has an informal involvement and consults on certain issues. The ‘grey box’ system is the most difficult to manage. The reason of this is obviously the diversity of integration and cooperation, but also to the emergence of many coordination costs, which are not anticipated and which threaten the development cooperation. Formal or personal relationship Regarding the question of how a long-term relationship between suppliers and customers for product development can be best ensured, Ms Kalemond answers: “Sure, there must be an agreement and a LoI (Letter of Intent), but the personal relationships are much more important.” But for this to work, you must have a sound commercial basis. That is to say that both parties actually make money. Ms Lakemond states that open books gives a slightly positive effect, but that just tends to proof that the buyer is stronger than the supplier. Productivity may increase The total productivity may increase in outsourcing because of cross-functionality and diversity increases. This in turn improves the prospects for new ideas and solutions. Here Ms Lakemond emphasizes that it is very important to have a common goal and some similarities in approach between client and supplier. She warns however, that in some projects clients have difficulties with the transparency and it is difficult for them to continue. In the worst case, the consultancy part develops its own live and follows its own goals, which in turn reduces productivity. This is a dilemma and it is partly built into the consultant’s role and differs in part from the component supplier's incentives to streamline its product development – which more closely conform to the client’s. Unfortunately, there is a tendency to ‘milk’ the contract by pulling out on them. Consultancies have to become better and develop a clearer common target with the client. Ms Lakemond ends by saying that the outsourcing of product development may not go too far, because the client must have the resources and skills to integrate the supplied. For the relationship between client and supplier to work, it requires an overlapping of competences. This provides better conditions – the client is competent enough to clearly articulate their needs and requirements. Outsourcing, no quick fix Outsourcing of product development must be a strategic decision and not be rash with poor analysis, because it can produce large negative consequences. For those companies that have low levels of outsourcing when cost saving becomes an issue – the outsourcing of product development is by no means a quick fix. But the companies that have followed a deliberate and long-term strategy in outsourcing of its products also have a much greater flexibility when they want to adjust through cutting costs. In recession, those companies are not fixed on structural costs and those so-called one-off costs are significantly lower. To minimize problems that may arise between the purchaser and the supplier of product development, the two sides need to formulate a common strategic objective. Author: Jonas Hjelm, product strategist Oxyma Innovation Image source: Davab
Keysight, FormFactor and CompoundTek to collaborate Keysight, FormFactor and CompoundTek, have formed a joint plan to provide an advanced photonics on-wafer testing solution to include automated alignment, simultaneous optical-optical and optical-electrical device tests.
Wireless Telecom buys Holzworth Instrumentation Wireless Telecom Group Inc. has signed a definitive agreement to acquire Holzworth Instrumentation Inc., a Boulder, Colorado-based provider of specialty phase noise analyzers and signal generators.
NCAB Group acquires Altus-PCB in USA Altus-PCB is a full-service supplier of PCBs based in New Jersey, USA, that has a business model similar to NCAB’s. Tee US company has a high level of technical expertise and sells mainly to original equipment manufacturers (OEMs).
Mycronic's Thomas Stetter looks back at a successful year As the company is moving more and more towards becoming a full solutions provider, business is taking off and the numbers show very much confirms that the Mycronic's strategy is working.
IBL Löttechnik reviews 2019 IBL Löttechnik GmbH is staying on top of the market thanks to continues R&D investments.
Second install for EFI at Mid America Display Silicon Valley’s EFI will install a second EFI Nozomi C18000 single-pass inkjet, direct-to-board printer later this month to Mid America Display.
Ron Jakeman of Electrolube looks back at a successful 2019 Electrolube has been growing, both in terms of its footprint and financially, for a number of years not; Ron Jakeman details the company's progress.
Etteplan and Scanfil to start strategic cooperation in joint customer projects Engineering company Etteplan and contract manufacturer Scanfil have today agreed to enter a strategic partnership in Finland.
Sponsored content by SourcengineComponent Aggregators vs E-Commerce Marketplaces What is the difference between electronic component aggregators and a marketplace?
67% of a buyer’s journey is now done digitally. Learn how marketplaces emerged as full-cycle procurement platforms and challenged the traditional component aggregators.
The lovechild of ACE Production and InterSelect Carlos Bouras of Nordson Select gave us the rundown of the result of the integration and combination of ACE Production and InterSelect GmbH - the new Integra.
American Battery Metals, U.S. lawmakers convene American Battery Metals Corporation has completed a series of meetings with lawmakers and personnel in the Department of Energy and Department of the Interior in Washington, D.C., to discuss issues critical to the domestic battery production and storage industry.
Cogiscan, Critical Mfg. form strategic partnership Quebec, Canada-based Cogiscan and Critical Manufacturing, headquartered in Portugal, have forged a strategic partnership to deliver smart factory solutions for electronics manufacturers.
Collins Aerospace expanding in North Africa Collins Aerospace Systems, a unit of United Technologies Corp., has taken the first step toward the expansion of its existing site in Casablanca, Morocco.
Sponsored content by Nordson ASYMTEKStart-to-finish conformal coating with reliability and efficiency Nordson ASYMTEK’s flexible, modular, Panorama™ S-Line delivers conformal coating process control in a space-saving footprint with overlapping line processes that minimize manufacturing floor space. This innovative, patent-pending line layout trims 50% of the line’s length by using the lower compartment in each piece of equipment for functional use. Combined with Nordson ASYMTEK’s global support, this complete conformal coating line delivers quality, product reliability, efficiency, and safety for all your conformal coating applications.
The advantage of Vantage - Garrett Wong tells the tale Nordson Asymtek's Garrett Wong gives us a rundown of the business year and also details the Vantage Advantage
Saki’s Eddie Ichiyama details a very successful business year Eddie ichiyama from Saki gave us an update on how 2019 has been for the company and also shared some details on the recent expansion in the Czech Republic.
The ripple effect of Enrico Krog Iversen while being an active part in creating one of the fastest growing robotics companies in modern time might have been enough for most people, that does not seem to have slowed down a certain Danish entrepreneur.
Yamaha's Ichiro Arimoto on the business year and the company's new ventures Evertiq had the opportunity to talk to Ichiro Arimoto, General Manager of Yamaha Motor Europe, about the business year and the company's new ventures.
Sponsored content by EsemdaContract manufacturer Esemda opens new facility in Vilnius and expands EMS The new facility has been built with reserved space for future expansions. As Esemda constantly grows, it is of great importance to be able to rapidly increase production capacity in large volumes.
Mycronic, Indium forge strategic partnership Indium Corporation has announced a strategic partnership with Sweden-based Mycronic, to develop no-clean and water soluble solder pastes for jetting applications.
SCHMID delivers PlasmaLine to Hofstetter PCB SCHMID announced it has installed the company’s first PlasmaLine comprising ICP etch & sputter deposition of its Korean JV SCHMID AVACO at Hofstetter PCB AG in Switzerland.
Cobot market to reach USD 9+ billion by 2025 A new report from Tractica is forecasting continued rapid growth for the global collaborative robot (cobot) market over the next few years, reaching revenue of USD 9.7 billion by 2025.
MixComm scores USD 8+ million in series B round New Jersey-based fabless semiconductor company MixComm has secured USD 8.6 million in series B funding led by existing investor, Kairos Ventures.
Sponsored content by NCAB Group Benelux B.V.Failure is not an option for a PCB More than 30% of the Gerbers NCAB Group Benelux B.V. reviews, have problems. However, the PCB are integrated in key end-user product with more and more High Tech PCB. We are here to support you on the new technologies growth to maintain a high reliability and quality. Contact us to review it together.
SIA elects 2020 leadership The Semiconductor Industry Association (SIA) Board of Directors has elected ON Semiconductor CEO Keith Jackson as its 2020 Chair and Qorvo CEO Robert Bruggeworth as its 2020 Vice Chair.
Si wafer shipments recede for fourth straight quarter Worldwide silicon wafer area shipments slid for the fourth consecutive quarter of 2019, according to the SEMI Silicon Manufacturers Group (SMG) in its most recent quarterly analysis of the industry.
Decline in Q4 DRAM contract prices lessens as buying momentum recovers According to the latest analysis from the DRAMeXchange research division of TrendForce, Q4 DRAM ASP is as of yet undergoing a slight QoQ decline, but this decline has shrunk down to 5%.
Technica forms growth-focused equity fund San Jose-based Technica USA has reached an agreement on an equity investment centered on future growth for the global PCB fab and assembly supplier.Load more news