For several years debate has raged in product development over the benefits vs. drawbacks of outsourcing and/or offshoring. This article from the archives of Engineering Automation Report is as current today as when it was written in 2007. There are no easy answers.
By Randall S. Newton
[Editor’s Note: The article was originally published in Engineering automation Report in March 2007, but the subject matter is current. A few details have been brought up-to-date. Jon Peddie Research acquired the archives of Engineering Automation Report in 2010. For an update on the research of Steven Eppinger, see the GraphicSpeak article, “The Outsourcing Trap: Eppinger Takes a Second Look at Global Product Development.”]
The CEO of a Iowa-based manufacturing firm called in his CAD/PLM reseller for a chat—and a challenge. “We’re a $50 million company and we have one competitor,” the executive says. “We are sure that in five years only one of us will survive.” The CEO wanted to know how EAC Design, PTC’s most successful North American reseller, could help.
The scene from Iowa is being played out in manufacturing firms of all sizes, in all regions. Globalization is no longer a topic of debate, but an entrenched part of the competitive landscape. “We see outsourcing of engineering taking place in the smallest firms,” says EAC Design CEO Thane Hathawayn. “Everybody feels they have to do it all and do it better.”
Hathawayn was one of several speakers drawn from universities, PTC resellers, and PTC customers who gathered at PTC headquarters in January, 2007 for a conference on “Product Development Strategies for Small and Medium Businesses.” From their separate viewpoints, all agreed that no company is too small to take advantage of globalization, but it isn’t easy.
The Four Enablers of Global Product Development
Engineering is quickly becoming the realm of “globally connected individuals and teams,” says Steven Eppinger, a professor at the MIT Sloan School of Management. For several years he has been studying the emergence of what he calls global product development (GPD). Fully realized, GPD has four enablers:
- Fully digital product development
- Ubiquitous Internet connectivity
- Global skilled labor market
- International collaboration experience
Firms who succeed at operating on a global level must have all four enablers in place, Eppinger says. Firms that try to spread their work globally but lack in one or more areas will have to retrench or establish a partnership with another firm that can fill the gap.
The motivations for engaging in Global Product Development vary, Eppinger says. Some firms see it as a matter of survival (“We have to cut costs”). Some see GPD as a path to growth. Others turn to GPD as a “lean” strategy, whereby the company can buy just-in-time skills, flexible processes and local expertise. Some see GPD as an agility issue, Eppinger says, although he thinks “24×7” engineering is “largely a myth” What is happening, Eppinger says, is that companies act as if they are running 24×7 through the use of intelligent sharing and coordination between offices.
Eppinger cited several firms who have successfully made the transition to global product development for either a new product or for the entire company’s production. He noted that globalization isn’t about finding a cheap place for manufacturing, but taking advantage of resources globally. In the case of Kodak and the development of its new line of digital cameras, it meant outsourcing much of the engineering and design work to two high-priced locations, Japan and Western Europe. “Labor in Japan is expensive, but that’s where the expertise was to be found.” So Kodak handled project management and marketing from its Rochester, New York headquarters, established a new Kodak Digital Products Center in Japan, but then outsourced much of the engineering from there to Germany and Switzerland, where there were experts in optics and electronics.
Another example of outsourcing for expertise and not cost comes from Korean manufacturing conglomerate Hyundai. For a new car, Hyundai retained vehicle engineering and component design in the home office, outsourced engineering calibration to Detroit, hired diesel engineering expertise from Germany, and sent vehicle styling and product testing to California.
Offshoring vs. Outsourcing = Location vs. Ownership
Eppinger makes a distinction between “offshoring” and “outsourcing.” Offshoring is about the location of the work; outsourcing is about the ownership of the work. You can offshore car body design, as Hyundai did, but still retain managerial control; to outsource the same work would be to say to a design team, “send us a new car design” without being involved in the process.
From his vantage point in Germany, cost is the one single issue driving global product development, says Prof. Dr.-Ing. Jörg Feldhusen, Dean of the Institute for Engineering Design at Rheinisch-Westfälische Technische Aachen Hochschule (RWTH Aachen University) in Germany. SMB’s must adjust to globalization, he says, because of the variety of pressures that make it cost-prohibitive to do business as usual. But globalization doesn’t have to be a one-way street, Feldhusen added. The ability to work and compete globally means there are opportunities to be found by entering new markets.
Feldhusen is worried that SMBs do not have the technical resources they need to succeed on the global stage. Knowledge management is “completely missing” at the beginning of the design process in most small manufacturing firms. “The focus on product life cycle must start with the idea,” The idea process must be modeled from the very first sketches, Feldhusen says, as well as the functional definitions associated with the initial design. “This data is not being built up,” in most small firms. Ontology would be better than nothing, but Feldhusen noted that “engineers think in pictures.” There must be “continuous data flow from first idea to the recycling of the final product,” and it must include the visual as well as the tabular.
Engineering departments in German universities are more closely tied to industry than in the US. Feldhusen says that 80% of his department’s research budget comes directly from industry. He is currently involved in a project to bring product data management (PDM) resources to small and medium sized manufacturers. The university has a countrywide license for PTC Windchill that it makes available for a period of time to small manufacturers, who pay for the service. The university supplies templates and training. When asked about the role of German enterprise resource planning (ERP) software vendor SAP, Feldhusen says he prefers to not deal with SAP. They have a need for “the very small details—we don’t have half the knowledge they expect.” Beyond that is the issue of technical control; which system takes the lead, PDM or ERP? He also prefers to deal with PTC’s Windchill because it is an Internet-based service, which means the data hosting and back-office functions are not an issue for the small firms with whom he consults. “Big software is an issue,” Feldhusen says. “We help them out by starting with what they can handle.”
Skype as a PDM tool
Firms on the cutting edge of global product development often find themselves ahead of the software vendors, says Ken Haven, chief executive officer, Acorn Product Development. The company has 40 employees and 30 seats of what was formerly known as Pro/Engineer and Windchill PDMLink. “Collaboration is really important to us,” Haven noted. “It is easy to find Pro/Engineer contractors.”
Acorn does design work for leading technology manufacturers including Apple, Sony, and Logitech. One time Logitech hired Acorn to develop an accessory for a Sony product that had not yet been announced. Acorn was “using spy data” to work from and doing the design work in offices in California and Massachusetts, while sending data to China for manufacturing.
Haven noted that his company relies on Skype, the free voice and instant messaging client recently acquired by Microsoft, for daily communications between their US and Chinese offices. “Video conferencing is expensive; Skype is free and good enough.” Haven says it would be “of some value” to be able to attach Skype data (voice, video conferencing, and instant messaging) to the PDM stream.
All the speakers at the PTC event conceded that most SMB manufacturing firms are just getting started in global product development, and that it is at once essential and not enough. As MIT’s Eppinger noted, you can’t keep cutting costs forever. “GPD is for many a new set of tools and processes. There will have to be other forms of innovation in the future.”