Emphasis On Managing Cost Soars

Design engineers are on the front lines as U.S. manufacturers strive for improved competitiveness and profitability through more efficient supply chain management.

• At Lucent Technologies engineering teams are involving key supplier partners in design at the concept stage and then creating platforms that can leverage common part use across the enterprise. That strategy began three years ago and is yielding measurable improvement in the company's gross operating margin.

• IBM's Integrated Product Design team recently moved into a new corporate "on-demand" supply chain organization that makes product development responsive to customer changes.

• Sikorsky Aircraft analyzed work activities for its engineering workforce, determined which was "core" to the company's business mission, then picked outsourced partners for less critical work through an electronic reverse auction.

Several major American corporations began supply chain transformations in the face of growing red ink (such as IBM and Lucent) and others (such as Procter & Gamble) because it became easier to find profits in cost management than through higher pricing. In Lucent's case, highly customized products made it nearly impossible to sell $7 billion worth of inventories when high-tech markets collapsed in 2000-2001. In IBM's case, huge product development costs made it noncompetitive in many businesses. In May, IBM completely exited the personal computer business, selling its remaining product lines to China-based Lenovo.

Product development that remains in the U.S. will be done very differently, with significant emphasis based on business targets and collaboration among functional groups. Lucent is a good case in point. On the brink of potential bankruptcy, Lucent reorganized in early 2001 and created a group called Supply Chain Network that managed engineering, R&D, distribution, logistics, and supply chain management. The company chucked out manufacturing plants and then established strategic supplier partnerships that led to almost 20 percent in year-to-year price savings.

Four years later, the program is spreading and expanding, says David J. Ayers, vice president of platforms and quality engineering at Lucent.

"We are 95 percent now at adhering to our sourcing strategy," Ayers told Design News. "What that really means is that when we pick a new component or technology, it's really aligned into our sourcing strategy. I think that's about the right percentage because new opportunities arise and they may be new to the sourcing strategy. There also may be a rationale to have uniqueness in some part of the product."

Previously, design teams in different business units, and even different factories, functioned without collaboration.

Tech Metrics at IBM Metric Improvement Development Expenses (as a percentage of revenue) 50% Hardware Development Time 67% Abandoned Project Expense >90% Warranty Expenses (as a percentage of revenue) 25% Part Reuse 63%

Centralization and collaboration yielded big cost improvements at IBM, which now reports key engineering-related supply chain metrics as part of its quarterly briefing with financial analysts.

Move toward fewer suppliers

Lucent, which includes the old Bell Labs unit of AT&T, also has dramatically reduced its number of suppliers as a result of the new strategy. Engineers now deal with fewer than 1,500, compared to about 3,000 at the inception of the program. The key suppliers are considered partners who become involved at the concept stage of project development. They receive confidential technical, and even commercial, information about the project. "We now have very strong design and supply agreements with our supplier partners on certain subsystems, such as power amplifiers, rather than design them ourselves," Ayers comments.

Measurable cost reduction is the important result of the effort. Ayers estimates that engineers at Lucent helped drive eight points of improvement in gross operating margin in 2004.

IBM also had a tradition of engineering teams operating independently with little or no collaboration with suppliers. At IBM, everything was secret. The results were calamitous. Development cost as a percentage of sales was above 10 percent versus best-in-class of about 5 percent. Red ink mushroomed. IBM developed an integrated product development process that also centralized the engineering decision-making starting with the earliest design phase. New development councils created the strategies for specific product groups, such as memory. The engineering development councils then met with functional groups ranging from purchasing to manufacturing to make sure they were all aligned to the strategy. As core design teams develop projects, bills of materials are checked for conformance with preferred parts lists. IBM also developed a gated stage review process with a tough assessment after the concept phase to make sure that projects were worth pursuing.

Measurable improvements resulting from the program include:

Product reuse. At the beginning phases of the program, only about 1-2 percent of the products were reused, probably more by accident than design. Today, about two-thirds conform to specifications set by the development councils. Exceptions are customizations.

Development expense. It's now running at about 5 percent of expenses to revenues, comparable to best in class.

Abandoned project expenses. Reduced by more than 90 percent.

"One of the reasons for poor execution before was that we were not market-driven," comments Jim Dickerson, director of integrated product development at IBM. "We were being driven by engineers who wanted to create the next big thing. In the old days, the engineer would be the project leader. Was he skilled in terms of project management skills? The answer was no. He or she was the technical expert."

IBM CEO Sam Palmisano centralized all of IBM's $39 billion supply chain functions, including engineering, into a centralized, fully integrated structure in 2002 that could respond "on demand" to market initiatives. One of the impacts of the Integrated Supply Chain (ISC) is a better matching of supply planning with demand forecasting. Another is that Dickerson's IPD team moved into the guts of the supply chain organization. Dickerson says he is now applying the lessons learned on mechanical design to IBM's rapidly growing services business.

A recent Forrester report on the transformation stated: "ISC's intent to deliver end-to-end solutions opened a supply chain Pandora's box—given the billions of permutations possible across the dozens of products and brands in IBM's hardware, systems, and services units. That's why ISC is deploying consistent cross-brand processes that give IBM's sales force up-to-date visibility into skills and resource availability across all IBM units—a prerequisite for matching solutions supply and demand."

Multiple examples of the new role of engineering within American corporations could be made. The role of auctions in the outsourcing process at Sikorsky Aircraft can be found in the archives at http://rbi.ims.ca/4392-522.

There are pros and cons about the development. Some would say it makes products produced by U.S. companies less innovative, less distinctive. However for now, at least, the drive to improve competitiveness and profitability will be front and center.