Involve Buyers!
More OEMs are realizing that if they want to reduce cost of their products they should involve purchasing in new product development to prevent cost from ever being designed in.
By Jim Carbone -- Purchasing, 3/21/2002 2:00:00 AM
It's no secret that electronics OEMs are increasingly turning to purchasing to reduce cost. After all about 60-70% of a typical electronics company's revenue is spent with the production suppliers that purchasing manages.
However it's also estimated that 70% of the cost of a new product is locked in at design. For purchasing to have a true impact on cost, buyers need to be involved from the beginning of new product introduction not after a product ramps up.
Many OEMs realize this and are including their purchasing or supplier management organizations at the concept stage. A growing number of companies have degreed engineers who report to purchasing. These engineers have an in-depth understanding of the technology, and influence component and supplier selection during design.
Companies that involve purchasing in design seem to have similar results. They use standard, readily available low-cost parts rather than costly custom components. They also more frequently re-use parts that are designed into other products that the OEM makes. And the number of suppliers is reduced as business is awarded to suppliers already qualified and on the company's preferred supplier list. All of this reduces cost and boosts profit margins.
One company that is a big believer in involving purchasing in new product development is IBM. Big Blue has about 700 purchasing engineers (PEs) throughout the company. The PEs work with new product development teams and help develop future technical specifications for components and products that will be used not only by IBM but the entire computer industry. One of their most important jobs is to work on technology convergence issues between IBM and its suppliers, according to Mike Polcari, vice president of procurement engineering.
"My team is looking at what the technology needs are for systems as they come along and what the capabilities are of the supplier base," he says. "We work with IBM designers and suppliers and try to bring them together to come up with the right technology at the right time."
When technology converges
Polcari says one way that purchasing engineers work on convergence issues for next generation products is through technology forums.
"We host technical forums where we bring in suppliers and development teams and we will have technical days of presentations from suppliers," he says. "We discuss where our products are going technologically and what suppliers see as key features of their commodities. Sometimes we even bring in other OEMs to look at an issue such as where server architecture is going," says Polcari.
By determining where the technology of end products and components are heading, IBM can influence the technical specifications of products it will need for its computers.
In fact procurement engineers work with standards organizations to influence industry-wide specifications. "We want to make sure that some of the standards, the technical features that are important to us, get incorporated in the products. We will work with the supplier base as well as with the rest of the industry to ensure that some of the things that we need get incorporated into commodity products," says Polcari.
He says that IBM's procurement engineers work with the JEDEC (Joint Electron Device Engineering Council) Solid State Technology Association committee to help set the standards. One example is double data rate (DDR), which is now the dominant DRAM architecture.
Several years ago, there was a question which architecture, DDR or Rambus, would be used with new faster Pentium 4 processors in computer systems. "We were one of the earliest and heaviest proponents of DDR because the features of that memory architecture were what our servers needed," says Polcari. "We worked with the supplier base as well as the rest of the industry to make it a standard."
Besides working on leading-edge technology, purchasing engineers also get involved in design issues relating to supply of components. Example: tantalum capacitors. Two years ago tantalum capacitors were in short supply because of a shortage of tantalum powder. OEMs and contract manufacturers scrambled to find tantalum capacitors and often and had to pay hefty prices.
To avoid future problems with tantalum capacitors, purchasing engineers worked with development teams to steer them away from using tantalum capacitors. Instead, ceramic, electrolytic and aluminum capacitors were designed in when appropriate. Availability of those parts is less volatile than tantalum caps. Now there are fewer tantalums designed into IBM products.
Check the shelf first
Procurement engineers also work with development teams to use standard parts whenever possible.
"In certain instances proprietary technology in design is the right thing to do. But where there is no advantage, we spend a great deal of time trying to help the development team decide not to use unique parts from a certain supplier and use more industry standard ones if there is equivalent performance," says Polcari. "Designers are always trying to reduce the cost of a system as much as possible and keep the technological edge that they have. They seek us out to help us with those things."
PEs are also involved with design reviews with new product development teams and suppliers. "For instance we will look at the design of a power supply to ensure that the technology is correct and the quality is going to be there as well. If there are cost benefits by simplifying the circuits, we'll suggest that," he says.
IBM isn't the only OEM that involves purchasing in design.
"Sun has always been a team-based culture so purchasing has always played a role on new product teams," says Steve Burman, director of supplier engineering for Sun Microsystems. However, the role has become more important in recent years. "Over the past six years we have done more leveraging and partnering with the supply base so the role of anyone in supply management has become much more key in product development."
Purchasing plays a major role in what Sun calls design for star (*). "It's not just design for manufacturing. It's design for wildcard and all the parameters need to be included," says Burman. "Cost is one of the stars and purchasing gets involved to make sure we minimize the number of components, component complexity and use off-the-shelf components as much as possible."
"Sun doesn't always have the opportunity to use as many standard components based on our architecture, so purchasing's role is even more important and we need to optimize as best we can," he says. Purchasing identifies the opportunities to use standard parts during design. Buyers monitor component count, part complexity issues and steer designers to previously approved suppliers.
Designing purchasers
While Sun may have involved purchasers in product development for years, Lucent Technologies has just gotten started, but appears to be involving purchasing in a big way. Lucent has about 800 people in its supply-chain network organization that are involved in design.
"I don't call them purchasing engineers," says Jose Mejia, president of Lucent's supply chain network organization. "They are supply chain product engineers. I want them to feel as if they are a product engineer and product manager with a supply chain hat. They are engaged in all the key deliverables through the lifecycle of the products."
Mejia says the 800 work in the product engineering, planning and supply management group within his organization.
"The scope of the group goes from engineering product management and the whole issue of life cycle management," he says.
Mejia says the group does more than just steer designers to preferred suppliers. "They are the key group that leads efforts on design for manufacturability, design for cost and design for volume and quality," says Mejia.
"The group needs to know who are the customers, what regions they are in, what will the market bear in terms of pricing. What is the level of customization that will be allowed on the basis of the technology as well as the marketplace. They also develop the supply chain readiness plan as well as risk mitigation plans," he says.
This group is responsible for product cost and target costs. They determine "if we have the right target cost by customer and by region and if we understand how the pressures on the target cost will change over time."
The group will also look at what improvements have been made in the design of the supply chain as well as the product. "For instance when a new product is released the group will measure what is the percentage of reuse of suppliers and what is the percentage of weight or space that has been taken out of this type of product family," says Mejia.
They also set targets for using strategic suppliers on new products and review the level of customization and the level of standard parts in the bills of materials.
He says the group controls the creation of part numbers, bills of materials, creation of target costs and whether a new product is allowed to go from one gate to the next in the new product development process. Lucent has five gates for product development. For instance if a design team doesn't have supply chain readiness plans and target costing plans for a new product, the product doesn't go into production.
What a concept
One member of Lucent's product engineering planning and supply management group is Paul Toomey, who is director of life cycle management at a Lucent new product development facility in Westford, Mass. "We get involved at the concept phase of a product where we work with product development teams and help consider the supply chain related implications," he says.
Toomey is involved with data networking products. Supply chains for those products include manufacturers of power supplies, circuit cards, chassis, backplanes and electromechanical devices.
Often designers of data networking products will want to use a supplier who is not one of Lucent's preferred suppliers.
"Often it is a geographical preference," says Toomey. "The design team wants to be able to prototype with local suppliers where they can interact quickly and easily.
For instance, the development team may want to use a local metal fab manufacturer in Westford because of its close proximity. "But we may plan on making the product in Panang and Dublin and that company doesn't have locations in those areas. Lucent wants the global volume supplier of a given part or assembly to do the prototyping because Lucent wants suppliers to have as much experience with the product as possible. Toomey's job is to steer the development team to global suppliers.
In fact, as part of designing the supply chain, Toomey's group identifies which global suppliers in which locations are the best for a new product.
"We will look at labor costs for products manufactured in Panang vs. Dublin comparing tax incentives in Dublin to incentives in Panang," says Toomey. "We try to figure out which scenarios make the best sense and will allow us to meet the gross margin target that we set for the product. Labor costs, tax incentives and location of suppliers and supplier capabilities in a particular region as well as location of customers are factored into the decision.
Besides determining the best location for a product to be made, during the development stage Toomey's group also develops test equipment with supply chain partners, buys prototype materials and involves Lucent's electronics manufacturing service (EMS) providers.
"We qualify the process and the supply chain to make sure it can perform to the level we will need in terms of cycle time, yields and quality, delivery, cost and so on."
Results, please
Mejia says that although the group is only about a year old, it has contributed significantly to Lucent's efforts to reduce inventory, improve profit margin and to get new product to market quicker. While Lucent has struggled over the past two years as the economy soured and de-mand for networking and communications equipment dropped off, Mejia believes that having heavy purchasing involvement in new product development will result in a more competitive, more profitable Lucent when demand for equipment picks up again.
He says there already have been short-term results.
"Our company went from margins of single digits last year to 14% last quarter (Q4 2001). This quarter we will be in the 20s. Our target is to be in the 30s. If you ask anyone at Lucent who is responsible for product cost, they will say supply chain network and it's the product engineering, planning and supply management group that is driving the cost," says Mejia.
The work of the group is also having an impact on other financial results, according to Mejia. "Our inventories went from $8 billion to $2.7 billion in nine months, he says. In addition Lucent has reduced its number of suppliers drastically It now has about 70 preferred suppliers who get about 89% of Lucent's business. Three years ago there were about 2,000 suppliers who received that percentage of Lucent's business.
One way inventory has been reduced is through a supply chain readiness plan that must be in place before a product goes to market.
"We look at every new product and at the material planning and logistics. We develop a plan around management of the inventory for the product," says Mejia.
For instance if a new product is to be released in the first quarter, it may be determined that Lucent needs $50 million in inventory by Jan. 31 to support the new product. "We would say do we really need the $50 million of liability? Can we do something to change leadtimes with suppliers? Can we assure ourselves that before Jan. 31 we have won enough contracts that it isn't really a liability because we know we are going to use it even if the product has not been government approved."
Mejia says that perhaps the most important aspect of having early purchasing involvement in design is that it allows Lucent to get to market with products faster than its competition.
He says a recent example is its development of third generation (3G) mobile network infrastructure products which Verizon Wireless recently purchased for the launch of the first ever 3G network in California and several other states. The 3G network enables new high-speed data services such as audio streaming, email and Internet access at speeds up to 144 kilobits per second.
"Ask any of my competitors if their customers are using 3G technology out there and they will say they are all behind," says Mejia.
He says supply chain networks involvement in design has also helped Lucent come out with new optical products ahead of its competition.
One that has been announced is LambdaUnited, an optical transport system and switch that allows broadband services to be deployed.
"We got it out in less than a year although everyone was saying it would taken another year or so. He says Lucent develop both products with early purchasing involvement.
Besides Lucent, other OEMs also report positive results when they involve purchasing in new product development efforts.
Motorola Personal Communications Sector saved about $1.3 billion in a year in material costs after it began several supply chain initiatives that included early purchasing involvement in design.
Theresa Metty, director of Motorola's global supply chain organization, attributes the savings to a variety of purchasing initiatives in design including re-use of components where possible. Re-use means designing in the same components that were used in previous products, rather than designing in new components. Purchasing also steers design engineers to more standard parts and to suppliers on Motorola's preferred supplier list.
The initiatives enabled Motorola to concentrate more business with fewer suppliers and obtain better prices. It resulted in Motorola cutting its number of suppliers from about 300 to 100.
Siemens Medical Solutions cut its number of suppliers in half to 2,500 and cut materials costs by 25% over three years by implementing a purchasing strategy that involved use of purchasing engineers in new product development.
Siemens says it has been able to measure the results of its strategic purchasing. Each new product development team includes a product-oriented purchasing engineer ( POPE ), says Ernie Miller, director strategic purchasing management.
The POPES job is to set target costs for each new product and drive the achievement of those targets. The POPE is also responsible for bringing in the appropriate suppliers during design and to make sure sourcing strategies of Siemens's strategic purchasing organization are implemented in the new product, says Miller.
While OEMs have been active in bringing purchasing into design so have contract manufacturers as OEMs entrust their manufacturing partners with more responsibility including design.
Steve Martson, senior vice president and chief procurement officer of Flextronics, says Flextronics is involved in design in several ways. Flextronics has strategic supply chain managers dedicated to individual customers. The SSCM frequently has an engineering background. With some customers the SSCM is located at the customer's site.
Flextronics also has purchasing engineers. "If we identify a source that the customer may not be doing business with, the purchasing engineer helps the customer evaluate the capabilities of the supplier," he says.
Now Playing: 