Value Chain Embedded & Distributed Engineering

There is growing pressure on a company’s engineering function to address issues which span far and wide in value chain. Hence engineering needs to leave the confines of its dept. New legal regulations, sustainability related expectations, cut-throat competition require product and process re-engineering throughout the value chain. The optimal and sustainable way of doing so is to embed the business transactions of value chain partners with engineering and engage them in co-creation on continuous basis. And one can do so effectively by leveraging existing IT infrastructure, reinforcing it with latest information technologies and backing it with a governance model and performance measures. Lets examine in detail the challenges which engineering function faces and how to address them.

Challenge 1: Growing Expectations from Engineering Dept.

Earlier companies were more Engineering-driven. The engineering dept. alone used to decide on new product and process changes. As the business world became more competitive, companies started becoming more Market-driven. As a result, today engineering depts. have become more tuned to customer and other stakeholders’ needs and incorporate their feedback in both product and process design. However, still both product and process engineering are confined to respective departments and a company’s lab is the epicenter of all engineering activities. 

The arrangement has served well in developing in-house R&D expertise to outpace the competition. However, going forward, this arrangement is not sufficient to impart competitive edge in increasingly fast-paced and interconnected business world. The demands being put on engineering dept. have literally exploded in recent times. The list below, though not exhaustive, is a good indicator of huge expectations that product and process engineering will have to meet in future.

Meet customers’ and compliance requirements

- Meet customers’ both explicit and implicit needs

- Compliant with legal standards (Conflict Minerals, RoHS, REACH etc.)

- Compliant with various product labeling requirements

Reduce product development, production cost & distribution cost

- Design for Manufacturability

- Design for Maintainability

- Optimized packaging with high cube utilization  

Faster Time to market

- Reduce physical prototype iterations

- Share knowledge and enable design reuse

- Concurrent engineering and virtual validation

Technology Leader

- Stay ahead in product technology curve

- Stay ahead in process technology curve

Sustainability

- Safe and environment friendly during customer use. Low carbon footprint during usage.

- Safe and low carbon footprint during production (starting from a Tier 3/4 supplier)

- Easy to dispose/recycle with low carbon footprint

- Design for Environment (Using Bio-mimicry, Green Chemistry, Closed Loop Manufacturing etc.)

- Support corporate ‘Green’ or ‘Ethical’ Branding with right product and process design

Reduce enterprise risks

- Mitigates supply chain risks and insulate from supply chain disruptions

- Mitigates legal risks associated with production and product failure

- Avoid risks to reputation stemming from actions/practices of supply chain partners

Challenge 2: Increasing Dependency on Value Chain Partners

The value chain of a company today constitutes of a complex web of interdependent relationships with external agencies.

• The corporate strategies adopted by companies in present times are focused on developing core competencies, the side-effect of which is heavy reliance on other value chain partners for other business functions. 
• Suppliers not only produce parts but also do the research and development work for the same. 
• ‘Extended Producer Responsibility’ (OECD, 2006) principle has stretched the responsibility of a producer and calls for greater collaboration with value chain partners. 
• Regulations like ‘Conflict Minerals’ (SEC, US, 2010) cannot be met by a company alone and would require the company to engage its downstream value chain partners.

Hence changes in both market and non-market environment are impacting the whole value chain and hence deserves a united response from all value chain partners.

The Way Forward: Paradigm Shift in Engineering Function

In such a scenario, meeting the growing expectations on engineering becomes far more challenging. The response warrants a paradigm change where engineering moves out of the confines of its departmental silo and seamlessly integrates into the value chain. For instance, engineering collaboration can be embedded in routine supplier interactions. Supplier metrics can be enhanced to reflect engineering related KPIs. 

As shown in the illustration above, engineering function is plugged into all value chain interactions from supplier to customer. By doing so, the whole value chain can be leveraged for a superior product and process design to respond effectively to changes in external environment. 

Illustrative Impact Areas/Examples

• A good example is ‘Food safety’ related legislation (FDA, US, 2011) which impacts product and processes at every step of journey from farm to fork. The responsibility of compliance lies with leading food companies who in turn need to engage their value chain partners to redesign processes to ensure safer food and traceability.
• Another example is the dynamic Hi-tech industry which is divided into specialized players. A Fabless firm to remain competitive has to sync its engineering activities with the developments in manufacturing processes. A firm can do that on continuous and sustainable basis only if it has strong engineering channels with Foundry suppliers along with routine transactional interactions.
• A logistics provider can help with their experience on efficient packaging design, labeling, use of right packaging material to comply with regulations on ‘Toxics in Packaging’ (Northeast Recycling Council (NERC), 2009) and similar others.
• Involving customers during design and development can benefit engineering focused companies like medical diagnostics equipment, industrial machine tools and others. For instance, production personnel in a factory that has been using a machine tool for 5 years knows more about that machine’s behavior compared to the manufacturer himself. Why not engage the customer’s production team to be part of machine tool design? 
• Embedding engineering channels in value chain drives innovation both ways. The channels can bring innovative insights and ideas from value chain partners. The same channels can be used to drive product and process innovation throughout the value chain. This makes a company more demand-driven rather than engineering-driven.
• Established communication channels with customers provide opportunity for Demand Shaping. For instance, internet retail companies leverage their customer touch-points to influence product choice and shape demand. 

Implementation: Leveraging Existing Infrastructure & Cloud

After going through the merits, the next obvious question is how one makes it work. One necessarily need not build entirely new infrastructure for the purpose. Existing infrastructure can be enhanced or cloud computing can be leveraged to integrate a specialized function like engineering with usual transactional interactions in value chain. 

To illustrate with an example:

A company has an intranet portal for its suppliers to log in. The functionality of the portal can range from providing order information to monitoring supplier performance metrics or even CPFR (Collaborative Planning, Forecasting and Replenishment). 

The same platform can have an extra portal for engineering where a supplier can be provided with relevant engineering master data. In addition, the portal allows sharing of relevant drawings, engineering software tools (using SaaS model), comments, reports, templates, best practices etc. The extra portal would not cost much but allow engineering collaboration with suppliers on wide range of areas like Value Engineering, Design for Environment, legal compliance etc. 

A governance model with proper security and permissions would ensure that the supplier access is controlled and company’s confidential information does not leak through the supplier. 

Existing supplier performance metrics can be appended to reflect product and process engineering performance. Some examples of performance metrics could be ‘# of Design Suggestions Received’, ‘% of Suggestions Implemented’, ‘Component Cost Reduction’, ‘Sustainability Action Points completed’, ‘Legal Compliance Status’ etc. 

Similar to above, engineering function can tap into other value chain interactions with logistic providers, dealers, customers, experts etc. For instance, engineering interactions can be embedded in warranty process, spare parts ordering process, reverse supply chain and customer service process to improve component and product design. The overall benefits could be traced to enterprise level performance measures like ‘Time to Market’, ‘Product Success Rate’, ‘Product Cost’ and others.

Following are key pieces that need to be put together for effective implementation:

• IT: Information Technologies are now capable of providing a common platform for business transactions as well as sharing design data and collaborating on it. Cloud based computing further enhances cross-functional and service based interactions by:
• Giving access to design & engineering software tools using SaaS (Software as a Service) & IaaS (Infrastructure as a Service) to the value chain partners who cannot afford the high hardware infrastructure and license costs. 
• Moving the product development process and workflows to cloud and hence making the geographical and organizational boundaries irrelevant between a company and its partners.
• Governance: A governance model ensures controlled access and distribution of content.
• KPIs: Metrics monitor the system performance and ensure that desired value is being derived. 

Closing Remark

The demands on engineering function are only going to increase and span far and wide in value chain. Optimal way of dealing with it is to engage with value chain partners in co-creation along with business transactions. And one can do so effectively by leveraging existing IT infrastructure, reinforcing it with latest information technologies and backing it with a governance model and a set of performance measures.

Partnership Development: A Cornerstone for Business Strategy & Excellence

Last year, in one of my blog post http://frontiers2explore.blogspot.com/2010/06/competing-networks-holistic-approach-to.html, I emphasized that companies do not compete alone, their networks compete with other networks. In my other blogpost http://frontiers2explore.blogspot.com/2011/01/collaboration-new-wave-of-business.html, I dwelled upon various areas of collaboration including external collaboration. Both posts indicate that ability of a company to develop and manage partnerships is important to sustain a competitive advantage. In this post, various business scenarios that warrant partnership development are discussed which emphasize the direct linkage between 'partnership development' and 'business strategy & excellence'.  

Business Ecosystem: The concept of business ecosystem is two decades old but its relevance has been only growing with time. Today its adoption has gone beyond high-tech community. Any company irrespective of the industry is a part of a larger business ecosystem. 

For instance, the business ecosystem for a company making energy saving building materials will include green building design, building automation, life safety system, utility services, fire safety systems, hybrid energy systems, HVAC, lighting systems and other providers. All of these providers share something in common and i.e. 'Green Buildings'. Collective success of them will expand the market of 'Green Buildings' and hence the market for each provider.

Agri-business is another good case to understand business ecosystem. Agri-ecosystem consists of input providers like seed, farm equipments, fertlisers, pesticides etc, food processors, retailers, farmers and customers. Also the ecosystem includes advisory providers, regulators, logistics providers and others. Now consider a seed company. What can the company do to increase its sales more than its competitor when there is not much scope of product differentiation in seed business. The conventional business approach would focus on sales and marketing. But some companies have gone a step further to take a stake in success of their customer 'the farmer'. The success of the farmer benefits the company in two ways: First, it increases farm productivity and hence increases the demand of the seeds. Second, it builds the market reputation of the seed provider. But the success of the farmer depends on various other factors apart from seeds like, nutrient management, weed and pest management, irrigation, market prices he gets for his produce etc. Hence, the seed provider needs to engage the players in agri-ecosystem. Some seed companies are beginning to do so.

Business ecosystems are dynamic and new ones emerge over time. For instance, rise of mega cities and urban congestion is creating an Urban Mobility ecosystem comprising of transport providers, automotive OEMs, payment gateways, insurance, utility providers, location based service providers and others. Automotive dealers and OEM need to be cognizant of this development and ensure that they can sell their vehicles in this ecosystem. Some automotive OEMs are taking lead in creating such ecosystems and positioning their vehicles for on-demand use.

The be successful, one needs to identify the relevant ecosystem, partner with its constituents and then sell to the ecosystem. Doing so no only grows the whole pie but also increase your share in the pie.

Knowledge Intensive R&D: In knowledge intensive industries like Pharma, high-tech, software industries, R&D generates intellectual property (IP). IP becomes a source of competitive advantage and companies file patents to protect them. At the same time, companies have to take care not to infringe on others' IP because patent litigation can be very expensive and risky. Product development not only requires working with in-house IP but also that of competitors. Competitors can also act as Complementors. Hence it makes sense to partner with your competitors for mutual gain. Companies sign non-exclusive cross-license agreement where parties get 'freedom to operate' in each other's IP. 

Product complexity is increasing and products now combine the best of research in different fields. A company cannot expect to specialize in every field. Hence a company needs to co-create with companies specializing in other fields. One can see such partnerships in high-tech industry where a fabless manufacturer has to collaborate with manufacturers, EDA vendors and IP providers in product development phase.

Shifts in Value Chains: Roles of players in an industry's value chain change over time. For instance, one would normally see companies moving up the value chain. OEMs taking up a system integrator role and offering solutions rather than products. 1st Tier Suppliers increasing their participation in product development and assembling modules for final product. Consolidation may happen among upstream commodity suppliers to achieve economies of scale and increase their supplier power. New players like remanufacturers, recyclers, 3rd party logistics may gain importance in value chain. 

A company which focuses on its core competence needs to develop strong relations with other value chain players to adapt to changing business environment. For instance, an Automotive OEM will keep its core-competence in Power Train technology in-house and outsource other design works to capable suppliers. This would free up the resources for OEM to concentrate on next-gen technologies like electric cars, hybrids, mobility solutions etc. With growing pressure on environmental friendly handling of reverse supply chain, an OEM, rather than building the capabilities in-house, can partner with a reverse logistics provider. 

Industry Standards: Acceptance of an industry standard is always preceded by competing standards.  Betamax vs VHS and Blueray vs HD are typical examples of competing standards in past. The key success factor to win an industry standard war is the supporting network of companies from different stakeholder groups. For instance, to develop industry standard for infotainment, several OEMs, hardware and software services providers have come together to form GENIVI alliance. Currently we are seeing the standard war in 3D between LG & Samsung and strengths of their respective networks will decide the winner.

Sustainability for survival: Several companies have discovered that sweet spot where sustainability serves their business needs and hence enter mutually beneficial partnerships with communities/NGOs/Government/Companies. For instance, Microsoft is partnering with community colleges to improve education standards and hence also address its business need of skilled manpower. Starbucks partners with CI (Conservation International) to reach out to coffee growers who are important to their business. 

Above scenarios prove that partnerships is emerging as key strategic asset to stay ahead and respond to the dynamic and evolving business environment. Today ability to develop and sustain partnerships is a competitive capability but tomorrow it would become another survival skill.