28 Mar 2023 WHEN PRODUCT ENGINEERING BARS THE DOOR TO RE-SOURCING
When Product Engineering Doesn’t Fulfill Its Two Primary Roles and Instead Steps into Re-Sourcing, They Become a Significant Obstacle to Re-Sourcing of Manufacturing
Written By Jeffrey Cartwright, Shoreview Managing Partner | 8 min read
The Role of Product Development
Product development is a process that starts when a new product is developed, evolves as the product is changed and adjusted for maximum potential, and then levels off to day-to-day production. The Product Development cycle generally starts in marketing, then moves to a Product Engineering Group that creates the product and then, as part of that process, creates drawings and specifications for the product. Also, the Product Development process identifies the standard product cost, a function of quoting materials from the Bill of Materials, including all parts required to manufacture and assemble the product. It is typically the function of Operations (validated by Finance) to arrive at the Standard Cost of the product. Standard Gross Margins are then identified by the difference between the selling price and the Standard Cost of the Product.
Product Drift
Over time, products are changed in the manufacturing process. There are several reasons why this occurs, such as lowering cost by using a more efficient process or different materials. This drift from the original should be documented via the ECN (Engineering Change Notice) and it’s worth noting that, at Shoreview, we insist on this as part of the re-sourcing process. Much of the time in consumer products, there are differences in the original product and the product over time. Since the product being re-sourced is currently on the market, there are implied approvals by the consumer (who is not complaining), by the retailer (who is not rejecting the product), and by the importer (who has accepted the product into inventory). When those discrepancies are pointed out, invariably, the importer will choose to resolve the discrepancies by updating drawings and the Bill of Materials to reflect the current product.
In other aspects of business, it may be unheard of to have a third-party vendor “just” update changes without the knowledge or necessary approvals of the client. However, many importers have relied on Chinese factories to complete and continuously adjust the design process. The US importer becomes more reliant on the Chinese factory who is willing to accomplish those tasks. In extreme cases, over time, the Chinese factory takes over manufacturing all together and there is no true internal review department at the importer.
Of course, there’s always exceptions, and here the exception to this is industrial products, where the ECN process is more rigidly adhered to by the US importer from China and the Chinese factory. Unapproved changes are still being made, but the incoming inspections and adherence to specifications are more rigidly enforced and catch these changes as they’re made.
Performance Evaluations Are Based Upon Results (Numbers)
In manufacturing, there is a very simple rule for leadership and their measure of success; how one is measured determines how one performs. In looking at product changes, if they are approved as deviations either formally or simply by allowing them to happen, then those cost variances will be assigned to manufacturing or sourcing in the form of material usage variances or purchase price variances. Those deviations then appear on the financial statements as adverse numbers for manufacturing or sourcing. Suppose those product changes are formalized in the form of an ECN and standard product costs are updated, showing a decrease in gross margin, which then reflects adversely on Product Engineering. If Product Engineering initiated the change, as well as the updated ECN, they could take positive credit for upgrading the product.
However, if these changes are detected during the re-sourcing process, it is seen as an entirely different issue. First, there are questions as to why these changes were not known beforehand. Many times, it is attributed to poor incoming quality control, poor documentation of known changes, or poor oversight of the factory in China, none of which reflects well on leadership and impacts their performance evaluations. This can cause a vicious cycle of blame and avoidance that can lead to significant product drift.
Protecting a Reputation or Legacy
For those executives and managers that capitalized on China’s capabilities, many received extrinsic rewards like promotions or feelings of accomplishment for having established new procedures or sources. While all of those are good from a historical perspective, many executives and managers, both consciously or subconsciously, exhibit behaviors that resist or inhibit changing to new sources or new procedures. Re-sourcing the product elsewhere creates considerable challenges to the status quo.
One of the overarching principles to keep in mind is that product engineering is an applied science. The focus should always be on product performance, as well as aesthetic appearance, and not on minor things that do not detract from or add to the performance or appearance of the product.
As an applied science, there may be several ways to arrive at the expected outcome. Let me provide a simple example. In your home, your appliances require electricity. From a pure performance standpoint, is it important for the functionality of the appliance that the electricity be generated by wind, solar, nuclear, coal, natural gas, or hydroelectric power in particular? To specify that, as part of the design of the appliance, is unnecessary and may render the project to design the appliance completely unachievable. Moving to a more practical level, if two parts are joined within the interior of the product and are not visible to the consumer and the joint is strong and functional, is it important that rivets, screws, sonic welding, or adhesives are used to assemble the product? If one method is used in one plant and another method is used in another, is it a strike issue, and does it reflect adversely on either plant?
Recent Examples of Product Drift
Several recent examples of product drift that Product Engineering used to delay and therefore defend doing business with Chinese factories include the following:
- A current plant manufacturing a product decided to add two additional screws to hold interior components together. This resulted in too many screws being used compared to the Bill of Materials. No one in management objected; therefore, this material usage variance was accepted and continued for years. The plant purchasing department ordered more screws than were theoretically needed to ensure that the plant would not run short. Since this was not visible from the outside of the product, no one determined it to be a problem. When the product was moved elsewhere, and the Bill of Materials had not been updated, the plant ran short of screws and while waiting for a new shipment to arrive, the production line shut down. Note that updating the Bill of Materials is a Product Engineering responsibility that would add to the standard cost of the product. Product Engineering blamed the new plant for over-using screws even though the plant did exactly what the previous plant had done on the assembly line.
- In another instance, the screws identified in the drawings and Bill of Materials were to be painted black. Before the re-sourcing, the manufacturing plant had difficulty obtaining black painted screws and substituted them with unpainted screws. Since these were not visible to the consumer, a deviation was approved to continue using the unpainted screws. However, the drawings and Bill of Materials were not updated. The new plant followed the same process used in the old plant. When Product Engineering discovered the discrepancy, the new plant was shut down for failing to comply with the specifications. Again, those specifications were obsolete, but the discrepancy allowed the Product Engineering team to assert its position that the plant in Mexico was incapable of producing good quality product.
Were the above examples deliberate sabotage to protect the old way of doing things (sourcing from China), or was the Product Engineering department engaged in a corporate power game as to who is the most valuable part of the company? Either one is disappointing and both disrupted the production startup in Mexico.
Yet another possibility is that the Product Engineering department failed to monitor production from China. Most know that the Chinese will often change the product and feel that it is optional to inform the customer of such a change, and without proper monitoring an ECN will be missed.
Overcoming the Resistance to Change
J. M. Juran, a noted management theorist and icon of quality improvement and, therefore of change, wrote a seminal book on achieving fundamental change. This classic book, Managerial Breakthrough, first published in 1964 and revised in 1995, describes the difficulties and necessary efforts required to accomplish a major change within a company. It presents in detail the individual psychology of managers and leaders toward change.
Unfortunately, there are only limited options in dealing with persons protecting their status quo and position. Since they cannot be convinced by the logic of the change or will not accept the change once it starts to produce results, there is only one conclusion. They must be bypassed or eliminated from the change effort. That is not to say that they must be eliminated from the company but must be removed from the effort to re-source the products from another country.
Maximizing the Possibility of Successful Re-Sourcing
Re-Sourcing from China to another country is a strategic decision involving great effort and many difficulties to overcome. Re-Sourcing to another Southeast Asian country like Vietnam or Thailand is relatively easy as the Chinese culture extends into those countries, and often the factory in China will facilitate the change. The existing culture within the company should be successful in implementing such a change as it does not threaten the cultural patterns established over the years.
However, Re-Sourcing to the US (Re-Shoring) or Mexico (Near-Shoring) is far more difficult and resource-consuming. Executive leadership will need to be more intimately involved to ensure that the change effort is appropriately staffed with those favorable to the potential of change. Existing managers and leaders may resist these efforts which would substantially alter their roles, activities, or status within the company.
Since it also requires far more effort, it may be necessary to add additional resources internally or externally to accomplish the required tasks. If external resources are required, then the executive leadership should be diligent in selecting a consulting resource with a demonstrated track record of results in the target country, including hands-on experience with resources on the ground. Shoreview Management Advisors is such a company for Mexico. Contact us for more information on Re-Shoring or Near-Shoring.
