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Executive Summary

Today’s manufacturers of highly engineered products are faced with the most challenging environment in history. Traditional cost pressures, demands for improved quality and increased customization are exacerbated by increased global completion from small and large competitors alike. So how is today’s domestic manufacturer supposed to compete? The traditional answer of growing top line revenues while reducing expenses still works, but most companies have already attacked their most basic problems and are cautious, for good reason, to take on large improvement projects.

One compelling process improvement is the use of embedded offshore resources. At up to one third the wage rate and with an average education level one to two times that of a domestic resource the cost benefit is obvious. However, just adding offshore resources isn’t enough. The correct application of embedded resources can make a substantial improvement to your business beyond that of simply lower cost resources.

The benefits of addressing these problems and pain points are numerous including:

  • Raised bid/RFQ hit rate (bid quantity, quality, timeliness).
  • Increased job profitability
  • Manufacturing process bottleneck exposure (Job Router/Traveler creation, CAM/CNC programming, CMM works, etc.)
  • Higher production machine utilization rates
  • Increased production/product quality
  • Reduced production material usage and improved scrap utilization

In order for this to work it has to be done right. This white paper explores this premise in more detail.

Today’s U.S. based Engineer to Order (ETO) manufacturer faces a number of challenges. Customers, both individual and institutions, have steadily increased the pressure to:

  • Lower Cost
  • Increase Product Quality
  • Shorten Lead Times
  • Allow for Greater Customization

Competition has grown to include international small and medium businesses (SMBs) along with large multinational corporations who are looking to continue to grow by increasing their share in niche markets they previous refused to serve.

So how is today’s domestic manufacturer supposed to compete? The traditional answer of growing top line revenues while reducing expenses still works, but most companies have already attacked their most basic problems and are cautious, for good reason, to take on large improvement projects.

According to a 2012 study by McKinsey and Company and Oxford University including over 5,400 large scale IT/Engineering projects found that:

  • 17 percent of large projects go so badly that they can threaten the very existence of the company
  • On average, projects run 45 percent over budget and 7 percent over time, while delivering 56 percent less value than predicted

Businesses are now focusing on smaller process improvement projects. The subsequent improvement to both customer facing metrics (on-time delivery, high quality ratings) and internal measurements (estimated vs. actual costing, mean time to project launch) can be accomplished in a number of ways

  • Automation – Incremental investments in information technology or hi-tech equipment to solve a problem or remove a process step. These are still risky and expensive with a long/medium term payback.
  • Process Streamlining – Physical changes to work cells or outright moves to new locations. These are disruptive but change foundational business metrics.
  • Resource Cost Reduction - These allow accelerated payback but often hurts employee loyalty and morale.

Today’s market for those providing highly engineered products and components are more challenging than ever before. Increased cost pressures, demand for customization, an explosion of the number global suppliers, and larger companies looking to serve niche markets are forcing manufacturers to change their business model. These pressures often manifest themselves in some less than effective work practices as SMBs and their employees struggle to keep pace. Some examples of these include:

  • Not answering enough bids/RFQs to sustain order/production levels
  • Internal team is quoting the easiest to estimate projects, not the best work to perform
  • Answering bids/RFQs late or at the last minute resulting in lower hit rates
  • “Short cut” estimating practices that introduce risk
  • Losing control of a jobs cost during the manufacturing process
  • Late project launches to the manufacturing floor
  • Reluctance to use outside resources due to the teams’ potential resistance and the ability of outside resources to understand the nuances of their business

The benefits of addressing these problems and pain points are numerous including:

  • Raised bid/RFQ hit rate (bid quantity, quality, timeliness)
  • Increased job profitability
  • Manufacturing process bottleneck exposure (Job Router/Traveler creation, CAM/CNC programming, CMM work, etc.)
  • Higher production machine utilization rates
  • Increased production/product quality
  • Reduced production material usage and improved scrap utilization
  • Improved inventory turns
  • Improved employee morale and reduced turnover

There are a number of solutions to challenges outlined above, but all of them involve adding resources or improving technology and equipment. Ultimately it’s the business case and the underlying cost-benefit analysis that drives which investment into the operation is best. In this case let’s explore the use of embedded offshore resources.

Let’s first consider the fully loaded cost of a resource qualified to perform product or manufacturing engineering (2D drafting, CAD/CAM/CMM Programming, etc.).

Skilled Engineering Resource Cost:

  • Recruiting Expense: $2K - $15K
  • Base Salary: $60K - $85K
  • Benefits & Employment Taxes: $15K - $34K *assumes 1.25 – 1.4 base salary

Includes Social Security/FICA, Unemployment/FUTA, Medicare, Workman’s Compensation Premiums, Life Insurance, AD &D Insurance, Long-term disability, Health, Dental, Vision, Dependent Care, Tuition Reimbursement, Retirement Plans, etc.

  • Space: $2k for an average 8x8 workspace (225 – 250 square feet)
  • Other Equipment: Computer ($1K), Engineering Software ($2.5K), Phone & office supplies ($500)
  • Travel & Living Expense: $2K - $5K for miscellaneous company activities and travel

Total First Year Engineering Resource Cost: $85K - $145K Compare this to the first year cost of introducing an embedded resource.

  • Recruiting: $0K
  • Salary (Hourly): $36K - $56K *assumes 250 work days per year times 8 hours
  • Benefits & Employment Taxes: $0K
  • Space: $0K
  • Other Equipment: Engineering Software $2.5K
  • Travel & Living Expense: $5K - $8K *assumes two or three trips

Total First Year Embedding Offshore Resource Cost: $43.5K - $64.5K

This is compelling savings but the real win comes in the form of impact of improving the below business metrics:

  • Increased RFQ/bid capacity – In the majority of our customer base the existing sales team can, with minimal effort, increase the number of bids considered by 10 – 25%. This is typically driven from existing customers and a handful a prospect customers that already have expressed openness to sending over bids. This is often accomplished by one or more “Sales Blitz” campaigns. The challenge of running these campaigns is that if these new opportunities are not acted upon in a timely manner you risk alienating your customer base. Using embedded offshore resources enables companies to accelerate response time exponentially (usually 50% faster) for two reasons. First, you have a knowledgeable resource(s) working within a well defined quoting process built during the onboarding process, and second the majority of the work takes place during business hours that don’t overlap with North America. Critical RFQ’s can often be quoted overnight.
  • Improved bid hit rate – The hit rate of RFQ responses is a function of a number of variables. One of Katalyst’s customers has calculated that the bid hit rate doubles when they answer within the first 24 – 48 hours, even when given a 7 – 14 day response window. Another factor is the quality of the bid. A high quality bid, defined by those with more detail and an above average professional appearance, typically is 5 – 10% more successful with the same gross margin according to results reported by Katalyst customers.
  • Better upfront quote accuracy – Accurately depicting bid costs ultimately leads to a reduction of projects that are very low margin or actually lose your business money. The average Katalyst customer bids between 10 – 50% of their jobs using an abbreviated process. One customer referred to this style of quoting as “back of the napkin.” Another customer would quote using a “dollars per pound” for complex fabrications. By leveraging embedded engineering resources and eliminating this practice the average Katalyst customer will reduce low margin or losing jobs by 60%. This has a positive impact on profitability even if your business doesn’t add additional top line revenue.Risk mitigation – We have found that our customers tend to overprotect the organization by bidding too high on large projects. This is a poor risk mitigation plan. The average Katalyst customer reduced their job actual vs estimated cost by variance by 25% (see figure 1).

Another, often unanticipated, benefit to customers of embedded offshore resources is increased employee satisfaction. The estimating/bid teams for most ETO companies is one of the most overtasked and stressful teams. By adding resources that remove much of the mundane work behind bid building, that team ends up focusing on the most critical portion of each bid coordinating with manufacturing, sales and other team members and orchestrating better bids that are more timely delivered. It doesn’t take this team long to learn that the embedded offshore team is there to help and not to replace them.

In order to facilitate accomplishing the above there are some critical of the best practices that success businesses follow.

  • Increased RFQ/bid capacity – In the majority of our customer base the existing sales team can, with minimal effort, increase the number of bids considered by 10 – 25%. This is typically driven from existing customers and a handful a prospect customers that already have expressed openness to sending over bids. This is often accomplished by one or more “Sales Blitz” campaigns. The challenge of running these campaigns is that if these new opportunities are not acted upon in a timely manner you risk alienating your customer base. Using embedded offshore resources enables companies to accelerate response time exponentially (usually 50% faster) for two reasons. First, you have a knowledgeable resource(s) working within a well defined quoting process built during the onboarding process, and second the majority of the work takes place during business hours that don’t overlap with North America. Critical RFQ’s can often be quoted overnight.
  • Improved bid hit rate – The hit rate of RFQ responses is a function of a number of variables. One of Katalyst’s customers has calculated that the bid hit rate doubles when they answer within the first 24 – 48 hours, even when given a 7 – 14 day response window. Another factor is the quality of the bid. A high quality bid, defined by those with more detail and an above average professional appearance, typically is 5 – 10% more successful with the same gross margin according to results reported by Katalyst customers.
  • Better upfront quote accuracy – Accurately depicting bid costs ultimately leads to a reduction of projects that are very low margin or actually lose your business money. The average Katalyst customer bids between 10 – 50% of their jobs using an abbreviated process. One customer referred to this style of quoting as “back of the napkin.” Another customer would quote using a “dollars per pound” for complex fabrications. By leveraging embedded engineering resources and eliminating this practice the average Katalyst customer will reduce low margin or losing jobs by 60%. This has a positive impact on profitability even if your business doesn’t add additional top line revenue.Risk mitigation – We have found that our customers tend to overprotect the organization by bidding too high on large projects. This is a poor risk mitigation plan. The average Katalyst customer reduced their job actual vs estimated cost by variance by 25% (see figure 1).

FIGURE 1

Bid/Estimate Statistics

    graph-1.png
  • The average varience of job costs vs estimated price before use of Katalyst team averaged +/- 35%
  • After application of rigorous process improvement using embedded engineering resources the variance is reduced to +/- 10%
graph-2.png