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 / Summer 2007 / Issue 47(originally published by Booz & Company)


Making Offshore Engineering Pay Off

How some companies send design work overseas without fear of diminished quality or intellectual property theft.

Most manufacturers can easily tick off any number of practical reasons either for building new factories in China, India, Vietnam, and other low-cost nations or for buying parts from suppliers based in those countries. Simplified supply chains, better inventory management, and sharply reduced costs are among the obvious benefits. But the same group displays less enthusiasm for offshoring design and engineering.

On the face of it, that’s a logical response. For one thing, compared to manufacturing and materials, engineering typically accounts for a tiny portion of the total cost of a product and therefore tends to merit little attention from top management. And perhaps more importantly, many manufacturers view engineering as the company’s “crown jewel” — and they thus desire to keep it close to home, where it can be sheltered from intellectual property theft.

These rationales, however, overlook a critical but seldom recognized fact: As with factory operations, not all engineering tasks are created equal. Some design tasks are complex, continually evolving, or proprietary, and require sophisticated skills, a high degree of consultation with customers, or protection from piracy. Consequently, these activities are usually best maintained in-house. But other endeavors, such as engineering simple, modular parts, are the equivalent of commodities and can be handled advantageously in low-cost regions.

Indeed, a global engineering footprint — one that includes engineering facilities in both developed and developing nations — can generate measurable cost savings and greatly increase customer satisfaction. By shifting auto parts engineering operations from the United States to Eastern Europe and Asia, for example, the Delphi Corporation slashed its overall engineering costs by as much as 65 percent. Moreover, the company’s non-U.S. revenues grew significantly, a substantial benefit of its extended engineering footprint in locations such as Sao Paulo, Bangalore, Seoul, Tokyo, Shanghai, Krakow, Singapore, and Juarez.

The approach many companies take in figuring out their mixed footprint is to distinguish between performance-based design cycles, which typically involve myriad changes in design from one generation to the next, and cost-based cycles, used for products with a mature underlying technology and slow rate of innovation. With performance-based cycles, upper management and customers (in the case of suppliers), as well as the marketing, sales, design, and engineering departments, usually play a big role in the frequent blueprint alterations. To juggle the continuous flow of new ideas and implement them efficiently, it is critical to have cross-functional development teams tied closely to corporate headquarters and a skilled engineering workforce — the kind often found only in more developed regions. But cost is not a major factor.

The opposite can be said about cost-based cycles. For these tasks, limiting expenses is the overriding issue, and frequent consultation with management, customers, and other stakeholders is unnecessary. The product’s design and fundamental technology are well established and unlikely to undergo significant alteration. Consequently, companies can benefit from offshoring these engineering processes to low-cost nations.

Assessing performance- and cost-based cycles will provide some initial benefits. But over a longer period of time companies will find that few products are clear-cut enough, and few customer relationships static enough, for this approach to suffice. Nuances make it difficult to place the development activity easily in one camp or the other. And customers frequently change their product designs, necessitating continual reevaluation of engineering needs in many cases. Consequently, a more effective method for suppliers is to determine the product and integration complexity of each component in their portfolio and place these findings against one another to map the most advantageous locations for each engineering activity.

Product complexity is measured by the number of subcomponents, mechanical movements, process or design technologies, software modules, and suppliers. In the automobile industry, integration complexity is gauged by the number of intercompany interactions that are required by design, input–output ports, connector pins, customer change requests, and interrelated systems.

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