I had a remarkable interview with a medium sized supplier today, that has truly found a business model which I believe holds a promise for a new industrial revolution in North America. The approach is built on one of America’s most important capabilities that makes it stand out globally: the ability to generate ideas and bring them to market.
The individual I met with works at a medium sized business with a full service industrial design team, that works with major OEM brands on accessory products for consumer-based products like motorbikes, snowmobiles, etc. The supplier will identify the market niche in conjunction with the marketing team, begin work on key features, price points, and continue to work with the OEM marketing and engineering and purchasing team all the way through production. To achieve this capability, the company has invested a lot of upfront resources that not a lot of manufacturing companies in North America have today.
The individual I met with noted that “We don’t seek any bid to quote business. We don’t stand by the fax machine waiting for Request for Quotes, and hope to bid on new business. Instead, we have partnerships with OEM’s, and they come to us with ideas, and a market need.”
“On 98% of the products we develop we own the IP or at least help develop and it. This gives us a unique business model and helps us influence the parts to ensure that they are optimized for our manufacturing floor, and helps us to influence it so that we can bring to bear our deep market knowledge of the accessories we build for our OEM customers.”
This company recognizes that many of their OEM customers are “clunky” in the product development processes, and as a result, take a lot longer to make decisions, vet them through the different functional decision meetings, and render a final decision. The length of this process also makes them more costly. So the smart OEM’s are recognizing that suppliers are not only faster, but that their R&D $ can generate a much higher ROI than they can.
But to make this work requires a different business model. To begin with, there needs to be a fundamental shift away from price-based procurement, to target costing. Most OEM’s are pretty weak at target costing. In fact, this supplier notes that “we usually tell them what their target cost should be, because we know it better than they do. But once we share that with them, than they understand that they won’t ever try to slash our margins. Because our R&D investment is expensed and built into our overhead cost, they don’t attack SG&A either. We both go after costs that are directly tied to material or other components that we can influence.”
How does this work? Because trust equates to speed of business. The supplier notes that “They are communicative and we know where we are at. We operate on a handshake and we aren’t looking for a contract in the development meeting. If companies want to get hung up on the formulation of the deal, it won’t work. Our thinking is that if the business case for the deal makes sense we don’t need a lot of language around the deal. We know where their heart is at and they give us good feedback, and we’re okay with that.”
Maybe this model won’t work for everyone. It only works for when the OEM values the design resource and is willing to “turn over the keys” to the other party, and when there is a true collaborative dialogue that takes place on a regular basis. This company is able to charge more, but their speed to market allows the OEM to get products that their customers want and need faster than the competition, which in turns allows them to be first to market and charge more for the product.
I believe this is the new model for American manufacturing. And it starts with re-thinking the way we write contracts, how we manage supply chain relationships, and how we think about design, development, and manufacturing roles and responsibilities across enterprises. Small business is the growth engine behind this revolution in manufacturing.