The New Reality of R&D

In the race to reduce costs, traditional outsourcing of engineering tasks may lead to higher R&D costs. But to stay competitive the OEM must still outsource. Fortaco Technology’s Rafal Sornek shows how to improve R&D efficiency through early involvement of strategic suppliers.

by Rafal Sornek, Senior Vice President for Technology, Fortaco

Batch engineering and outsourcing your engineering haven’t always been bad ideas, but they can easily be carried too far. Savings on an hourly rate are tempting, especially for what may first appear to be repeatable tasks. But despite a better hourly rate, the number of hours involved for seemingly simple tasks can often add up.

If I would ask one of my Fortaco engineers to design a steel bracket, he’s likely to tell me we need to take five-millimeter steel and bend it in a certain way. But if I have to outsource that same bracket to engineers, who don’t know my product, they’ll use software to calculate stresses, they’ll model the bracket, establish boundary conditions, and then they’ll send me a report. The outcome may be the same, but it will take twice as long. It may not even be cheaper, and it certainly doesn’t add to my efficiency.

Too far from the product
In my past life as head of R&D for a major OEM, I witnessed the outsourcing of key component engineering. I realized that given the turnover in R&D, many OEM engineers just don’t have much of a connection to manufacturing. In new component design you design details, send drawings, you have a price target from a sourcing organization, and then you just have to pray that your supplier’s price is on target.

But usually it’s not. Then a discussion ensues about how to lower the price. The supplier will suggest alternations, and the result is three to four loops of design changes. The heavy time pressure makes engineers reluctant to make any big changes, and the outsourcing process puts engineers between a rock and a hard place. That is unfortunate, because the bigger game – what the OEM needs to worry about – is being first to market with your product.

The costs of inefficiency
Delays to market can mean the loss of the premium price and share-of-mind that first-to-market products command. But even simple delays will cost you dearly. To understand what delays cost you, first forecast your revenue, your cost of goods, and get your net present value. If you have a 30 million NPV in a 60-month period, then every month of delay is costing you one-half million euros. Companies often fail to calculate delay costs, or are sometimes even unaware of them. They don’t see it directly in the cost, but it’s there.

A third cost of delays can be felt in the return on R&D, calculated as the gross margin generated by the product divided by the R&D spend over a given period. According to studies done on OEMs, their return on R&D is 12 euros gross margin per one euro spent on R&D. But if you concentrate on your core — let’s say you’re a system integrator — then I know companies that can go up to 60 euros gross margin per one euro spent on R&D.

How is this possible? It’s because these companies are not asking their engineers to design a hydraulic cylinder. Instead, they outsource it to a company that specializes in hydraulic cylinders. An OEM simply cannot afford to be an expert in everything.

Electric mobility: problem or opportunity?
Given changing CO2 emissions standards and improving technologies for lightweight steel structures, electric mobility in the off-highway business has finally arrived – and with it the potential to destroy an OEM’s return on R&D. Electric mobility does not mean the replacement of diesel engines, but rather that crane manufacturers, for example, will need to produce every model in both diesel- and electric-drive versions. This means companies will be looking at doubling their R&D expenses in order to produce an electric model.

Unfortunately, there is no reason to expect sales to double, and with sales held constant, doubling R&D expenses will result in the return on R&D decreasing by half. OEMs will be left with the choice to invest more in R&D, or find partners who can do it on their behalf. Since there is no fixed cost connected to the external option, this approach holds appeal to bean counters at OEMs. But it makes engineering sense, as well.

In this age of digitalization OEMs need to focus their R&D on what makes them unique versus the competition. Does it make you unique that you design your own steel structure yourself? I’d argue that it’s better to put your resources into thinking about the solution you’re offering. Think at the system level.

Bring it home with Fortaco Technology
“Outsourcing” may be one of the uglier words in the engineering vocabulary, but it is not necessarily a synonym for cheap or low quality. We created Fortaco Technology to offer design-to-manufacturing capabilities for the off-highway industry.

In 2017, we began working with a major construction equipment company in a design-to-manufacturing advisory capacity. We’re the guys looking over their shoulder. We were able to show the customer how their current designs would mean a robotic arm couldn’t get access to make a weld and would require human intervention. Our advisory approach is expected to reduce manufacturing costs for the customer by 15 to 20 percent.

A second solution from Fortaco Technology is called Toolchain. Its role is to extend the “looking over the shoulder” aspect of Fortaco all the way back in the work process to data analytics and carried through, in part with a digital twin, to product specification, concept, design, and manufacturing. Expected benefits are a 10 percent material savings, 18 percent labor cost reduction, and 50 percent faster product development time.

A new reality
It’s the new reality of R&D. Outsourcing doesn’t have to be a dirty word. In fact, outsourcing is inevitable, and how we handle it can make or break the business. The good news is that while engineering services may have to be outsourced, there is no good reason an OEM can’t improve efficiency – and its return on R&D – by doing so.

Rafal Sornek, PhD, Fortaco’s Senior Vice President for Technology, invites you to calculate your return on R&D and get in touch