Outsourcing a key determiner of success in dynamic markets

Semikron Pty Ltd

By Timo Gassauer, Head of Product Line Stacks
Wednesday, 06 February, 2019


Outsourcing a key determiner of success in dynamic markets

We live in incredibly dynamic times, characterised by rapidly developing markets and global competition. Product life cycles are becoming ever shorter, while pressure from rising costs spirals ever higher.

In order to be profitable in these conditions, companies must reduce their development times, recoup their initial investment costs sooner and bring products into markets more rapidly. A make-or-buy decision can play a pivotal role when it comes to success in these growth markets, as we discuss below using power electronic assemblies as an example.

For industrial applications, average development cycles for a new generation of power inverters currently last for around two years. Traditionally, high levels of vertical integration at the development and production stages, requiring a great deal of expertise and copious resources, explain the comparatively long completion time for this phase. The power electronic stack, which comprises a power module with air or water cooling, a gate driver, a sensor system and a DC link circuit, accounts for a large percentage of this work. Large-scale deployment of development resources often limits companies to a serial product development approach. However, if you consider the fluctuating conditions that manifest themselves in the current market dynamics, such a time-consuming strategy runs the risk of development failures.

Make-or-buy decisions can play a role in achieving success, particularly in highly dynamic markets. This is where outsourcing the development and production of power electronic assemblies can really pay dividends: it allows companies to quickly recoup initial investment costs and utilise flexible global production facilities, while also keeping product life cycle costs low and capitalising on power electronics expertise that has been accumulated over many years and spans various industries. These benefits ultimately help to reduce the risks associated with dynamic market trends.

Quickly recoup initial investment costs

‘Time to market’ is also a key consideration in growth markets in which a rapid response time and fast product approval are crucial factors for success. In general, developing new products requires abundant resources, particularly in terms of time, in order to ensure that the product meets market requirements.

Reduced risk, low cost

In contrast, using existing assemblies or outsourcing development can help companies to respond quickly to fluctuating market demands. To establish themselves as a major market player and accumulate customer experience, companies can use a flexible approach such as this to bring a product that meets the minimum product requirements (‘minimum viable product’) to market in no time at all. The feedback obtained after launching this first iteration is then used directly to develop the product further; refinements are made quickly and the product is continually improved. As a result, the company benefits from a reduced risk with regard to product development failures, a precautionary measure that potentially saves a lot of money where there is cause for doubt.

Fast time to market coupled with low investment costs also guarantees a higher profit margin: when competition initially intensifies and both prices and profit margins drop drastically, the market becomes less attractive and innovations focus on process optimisation in order to lower costs. If, however, based on the time-to-market principle, a product has already had the chance to establish itself in the market early on, the costs can be recouped more quickly and higher profits can be made throughout the product life cycle. Leaving it too late to bring a product to market forces the manufacturer to take a defensive position and increases cost pressures. Generally speaking, highly dynamic markets with global competition engender shorter product life cycles, reducing the amount of time available to earn back the initial costs.

Utilise flexible, global production facilities

In a globalised world, transport costs have been subject to a continued downward trend, which has facilitated international trade and the movement of goods. A regional production site is therefore able to supply markets across the world. However, the tide has turned and we are now once again experiencing a rise in global barriers, like increasing tariffs and local content demand. To participate and compete in the global market, production must predominantly be limited to regional markets in order to satisfy local requirements. Dynamic markets are also frequently subject to fluctuating demand; this requires elastic capacity, which the manufacturer must either already have in place or be able to create at short notice. For small and medium-sized enterprises, it is therefore no longer profitable to maintain their own production facilities. Outsourcing production therefore not only helps companies have their products manufactured locally, but it also helps avoid tariffs and helps keep local communication fast and effective.

Low product life cycle costs

Before an industrialised product is ready for series production, the product life cycle of a power electronic assembly begins with the design and development stages, as well as the product qualification phase. These include simulation, design, prototype assembly and extensive qualification testing. This development can take up to 24 months and, even for supposedly simple designs, can generate six- or seven-figure costs.

In addition, the design requires precise planning of vendor parts; the selection and qualification of suppliers is also an important part of the process, which in itself involves a not insignificant amount of work. Power electronic assemblies consist of as many as 500 individual parts from a large number of different suppliers. Bypassing component qualification and supplier validation is liable to increase the risk of field failures further down the line and the risk of additional hidden costs.

These days, a second-source strategy is often put in place in order to minimise the risk posed by supplier default. However, this does entail additional costs and work. Managing as few components as possible in order to keep costs and the material procurement risk under control can therefore be advantageous, and outsourcing can bring this benefit with it.

Savings of over 20%

Significant savings can be achieved across the entire product life cycle when a company opts to buy instead of to make. Take for example the cost of approximately 100–200 assemblies per year — companies can expect savings of more than 20%. Other benefits include the reduced risk of field failures further down the line and fast availability. Outsourcing hardware development and production also allows companies to focus on their key areas of expertise and on the unique selling points that set them apart from the competition.

Capitalise on expertise spanning multiple industries

To avoid reinventing the wheel every time a new product is developed, it is worthwhile taking a look at other applications in order to benefit from existing experience. It is often the case that new materials, topologies and designs have already undergone testing for other applications and that knowledge has already been gained through experience with these.

As a specialist in packaging technology, SEMIKRON possesses comprehensive expertise in the design of power electronic assemblies in all the relevant electronic fields of application. Amongst other things, the company draws on this expertise to achieve optimal performance for its customers. The combined benefits of new technologies — such as wide bandgap materials, new topologies such as three-level topology and new connection technologies — helps create an optimal balance of price and performance in custom design.

Summary

The results of our analysis demonstrate that there are many advantages associated with outsourcing the development and production of power electronic assemblies in rapidly expanding markets. With full cost control throughout the product life cycle, cost savings of over 20% can be made, while the risk of development failures is also lowered. And with more than 200,000 assemblies in the field, SEMIKRON is a market leader in power electronic designs.

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