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Choices in sourcing product development

By Alan Richardson - Last updated: Monday, October 11, 2010

So you are planning to conduct a new product development.  You’ve quite a number of choices:

  • You could in source – it yourself if you have the capability
  • You could in source the design but augment your team with interim staff or contractors – do this if the project meets the criteria for insourcing and you have the key resource and don’t want to grow implementation resource in your full time staff
  • You could outsource the design to the contract manufacturer who will produce the product
  • You could outsource the design to a specialist product development house

The right approach will depend on both market and competition factors and strategic factors. The fundamental issue is how will your business maximise its through life profit from the new development. The decision factors are:

  • How fast can I get the product to market?
  • How can I maximise its appeal to the segment (s) I am targeting
  • How can I minimise production cost?
  • How can I mimimise development cost? But we careful about this because minimising development cost at the expense of time to market or product production cost will often lose so many customers as to transform the economics of the development
  • What strategic capabilities am I trying to retain in house – (long term basis of competition)?

The above questions are complex and may well depend on where you are. If your market share is about what you want it to be, the market is slow moving and you just want to take some cost out of an existing product then the simplest approach will often be to use your in house team or the team at your contract manufacturer to incrementally update an existing design. But using a contract manufacturer will always reduce some of your strategic options going forward. For instance, it might be difficult to transfer to another manufacturer when there is future need. If they are subsidising the design, your IP position might be reduced. Finally, the product may have more limited scope – i.e. meet the current requirement but not be designed in a future proof way.

On the other hand, if the market is undergoing a step change then you may need to make a radical move to respond to the new opportunity or the competition. In this case, outsourcing to a product development specialist may offer the best value. It is critical to find a partner you trust, who will bring the unforeseen trade-offs to light and work through them together. If you haven’t closely with someone recently then you should normally compete a small set of qualified providers identified through your network of trusted contacts. In one such case, a client of ours needed a product that responded to the competitive threat from a competitor in nine months when all they had was a chemical formula for a process and no method to implement. After the product was developed by us, they informed us that had they done it themselves, it would have taken between three years and never. Under those circumstances, the time to market costs dwarf the product development costs. In another circumstance, a client doubled their market share in a consumer product market by spending less on engineering than their quarterly spend on advertising.

On the strategic side, if you are a start up company, you will have to trade off time to funding milestone versus time to recruit and build a team when deciding on insource and outsource options. Usually the need to build a strategic capability requires some involvement internally but the need to meet milestones may well favour outsourcing keys parts of the development ofr risk reduction and acceleration.


AuthorAlan Richardson

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