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Author: Gerner, Michael E.
Title: Customer Based Accountability Structure in a Contract Manufacturing
Engineering Department The accompanying research report is submitted to the University of Wisconsin-Stout, Graduate School in partial
completion of the requirements for the
Graduate Degree/ Major: Master’s - Technology Management
Research Adviser: Sally Dresdow, DBA.
Submission Term/Year: Spring, 2012
Number of Pages: 40
Style Manual Used: American Psychological Association, 6th edition
I understand that this research report must be officially approved by the Graduate School and that an electronic copy of the approved version will be made available through the University Library website
I attest that the research report is my original work (that any copyrightable materials have been used with the permission of the original authors), and as such, it is automatically protected by the laws, rules, and regulations of the U.S. Copyright Office.
My research adviser has approved the content and quality of this paper. STUDENT:
NAME Michael Gerner DATE: May 14, 2012
ADVISER: (Committee Chair if MS Plan A or EdS Thesis or Field Project/Problem):
NAME Dr. Sally Dresdow DATE: May 14, 2012
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This section for MS Plan A Thesis or EdS Thesis/Field Project papers only Committee members (other than your adviser who is listed in the section above) 1. CMTE MEMBER’S NAME: DATE:
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3. CMTE MEMBER’S NAME: DATE:
--------------------------------------------------------------------------------------------------------------------------------- This section to be completed by the Graduate School This final research report has been approved by the Graduate School.
Director, Office of Graduate Studies: DATE:
2
Gerner, Michael E. Customer Based Accountability Structure in a Contract
Manufacturing Engineering Department
Abstract
In today’s product manufacturing industry many businesses do not build their
own product. Rather they utilize a contract manufacturer to create their product based on
a set of requirements they provide. A contract manufacturer’s engineering organization
structures might have a variety of ways of splitting up workload and accountability to
build this product for the customer. In this study, the structures are compared with an
engineering department split by customer programs vs. a more traditional structure of
process accountability. Labor profitability and customer survey analysis are used to
compile a recommendation that a customer based engineering structure has advantages
for a contract manufacturer in a high mix low volume environment.
3
Acknowledgments
I’d like to acknowledge my advisor, Dr. Dresdow, for supporting this engineering
performance research from an organization development perspective. Her patience and guidance
truly helped me understand the pertaining literature review of this subject.
I’d also like to acknowledge my wonderful and supportive wife Amelia Gerner. We first
met several years ago as I was beginning this work. Now as I compile the findings we are
enjoying the addition of our daughter, Mara.
4
Table of Contents
............................................................................................................................................. Page
Abstract ...................................................................................................................................... 2
Chapter I: Introduction ............................................................................................................... 5
Statement of the Problem ................................................................................................. 8
Purpose of the Study ........................................................................................................ 9
Assumptions of the Study ................................................................................................ 9
Definition of Terms ......................................................................................................... 9
Methodology ................................................................................................................. 10
Chapter II: Literature Review .................................................................................................... 11
Contract Manufacturing ................................................................................................. 11
Service Industry ............................................................................................................. 14
Process Experts ............................................................................................................. 16
Lean Manufacturing ...................................................................................................... 18
Performance Metrics...................................................................................................... 20 Chapter III: Methodology .......................................................................................................... 25
Data Analysis ................................................................................................................ 25
Instrumentation.............................................................................................................. 25
Data Analysis ................................................................................................................ 27
Summary ....................................................................................................................... 29
Chapter IV: Results ................................................................................................................... 30
Labor Performance ........................................................................................................ 30
Table 1 - Labor Performance ......................................................................................... 30
5
Customer Satisfaction .................................................................................................... 31
Table 2 – Customer Satisfaction .................................................................................... 32
Chapter V: Discussion ................................................................................................... 33
Limitations ................................................................................................................... 33
Conclusions ................................................................................................................... 34
Recommendations ......................................................................................................... 35
References ................................................................................................................................ 36
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Chapter I: Introduction
Contract manufacturing involves one company utilizing the services of another company
to produce its idea/product. Since equipment costs and buildings are a large part of any
company’s liability, contract manufacturing eliminates the need for a company to have its own
assets. That means a new startup company does not have to invest in a manufacturing facility
and can have its products built by a company with the relevant expertise and appropriate
equipment. Typically, a contract manufacturer does not have any stake or proprietary ownership
in the product it builds. Rather a contract is mutually agreed upon to manufacture the product(s).
The contract manufacturer may even be contracted to provide customer support of those products
over the long run.
This case study looks at Company XYZ, a contract manufacturing company, that
provides services for the assembling and soldering of electronic hardware and the value to
customers this service holds. This type of production requires high precision equipment to place
electronic components on an electronic circuit card. The equipment needed to manufacture the
product is expensive and quickly becomes outdated. The reason for this is the frequency of
technological advances, similar to how consumer electronics continuously evolve to have
improved performance and capabilities as compared to the past models. Companies who require
high precision work can receive high quality products without having to periodically purchase
expensive assembly equipment. A typical array of equipment required to assemble the
electronic products includes on average seven processes and three inspection technologies. The
cost to purchase just the equipment for this type of assembly is $2 million. There are additional
costs to hire, train, and retrain a skilled work force to execute the assembly process. So the value
7
a contract manufacturer provides is not just in the service of building a product, but also in
saving the customer the need to invest in costly equipment and training a skilled workforce.
Another value the contract manufacturer provides is a systematic process for taking a
new order and identifying all the manufacturing tasks needed to ensure that delivery goals are
met. The predetermined tasks are a result of the contract manufacturer’s experience and
understanding of the lead times for parts and tooling. Best practices are captured in standard
work procedures from the supply chain management of components to soldering techniques.
Continuous improvement activities are used as tools to drive efficiencies and add value to the
customer. By reducing inventory turns with favorable purchasing practices, and reducing
manufacturing lead times by increased assembly velocity, the overall cash cycle time improves
In order to provide service and value as efficiently as possible, contract manufacturers
have a highly organized infrastructure. Company XYZ provides services for approximately 100
customers that represent products from industries including: medical, computing and aerospace.
Revenue from the products and services sold to its customers exceeds $2 billion worldwide. In
order to manage this volume of global business and diversity of products, the operations are split
into smaller virtual factories that reside within a plant. These virtual factories focus on a small
set of customers and offer their own equipment and support staff to these customers. This
includes its own planning team, engineering team, management team, and production labor
force.
Company XYZ has a corporate business unit that establishes best practices for all the
factories and they collaborate on improvements that are made within a factory. Corporate can
compare performance between factories with metrics they have in place. The factories have
similar planning, management and production labor structures. In addition job duties are similar
8
in the factories. However, the engineering team can have different organizational structures on
how they distribute the workload.
These engineering accountabilities can be based on either the processes needed to build
the product or by the different customers within the virtual factory. In other words, the
engineering organization can be based on a traditional manufacturing structure or a customer
service structure. Company XYZ has a traditional manufacturing structure for some of its virtual
factories. This structure assigns accountability based on the processes used to assemble the
product. That means that one engineer would be assigned to one or more processes (e.g. wave
soldering) and would service multiple customers. This has resulted in one customer having to be
in contact with multiple engineers, each one in charge of a different step in the process. The
process accountability structure could have various options that would affect the virtual factory’s
efficiencies and labor profitability. Metrics would ultimately reflect how the engineering team’s
distribution of accountabilities within the contract manufacturer’s infrastructure helps or hinders
labor profit and customer satisfaction.
Within Company XYZ one of the virtual factories had its engineering team changed to a
customer service structure. An individual engineer was assigned to a customer account so one
person supports all processes used to manufacture a customer’s product. In this way a customer
only needs to contact one engineer for all processes involved in the assembly of their product.
This was done to determine which structure leads to a higher level of customer satisfaction and
higher financial performance
Statement of the Problem
The process accountability structure for Company XYZ’s engineering group has resulted
in customer service dissatisfaction and potential revenue loss.
9
Purpose of the Study
The purpose of this research was to analyze data to determine if an engineering structure
would provide optimal customer service and expand business opportunities. This study provided
Company XYZ with a solution to optimize customer satisfaction by a redistribution of
accountabilities without adding additional resources.
Assumptions of the Study
The two factories used in the study are in one plant location. Using virtual factories in
one physical plant location minimize the subtle changes in culture and business practices
between locations. Both factories have equally skilled resources which gives them a similar
basis for comparisons.
Definition of Terms
High mix – low volume. A manufacturing process that builds a large variety of products
at low volumes.
OEM (Original equipment manufacturer). A company that manufactures its own
products to sell to its own customers.
CM (Contract manufacturer). A Company that manufactures a product for another
business under a mutually agreed set of terms and conditions.
Inventory turnover. The number of times that your inventory cycles or turns over per
year. It is one of the most commonly used Supply Chain Metrics. (www.supplychainmetric.com)
Manufacturing lead time. The cycle time from when an order is placed to shipping the
final product to the customer.
Cash cycle. The length of time between the purchase of raw materials and the collection
of accounts receivable generated in the sale of the final product (www.investorwords.com).
10
Methodology
To evaluate different accountability structures for Company XYZ’s engineering
department, data was reviewed for the traditional accountability structure between the traditional
and customer service accountability structure. Existing customer surveys and financial
performance data was analyzed to determine which structure results in greater customer
satisfaction and financial performance.
11
Chapter II: Literature Review
The distribution of the accountability of the engineering department can impact the
success of the business. Without the appropriate structure in engineering, a business might have
trouble with customer satisfaction and further revenue loss. The engineering department is a key
resource to implement services that are added-value for the customer. For a contract
manufacture, these services range from part procurement and assembly processes to design input
for higher yielding manufacturing.
The literature review addresses the contract manufacturing industry including market size
and current trends. Besides looking at just manufacturing, the relevant aspects of the customer
service industry is reviewed. Finally performance metrics are addressed including how they can
applied to this research project.
Contract Manufacturing
The contract manufacturing industry in electronics is growing into a substantial market.
Many OEMs and start-up companies are taking advantage of minimizing overhead by
outsourcing the building of their product to contract manufacturers. After a 4.7% growth in
2011, contract manufacturing revenue in 2012 is expected to decline by approximately 1% to
$357B (“Decline expected,” 2012). Regardless of a slight decline, this is a substantial market
and is being maintained during an economic recession.
Today there is indication that the contract manufacturing industry has shown multiple
benefits, as more and more companies are taking advantage of contracting out work. In little
more than a decade, the role suppliers play in developing, producing and sustaining complex
systems has quadrupled in the highly complex aerospace and defense industries (Mecham, 2011).
Roughly 60 to 80% of every major aerospace and defense manufacturing program utilizes
12
contract manufacturers (Mecham, 2011). In addition, the increasing reliance on subcontractors
has been clear in the growth of the Subcon exhibition. This is a large tradeshow based in the UK
that displays manufacturing and design services. Between 2007 and 2011 the number of
exhibitors rose by 91% and the number of visitors by 94% (“Growing up,” 2012). These
statistics note that contract manufacturing is a business model that has some major economic
impact. As more contract work is awarded, studying the organizational structure of contract
manufacturers’ engineering departments could have an industry-wide impact on productivity and
customer satisfaction.
The shift from OEM to contract manufacturing is more than a scaling up of existing
relations with current contract manufacturers; it means customers utilize more services than just
assembly work (“Benefits of Hiring,” 2011). The strategy is to have suppliers take on greater
roles in the design and development of products. In the electronics contract manufacturing
industry, a customer comes for more than building an electronics product per a bill of materials
and assembly drawing. They also look for a design service that can help the customer realize the
minimization of product cost. Designing for manufacturability is a forward-thinking
methodology of designing or redesigning a printed circuit board or wire harness for best practice
manufacturing (Hartwig, 2009). An electronics contract manufacture can apply best practices in
electronics design that would result in a product that can be built with the largest process
window. This means that the contract manufacture can build an assembly with a process
allowing for the largest variation. By having a larger set of tolerances the process will have
improved quality yields. Also, a product that is designed by the manufacturr will likely be
processed with minimal rework activity. Utilizing all the services offered by the contract
manufacturer can maximize the customer’s long term profitability.
13
The benefits of a contract manufacturing are seen in multiple businesses. Military and
aerospace prime systems integrators, such as Boeing, Lockheed Martin, Northrop Grumman, and
Raytheon, are catching onto a business reality that the commercial industry has known for years-
outsourcing electronic systems manufacturing can save time, money, and a lot of headaches
(Keller, 2007). This idea suggests that many of the electronics contract manufacturers have the
process controls in place to assemble high quality products. This is contrary to any thoughts that
a business might have in presuming outsourcing work to a contract manufacture might be
challenging if the assembly is viewed as complex. Contract manufacturers have the experience
of many builds allowing them to cater to customers needing highly complex product built at a
high level of quality. Machine Specialties Inc. has seen success by providing high precision
parts to the aerospace, industrial and medical industries (Lorincz, 2012). The company focuses
on having the best equipment and quality. Sales grew from $18M to $27M from 2005 to 2010
even after people spoke of the economic down turn in the beginning of this time frame (Lorincz,
2012).
Besides just assembling the product, the practice of outsourcing work has shown success
in business process operations such as inventory management or customer service call centers.
These business processes started with non-core activity and are now moving towards more
critical applications. It boomed with call centers and customer support processes, and it has
spread to other processes such as software development, human resources, finance and
accounting, training, payroll, and procurement (Hongyan & Meissner, 2008). Much of the
reason for the success of outsourcing business process is because of advances in software
technology. A substantial long-term impact on the whole process affecting the quality, cost and
associated risks of the operation of outsourced activities is realized using these software tools.
14
Many of these software tools are part of the typical offering of the contract manufacturer. A
smaller company can’t justify the overhead and can take advantage of this benefit by out
sourcing to a contract manufacture that has these business process tools deployed.
Service Industry
According to the North America Industry Classification System (NAICS) about 55% of
the US economic activity comes from the service industry (www.census.gov, 2011). There is
research to show how companies within the service industry can improve customer satisfaction
and ultimately lead to increased profitability.
The customer service industry organizational structure varies by business size. Customer
service representatives can be allocated by customer accounts or on a first come first serve basis
regardless of who the customer is (“Retaining customers,” n.d). Certain customers and products
may take priority over others, but all orders go through the same process. Organizing a customer
service department should address these priorities. Businesses with few employees may consider
limiting the customer service department to a manager or other reporting authority and several
customer service representatives to handle customer interactions (Long, 2012). Larger
organizations need to develop a customer service department with an established hierarchy,
allowing for a continual flow of information through all levels of the organization. This ensures
that customer complaints receive the needed attention at the time of the initial contact. Internal
departments receive appropriate communication related to possible problems with products or
services allowing them to fix any issues in the future (Long, 2012).
Regardless of the differences of accountability structure on a customer service
organization, the common goal is for those interacting with the customer are to listen to them and
have quality communication. The relationship should be open and communication between the
15
two parties and should be as frequent as required to assure that the product being manufactured
meets the highest quality standards (Schniepp, 2012).
An impression of how a customer is being taken care of forms from the way the customer
interacts with the business. To provide the best customer service experience, the individuals
having direct interactions with the customer are required to be perceived as sincere and deliver
on commitments (He & Li, 2011). This strongly suggests that both functional service aspects
(quality) and human interaction service aspects (empathy and assurance) are significant drivers
for overall customer satisfaction. One study of 900 front level service employees and their
supervisors showed a positive impact to customer satisfaction when service employees were
empowered to anticipate customer needs (Raub & Liao, 2012). It was noted that 23% of the
variance in customer satisfaction was contributed if the customer service employee was
proactive. Proactive customer service performance was characterized by a self-starting, long-
term-oriented, and forward-thinking approach to service delivery (Raub & Liao, 2012).
Proactive customer service employees relied on their own initiative, rather than waiting to be
prompted by their supervisors, their coworkers, or their customers to address a service issue. The
service employees were able to take ownership in doing things without being told (Raub & Liao,
2012). Allowing the employees to make decisions about actions to take for the customer gave
them a feeling of empowerment.
Based on the work done on customer service satisfaction in the service industry there is
an opportunity to transfer these concepts into other industries (Almedia, 2008). It is worth
considering that the service industry model can have its application and principles extended to
other sectors or subsectors of the economy. The research in this paper will take the idea of
16
customer service structures like employee empowerment and apply it to a contract manufacture’s
engineering department.
Process Experts
A business needs more than just good at customer service. A customer first comes to a
contract manufacturer looking for expertise in the process of assembling products. A contract
manufacture can ensure high quality work because of the resources they have including the latest
assembly technology and state-of-the art equipment (“Benefits of Hiring,” 2011). Many contract
manufacturers use assembly equipment for the assembly process made by other companies, as do
many companies within the service industry. Experts do not necessarily need to be within the
company that utilizes the processes and assembles the product. Instead those experts reside at
the company providing the assembly automation equipment. These engineers usually have a
store of experience from their work on many different systems and can apply that expertise to
assembly equipment being sold to a contract manufacturer (Phillips, 2010). These companies
build the equipment that assembles the product and then that equipment is programmed by the
contract manufacturer to build a specific customer’s product.
The contract manufacturer can be viewed as an expert user of the specialized equipment
rather than an expert process developer. Most electronic products share many similar
components; it is the arrangement and use of these components that differs. This allows for a set
of equipment to be versatile enough to build a wide range of electronic products. A contract
manufacturer would purchase electronic assembly equipment and solder from these different
specialized companies. The equipment manufacturer will train and provide process expertise to
the contract manufacturer to effectively use the equipment. The contract manufacturer then
17
relies on the engineers at the equipment manufacturers that focus on building assembly
automation equipment for that expertise.
An example of using the expertise of supplier companies is the purchasing of the solder
alloy used to create the many electrical connections within an electronics assembly. The solder
alloy company provides the details of processing parameters to create the highest quality solder
joint (“Enviro MarkTM,” n.d). Processing guidelines are provided, like target temperature for
the melting point of the solder and how long to hold it at a temperature range to adequately wet
to the metal plated areas. These optimal parameter settings have had much research into defining
how to create a high quality solder joint. Organizations of industry experts have even
collaborated to develop solder joint quality standards based on reliability testing (www.ipc.org).
In the end, a contract manufacturer is just an expert in using the equipment and materials they
purchase from someone else.
The market for industrial automation electronics equipment had a strong year in 2011,
growing revenues by 12.1% (Sultan, 2012). Revenue growth of 10.7% is predicted for 2012.
This shows that the general manufacturing industry continues to move to supplies that can
provide assembly automation equipment. Most electronics use similar assembly technology like
surface mount technology (SMT). This assembly technology is grouped by a set of assembly
equipment that can build. This allows for companies to by equipment for a supplier to assembly
many different products using the same equipment.
The industry of producing assembly equipment and supplies stems from OEMs who built
their own electronic products. Since contract manufacturers were not yet prevalent, they went as
far as building their own assembly equipment to build these electronic products. The decision of
a producer of consumer electronics to develop production equipment in-house imposes on top
18
management the need to decide whether or not to add this equipment to its consumer product
range (Brenner & Mayer 1995). Since an OEM had so much invested in the development of the
automation equipment, there was a business case to offer it as another product line. The OEM
indentified this new market as they could sell this automation equipment to other companies
needing to produce electronic products. This was the beginning of the assembly equipment
supplier industry and how process experts have remained at the company that builds the
equipment.
Since the contract manufacturer uses equipment and processes that are readily available
from other suppliers, the contract manufacturer can quickly respond to increases in demand. For
many OEM’s, the answer to poor manufacturing responsiveness or high manufacturing costs is
to outsource (Mason, 2007). The ability to be flexible on production capacity is a benefit a
contract manufacturer can supply to its customer. Increasing capacity would take longer if the
contract manufacturer had to build custom equipment vs. ordering pre-manufactured equipment.
The change in capacity can also be impacted by environmental or political issues. For example,
a contract manufacturer with operations in Taiwan was able to get a new plant into operation in
record time after its main manufacturing facility was inundated with floodwaters. (PR Newswire,
2011). Using equipment from outside suppliers, contract manufacturers are able to respond to
the changing capacity demands of customers and minimize the impact of product delivery gaps.
This ability is the basics of companies able to have a solid business continuity plan. In the case
of a catastrophe, daily operations could be minimally impacted.
Lean Manufacturing
A customer can take advantage of a contract manufacture that practices Lean initiatives.
A Lean organization understands customer value and focuses its key processes to continuously
19
increase it (“What’s lean,” n.d.). Lean drives the identification of inefficiencies and consists of
methodologies in continuous improvements. Lean methodologies have been around in business
as a form of a quality program for more than two decades. Established by Motorola in the mid
1980’s, Lean has since been adopted by a number of high profile organizations including Boeing,
Kodak and GE (Fraser, 2009). A GE project clearly demonstrated a value of a well-applied Lean
method to solve a process problem in its service division. The project was completed in a timely
manner and created capacity in an over-stretched customer services department.
Making improvements in manufacturing processes can improve customer relations.
Becoming more efficient results in the increased velocity of inventory turnover and cost
reductions. Many times technological innovation can be a co-operative effort between the
producer and the consumer (Falkus 1998). An example of this is that the customer and contract
manufacturer could share in the cost of new tooling that would help speed the assembly and
minimize defects. Allied Technologies International Inc. implemented new tooling to shrink
cutting time for the process from 29.4 to 16.8 sec, a reduction of approximately 42% (Wilson,
2010). They noted that their customers place value on the ability to integrate new technologies
to improve quality, to cut costs, and to reduce throughput time (Wilson, 2010). These
innovations can help support leaner and more efficient ways for the contract manufacturer to
manufacture the product for the customer. This results in an improved relationship with the
customer and a more lasting partnership by both parties by sharing in the cost reductions.
Besides the tactical sharing of continuous improvements within the manufacturing
process, Lean also highlights the importance of the voice of the customer. Porsche, the maker of
high-end automobiles, demonstrated great improvement in quality and productivity by utilizing
Lean methods (Womack & Jones, 2003). Porsche, as is typical in Germany, had brilliant product
20
engineers who believed strongly that the company with the best product, designed by the best
engineers, would win in long-term industry competition. Porsche had some major financial
challenges during the mid 1990s that they were able to overcome using Lean methods. Rather
than always implementing aspects that the product engineers at Porsche thought were important
in the car, listening to the customer made true impacts. In the first quarter of 2012, Porsche's
profit margin came in at 17.5%, making it the world's most profitable car maker (Rauwald,
2012). Lean promotes businesses to ensure that the voice of the customer is used to make
decisions and can be seen in the sustainable success of businesses like Porsche.
Performance Metrics
Financial performance is a baseline for any sustainable business and is calculated by
looking at the money going in and out of the business. The income after paying expenses is
divided by the revenues to give a ratio that measures the operational efficiency (Burch, 1994).
This metric is impacted by the performance of accurate quoting and the engineer’s ability to
provide efficient process instructions.
Successful labor performance metrics begin by creating an accurate quote on the labor
resources needed. This would include both the amount of labor time and skill level required to
build the product. A company uses a quoting tool for estimating cost and assessing the
requirements of making the product (Burch, 1994). The quote is based on the attributes of the
product and a calculation factor. For example, the number of electronic components to be
soldered on the assembly would drive the overall cost of the product. The number of
components result in a higher labor factor needed in the quote. Having a quote tool to help
calculate the impact of the attributes allows for accurate quotes of labor costs. There are risks of
bidding too high or too low as one might win business that mean the contract is not awared or it
21
will not return desired profits, especially if a long-term contract is in place (“ESTIM gives,”
n.d). Bidding too high and not having good cost controls to minimize labor rates could result in
not winning the business at all. Bid too low, and the profitability of the contract suffers
regardless of the efficiencies put in place. So it can be said that cost estimation methods are vital
to profitability and ultimately lead to the quotes that drive successful performance metrics.
In addition to costing, if the contract manufacture has a good partnership with the
customer there is an opportunity to better understand what the customer truly wants quoted. It is
critical that any business determines what the customer wants (Blanchard & Bowles, 1993).
Considerable work has been done to show companies that have a high level of customer
satisfaction can project improved financial performance. A study conducted at Michigan State
University showed higher customer satisfaction resulted in significantly improved financial
performance (Fronell, 2006). This study even goes into suggesting you are able to predict the
market with investment decisions based on customer satisfaction. The tool used to measure the
customer’s satisfaction is an index from the American Customer Satisfaction Index (ACSI).
Meeting the customer’s needs results in additional business and opportunities and can lead to
maximizing profits for the contract manufacture.
A customer survey is a performance metric any business can utilize to gather perceptual
attributes of customer satisfaction. With such attention focused on customers, a closed-loop
process in which every function worries about delivering a good experience is required (Meyer,
2007). The survey can be viewed as a tool and can be used by a company to gauge the
satisfaction of its current customer base and potential customers. This survey is a group of
questions answered by the customer with an attributed ranking of each topic. By analyzing the
results, the business can then drive improvement activity (Elliot & Shin, 2002). Using a
22
weighted score to measure overall satisfaction was studied to show that it was more effective
than using traditional ‘yes or no’ questions (Elliot & Shin, 2002). This study compared different
survey structures to measure student's overall satisfaction with his/her educational experience.
Traditionally this survey used simple ‘yes or no’ questions to assess the degree of overall
satisfaction. Even though this type of question is simple to answer and analyze, students may not
thoroughly reflect on the question before answering. This suggests using a survey that requires
open-ended questions along with ranking the importance of the attribute is the most effective
survey. This allows the user of data to understand which attribute is important along with how
the company or institution being measured is performing to that attribute (Elliot & Shin, 2002).
The following are examples of survey topics.
The quality of product delivered
The communication flow and responsiveness to inquires
The pricing of the product
Design reviews of the product prior to manufacturing
Manufacturing turn time of the product
Design confidentiality of the product
Each attribute would first be ranked by how important it was for the customer (Moorman,
2011). The range would be from a critical need to not needed. The second ranking is the
perception of the customer on how effective the contract manufacturer is at that particular
attribute. By having the two different ranking definitions for each attribute, a business can focus
on finding out what is most important to the customer. This includes how well, in the customer’s
view point, the contract manufacture is at performing to that attribute. As for the above
examples of topics, the contract manufacture might find out that quality delivered is more
23
important than the quickness, or cycle time, that the product is shipped in. They would then also
find out how they performed in quality and quickness in the eyes of this customer due to this
dual ranking system. However, this kind of importance rating is difficult to analyze. A more
startling finding is that the inclusion of importance information does not always improve the
ability to explain satisfaction (Colby, 2011). For example, if airline passengers were asked to
rank the importance of safety, it is more than likely they would rank it as critical. The majority of
the airlines resources would continue to funnel into the safety features of the plane but the
overall satisfaction might not improve. Flight attendants might be negatively impacting the
passengers travel experience thus causing an overall dissatisfaction (Colby, 2011). Regardless,
ranking attribute importance is a common practice of administering a customer survey. This
more recent work cautions that customer service importance ranking results are left for a bit of
interpretation by the business or institution.
Performance metrics in customer satisfaction and profitability have many different
definitions for many different customers. It is critical to note that Lean methodologies help us
measure results and drives for improvements. This continuous improvement culture is the
ultimate goal for any metric. This research drives metrics by studying a contract manufacture’s
engineering organizational structure. The goal is to identify how this structure can result in high
profitability and superior customer satisfaction. This gives both the customer and the contract
manufacturer a partnership and a competitive advantage. By driving manufacturing efficiencies
both the customer and the contract manufacturer will obtain greater value and the customer will
be more loyal to the contract manufacture.
When a business relies on multiple customers to ensure sustainable revenue growth and
profitability, listening to the customer has proven effective in numerous studies. Ensuring
24
customer’s needs are met maintains adequate revenues with repeat business. Successful
businesses also address business continuity and Lean initiatives. These are aspects that can
provide a competitive advantage to the contract manufacture. Arranging the accountability of
the engineering structure around these aspects can result in getting the most out of these areas.
In the end, the goal of any sustainable business is to have favorable financials. Work has
been done to review what metrics are effective in gauging a successful business. These metrics
promote the continuous improvement and financial security of the business strategy.
25
Chapter III: Methodology
The engineering organization can be organized as a traditional manufacturing structure
by process or a customer service structure based on accountability as previously described. Data
can be viewed between the two different methods by looking at customer surveys and labor
profitability performance. This study uses two virtual factories within one plant. One factory
would have the engineering accountabilities arranged by customer and is noted as F1. The other
factory (F2) would transition from a structure of having the engineers accountable by process to
customer accountability. By the end of the study both F1 and F2 would have the same
engineering accountability structure - segregated by customer. The research project was
reviewed by the Institutional Research Board and was determined to be Exempt.
Data Required
The data required was a combination of customer survey data and labor profitability
performance data. The customers used for the profitability data were limited to those with
consistent activity throughout the study time period. Other customers did have work during the
study time but transitioned out prior to 2011. This attempted to get consistent customer
interaction throughout the entire study. This resulted in the selection of four customers in each
factory. The available data covers 2009 through 2011.
Instrumentation
Labor profitability and customer survey results were the two tools used to measure
performance of the virtual factories. For this study, labor profitability was calculated based on
the actual labor costs measured (labor efficiency) and the labor costs quoted to the customer.
Any revenue associated with purchasing the material including mark up was removed from the
financial performance metric for this study. The engineers have an impact on the labor
26
performance as they establish the original baseline of the quoted costs. The better the engineer is
at gaining acceptance of a favorable quote by the customer the more likely the labor profitability
will be favorable. The next step for the engineer is to transfer this quote into an efficient
assembly process. The more efficient the assembly process the more favorable the labor
profitability will be.
Capturing the cost of building the product requires the collection of all labor hours
applied to the assembly. Company XYZ utilizes a data collection system to capture this time
allocation for each set of products. Those individuals that apply labor to a set of assemblies log
in and out of operations required to build an assembly. While they are at the workstation they
track each piece through that operation. This total time allocated and the skill set used can give
an accurate indication of the cost needed to build a particular product. Different skill sets can
have different rates associated with it. For example, a test technician used to electrically verify
the functionality of the electronic assembly comes at a higher rate compared to a direct laborer
used to cut wires for a harness assembly.
This difference in the cost of skills significantly impacts the labor profitability metric.
The engineer’s goal is to develop the most cost effective assembly process that yields expected
quality levels. If the process yields defective products and rework is required, the skill set
required to rework an electronic assembly becomes much higher. For this reason, having the
engineer define an optimal process early in the production build is preferred to avoid using the
more costly skill set of rework personnel. This scenario would undoubtedly affect the labor profit
negatively.
The next tool used as a performance metric was a customer satisfaction survey. It is a
group of questions answered by the customer with an attributed ranking of each point. By
27
analyzing the results, the business can then drive improvement activity based of areas of
customer dissatisfaction. Company XYZ utilizes an online tool that asks customers questions of
their experience which in turn promotes continuous improvement.
Data analysis
Factory 1 (F1) utilizes a customer based engineering structure while Factory 2 (F2)
utilizes a traditional process engineering structure for 2009. Starting in 2010 F2 changed the
accountability of the engineering department by customer, similar to F1. It is expected that the
labor profitability will be impacted by the changes in the engineering department’s
accountability within F2. F1 remains the same with its engineering department being
accountable by customer through the entire study period.
Labor profitability data of the contract manufacture are hard numbers coming from the
two factories studied. The labor costs are used to demonstrate profitability in this study to the
exclusion of revenue and potential mark up on parts. By using labor profitability, the importance
of good quoting and process design are revealed. The data comes from the same building
location but two different virtual factories. One factory utilized both the traditional structure of
the engineering department accountable by process and also customer accountable engineers and
the other solely used customer accountable engineers.
Each customer had numerous assembly part numbers built and had a yearly wrap-up of
the labor profitability (which is a summary of all the time used to build and test the product,
including any associated rework time). A scale from 1-10 is used to represent the actual
calculation of labor profitability, 1 being least profitable and 10 being the most profitable. The
reason for the scale is to not disclose the actual profitability values of Company XYZ as
28
permission was not requested to publish these values. Another set of data to be analyzed is
comparing customer satisfaction rankings.
Company XYZ had current customer satisfaction surveys and five questions were
selected that related to the effectiveness of the engineering structure. The company names have
not been disclosed and were replaced with Company A,B,C,etc..
The selected questions used included:
How would you rate the quality of the product delivered?
How was the communication flow and responsiveness to inquiries?
Has the committed delivery of the product been timely?
How would you rate material procurement and supply chain program
performance?
How is the quality of the Program Management interface?
Do quoting and proposal meet requests?
How would you rate the pricing of your product?
The customer first ranked the importance of each attribute and secondly their satisfaction
with how the contract manufacture performed that attribute. The attributes were ranked by how
important that point was for the customer and could range from a critical need to not needed. The
second ranking was a perception by the customer of how effective the contract manufacture was
with that particular attribute. This could range from very satisfied to very dissatisfied. An
overall average of the importance was captured in 2009 and in 2011 along with a combined score
of how the customers rated the effectiveness.
Importance to the customer:
5 – Critical
29
4 – Very Important
3 – Important
2 – Somewhat Important
1 – Not Needed
How effective was the contract manufacturer in providing that service:
5 – Very Satisfied
4 – Satisfied
3 – Neutral
2 – Dissatisfied
1 – Very Dissatisfied
Summary
These measurements provide the metrics used to gauge the differences between the two
options of organizing the engineering accountability. Labor performance directly impacts the
bottom line of the Company XYZ’s financial performance. The survey topics and rankings
attempt to cover all aspects of a successful business and are a reflection of how the engineering
accountabilities impact the customer experience. Each different measurement is linked to the
overall study of what contributes to high customer satisfaction and/or high manufacturing
efficiency. Recommendations can be made for the type of engineering accountability that should
be embraced for future factory cells within Company XYZ.
30
Chapter IV: Results
The data collected spanned a three year period and included the transition of F2 moving
from engineers accountable by process to engineers accountable by customer during the year
2010. The resulting data is displayed in tables to show the impact of the different engineering
accountability structures within F1 and F2.
Labor Performance
F2 is the factory that is the factor that was customer accountable for the entire period.
The F2 labor profitability showed improvement sequentially in each year after the engineering
structures were altered from process to customer based on three of the four customers. Customer
“E” remained statistically flat during the period. The three improved customers moved up in
labor profitability an average of 1.6 points between 2009 and 2011, see Table 1.
Table 1 – Labor Performance
Factory Customer 2009 2010 2011
F1 A 7.7 7.6 7.1 F1 B 8.8 8.5 8.4 F1 C 8.9 8.7 8.3 F1 D 8.5 8.7 8.0 F2 E 4.6 3.9 4.7 F2 F 4.4 4.8 5.9 F2 G 4.2 4.7 4.9 F2 H 5.2 5.1 6.7
The customer data from F2 was used to see if the change in customer accountability from
2009 to 2011 was statistically effective. The year 2010 was not used in the statistical analysis
because it was the transition year. A paired t-test was used to analyze effectiveness. By using a
.05 alpha we can be 95% confident that there is a statistically significant improvement in F2
31
labor profitability between 2009 and 2011. The one-tailed p value of 0.034indicates that the
labor profitability significantly increased..
Overall, F1 has a higher profitability rate than F2. This was, however, the only factory
within the company that was utilizing this customer engineer accountability for several years
prior. In addition, F1 (which was the control factory) had declining labor profitability over the
three year span. The average labor profitability from 2009 to 2011 fell by .6 points. During this
time frame some quoting practices changed slightly and reduced the amount charged to the
customer for set up of a new build. However, this practice was a companywide change and
impacted both factories. Based on this reduction in labor charged, the actual improvement made
in F2 could have been even greater than the data collected, meaning the shown improvements
more than offset the changed quoting practice noted above. The end results had F2 become more
profitable and at the same time the customer was provided more value per dollar spent. The .6
point reduction seen in F1 could actually be combined with the 1.6 point improvement seen by
the three F2 customers. By adding this offset, an overall 2.2 point improvement could have been
predicted. This results in a staggering 50% increase in labor profitability.
Customer Satisfaction
Customer satisfaction results were analyzed utilizing a pareto technique to rank the
attribute from highest to lowest based on importance (see Table 2). Ideally the contract
manufacture should focus on the attributes the customer thinks are most important. Here the
customers ranked product quality, communication and delivery as the top three most important
attributes. Arguably you could compare/contrast the different engineering structures with their
ability to fulfill these attributes. Most notably is the attribute of communication with the
customer. Having an engineering structure based on customer could lend to better interaction
32
with the customer in regard to communication. A .6 point improvement was made from 2009 to
2011 on communication (14%) across all customers within the manufacturing site. This
correlates with the change in engineering accountability in F2 from process to customer during
the time period studied. Overall, there was an average .27 point improvement (7%) from 2009 to
2011 on all attributes surveyed.
Table 2 - Customer Satisfaction
Question Importance Satisfaction Score
2011 Satisfaction Score
2009
Product Quality 4.68 3.90 3.91 Communication 4.60 4.55 4.00 Delivery 4.43 4.07 3.55 Technical Capabilities 4.13 4.26 4.45 Materials and Supply Chain 4.07 4.07 3.48 Program Management 3.81 4.39 4.00 Quoting/Proposals 3.79 3.79 4.21 Costs 3.68 3.64 2.90
Over the three year period the data showed some trends that come apparent with this
length of time. The data is linked to the impact that engineering accountability can have on the
performance of the contract manufacture. Based on the data, discussions can be made of why
the engineers contributed to the success of the different virtual factories within this
manufacturing site.
33
Chapter V: Discussion
Based on the performance metrics there have been improvements made in this factory.
The engineering accountability shift was likely a key contributing factor to this success. The
direct impact to the improved performance metrics could have been due to better quotes or more
frequent customer communication, however, the foundation of engineers accountable by
customer ultimately supported this. During this time period the count of engineers remained the
same in both F1 and F2. The efficiency gained with the same engineering resources allowed
them to make better contributions to the metrics studied.
Limitations
It was found that there were limitations in the complete implementation of defining the
engineering accountability change from process to customers in F2. Rather than an exact date of
change in accountability within F2, there was a transition time over several months. At the
beginning of 2010, both the engineers and other support team members learned to trust each
other as they supported the new accountability structure. This aligns with expected obstacles to
change in a company that has traditionally stringent levels of supervision and accountability.
Implementing a change like this was found to resulting in a low level of trust between
management and non-management employees (Ramirez, 2004). Clear communication is
required to explain to all team members when making a considerable organization change.
Without buy in form all team supporters, management and non-management employees trust will
be difficult to establish.
Since making a considerable organizational change will take much effort, splitting the
implementation into a manageable workload is preferred. Further work can be conducted by
implementing this practice on additional business unit sites one by one. This would allow more
34
customers to be included and grow the sampling size from just the eight customers used in this
study. This would result in a broader scope of how these engineering accountability structure
changes can be successfully applied.
Conclusions
Having an engineer matched up with the same accountabilities as the stake holder
(customer) ensures that their priorities are in the customer’s best interest. Being able to see all
the processes that the product requires during assembly allows for identification of redundancy
of value add steps and inspections. In addition, the customer has the simplification and
consistency of working with the same engineer, allowing for the engineer and the customer to
develop a relationship. Overall, courteous expressions and personal connection accounted for
significant customer loyalty within service providers (Koermer & McCroskey, 2006). For the
customer to feel they are a member of the team and part of a healthy relationship with the
contract manufacture you need to develop trust. Trust lies at the heart of a functioning and
cohesive team (Lencioni, 2007). Having the engineer accountable for the success of the
customer’s product grows trust between the engineer and customer. The customer feels that the
engineer is truly providing them value and invested in doing the greatest good for the customer.
In the end, competition and a continuous drive to increase productivity without adding
resources drives a need to improve. There are also increased pressures on margins as the
electronic assembly technology transitions more into a commodity product rather than
specialized processes. By improving performance metrics like labor profitability, the contract
manufacture has more of an opportunity to grant the customer price reductions. Utilizing Lean
methods in combination with efficiently using the engineering resources allows for these
productivity gains. As the customer builds trust with the engineer, the engineer can then help
35
communicate and sell certain price points. Without the trust spoken about previously, the
customer will continually second guess any quote.
Recommendations
The performance data has shown improvements in both customer survey and labor
profitability after F2 changed its engineering structure. The engineering accountability by
customer has shown to have a positive impact to Company XYZ. After a bit of transition time
from process accountability, the empowerment the engineers are experiencing today is creating
great relationships with the customers. Accountability is likely to only increase in importance in
organizations so it is important to have job accountabilities clearly identified (Ferris et al,, 2009).
This simple change in engineering accountability structure has made a long term positive change
in the success of this contract manufacture.
36
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