No manufacturer can succeed alone; suppliers are vital to every successful OEM business, directly contributing to the final product's success.
In the last article, I discussed the various types of products and their development environments. In doing so, I described the series product as being developed even before its eventual customers are identified.
If you’re a supplier or work for one, you might think:
'That doesn’t apply to us—we develop our series products together with the customer!'
But who’s right?
In this article, I’ll dive into this specific question and explore the collaboration between OEM developers and supplier developers.
The goal?
To foster mutual understanding and improve cooperation for better outcomes.
What does the development process of a final product look like?
I will start with a brief overview of the phases in end-product development to provide context for the explanations that follow.
Development follows the principle:
Specify from large to small — Validate from small to large
- a principle that is anchored in the V-model of system development.
It all starts with the customer-intended end product, which is usually understood as a more or less complex holistic system.
The OEM's developers describe and specify the end product very precisely, ensuring that all requirements are clearly defined.
A complex and time-consuming process begins:
Performance requirements and specifications are broken down along a new or existing product architecture into subsystems, assemblies, modules, components, and individual parts.
The objective is to ensure that all elements work together seamlessly to achieve the intended overall system characteristics.
There exists one major challenge in this process:
The performance of individual parts, components, and modules directly affects the allocation of specifications within the system. It would not be practical to impose technically unfeasible requirements.
This decomposition of requirements follows an iterative approach along the left leg of the V-model.
Subsequently, validation takes place step by step along the right leg:
First, each part must demonstrate that it meets its assigned specification.
Next, the interactions between individual elements are tested at each level, gradually progressing from single parts to the entire product.
Finally, at the top right-hand end of the V model, the entire system must demonstrate the defined product characteristics.
The development is only considered complete once all requirements have been fulfilled.
What does the OEM need from the supplier?
In the process of breaking down requirements, it is crucial for the OEM engineer to realistically assess performance and properties at each level.
At various system levels, suppliers now come into play.
As part of the specification process, the OEM must decide which components to source from partners—whether for economic, logistical, or expertise-related reasons.
At this stage, the supplier becomes an active participant in the project.
Even though the OEM is the supplier’s direct customer, the focus is ultimately on the end customer who will purchase the final product. In reality, the end customer doesn’t care who contributes which parts—what matters is the overall result.
It is crucial that all parties involved understand this relationship.
Only if the end customer is satisfied, places an order, and pays for the product can business success be ensured for everyone.
While the supplier provides a defined scope of supply, they are also an integral part of the project team during the development phase.
So the engineer at the OEM needs the same things from the engineer at the supplier as he needs from his colleagues at the OEM:
* Solutions for problems
* Information on the performance and properties of subsystems, assemblies, modules, components, and parts
* Feasibility and risk assessments for new developments
* Costs/prices
* Performance evidence for supply scopes
* Calculation models, prototypes, and production samples
You might be wondering why I didn't list any information about time requirements.
The reason is quite simple: Time cannot be integrated.
If the development of one component or module takes longer, this delay cannot be compensated for by a shorter development time of another component.
Components that are not available within the given time frame are automatically ruled out as viable solutions.
That's why development frontloading at the supplier is a crucial prerequisite for the OEM to bring technologically sophisticated products to market.
On the right-hand side of the V-model, the Original Equipment Manufacturer (OEM) engineer requires proof of performance.
Ideally, every engineer involved in the project should provide this verification for their respective scope of work. This includes engineers at supplier companies, who should demonstrate the performance of their supplied components or systems.
How can a supplier prepare their product?
At this point, I'd like to briefly discuss four key project categories:
* Integration projects
* Platform projects
* Component projects
* Technology projects
Integration Projects
The development process for an end-product following the V-model, as previously described, exemplifies an integration project.
In this context, the primary focus lies on harmonizing interfaces within the overall system.
This critical task is typically the responsibility of the Original Equipment Manufacturer (OEM).
Key aspects of integration projects include:
* Ensuring seamless communication between various subsystems
* Optimizing the performance of the entire system
* Managing complex interdependencies among components
* Coordinating efforts across multiple teams and suppliers
By effectively managing these integration challenges, OEMs can create cohesive, high-performance products that meet or exceed customer expectations while maintaining efficiency in the development process.
Supplier engineers must be prepared to optimize components, manage interfaces, proactively solve problems, and maintain seamless communication with OEMs
Technology Development and Pre-Development Projects
The development of new, innovative, and unfamiliar technologies must occur in advance of integration projects.
This proactive approach is crucial because it generates essential information regarding performance characteristics and properties, which serves as a prerequisite for successful integration.
Suppliers should take the initiative to:
* Independently develop technologies relevant to their scope of delivery
* Ensure these technologies are available at the project's outset
* Conduct technology and pre-development projects to achieve these goals
This strategy offers several benefits:
* Reduces risk in integration projects
* Accelerates the overall development process
* Enhances the supplier's competitive edge
* Enables more accurate cost and timeline estimates
By investing in technology and pre-development projects, suppliers position themselves as valuable partners to Original Equipment Manufacturers (OEMs), ready to contribute cutting-edge solutions to integration projects from day one.
Platform and Component Projects
Transforming pre-developed technologies into viable supply packages typically requires suppliers to undertake platform or component projects.
These projects bridge the gap between innovative concepts and practical, marketable solutions.
It's often not feasible or economically viable to have completed such projects when the OEM starts to integrate.
Significant investments before a supply contract is secured can pose financial risks. However, the more preparatory work is completed, the smoother and faster the integration project progresses.
OEMs prefer suppliers who offer:
* Ready-made modules or components
* Solutions requiring minimal or no adaptation
* Well-prepared scopes that can be easily integrated
Suppliers should adopt a forward-thinking strategy:
* Conduct preparatory work to the economically justifiable extent
* Develop a range of potential scenarios
* Prepare comprehensive preliminary investigations and decisions
By taking this proactive approach, suppliers position themselves as valuable partners, ready to respond swiftly and effectively to OEM needs. This preparation can significantly streamline the integration process, potentially leading to stronger partnerships and more successful projects.
How can effective collaboration be achieved?
Effective cooperation between Original Equipment Manufacturers (OEMs) and suppliers hinges on two fundamental principles: openness and trustworthiness from both parties.
Successful partnerships involve OEMs and suppliers aligning their respective product and technology strategies over the long term.
This foresight enables suppliers to prepare thoroughly and in good time for upcoming integration projects.
This level of openness demands a high degree of mutual trust, as it involves exchanging competitively sensitive information. Both parties must ensure that this data never reaches their respective competitors, as it's highly confidential.
Mutual Responsibilities
* For OEMs: Making timely decisions about goals, priorities, and preferred partners.
* For Suppliers: Allocating resources early and making upfront investments at their own technical and financial risk.
The second statement parallels the series product for the end user, as explained in the previous article.
Just as OEMs pre-finance product development at their own risk, suppliers should initiate preliminary work early, assuming calculated risks.
What challenges and obstacles must be overcome?
Here, I would like to discuss some examples of typical challenges in an OEM supplier relationship
Price vs. proof of maturity
In supplier competition, prices are typically objective and transparent. Since the supplier's price directly impacts the OEM's costs, it is natural for the OEM to prioritize selecting the supplier offering the most competitive price.
However, evaluating the performance and readiness of the supplier's scope of delivery is far more complex.
For instance, if one supplier has already completed preliminary work and can provide tangible evidence of their components’ capabilities, while another cannot, the OEM faces a challenging decision.
Often, the supplier who has invested in advanced development may charge a higher price compared to a competitor without such preparation.
This dynamic can lead to situations where the OEM selects a supplier based solely on a lower price. However, this choice may result in difficulties later in the project, such as delays, integration challenges, or compromised product quality.
The lack of preparedness from the selected supplier can ultimately hinder project progress and impact the overall success of the product.
To avoid such pitfalls, OEMs must carefully weigh both price and maturity during supplier selection, ensuring that short-term cost savings do not compromise long-term project outcomes.
Beyond price: Assessing supplier capability
A critical, often overlooked aspect of supplier selection is evaluating the supplier's ability to participate in a development project professionally, punctually, and with high-quality work. This assessment is crucial for long-term project success.
A contract between OEM and supplier can be compared to saying "I do" at a wedding. Once the "wedding" (contract signing) is over, a "divorce" (contract termination) becomes significantly more complicated and potentially disruptive for both parties.
If the honeymoon period is quickly followed by arguments and dissatisfaction with the partner, this will have a negative impact on the final product and thus on the financial situation of both partners.
So don't be fooled by appearances. You have to look at what's inside.
In-Production Challenges: Cost Reduction vs. Quality Assurance
Once the end product successfully transitions to series production, the real business begins.
This phase introduces a delicate balance between cost optimization and maintaining product integrity.
Suppliers naturally seek to reduce production costs to improve profitability, while OEMs often demand price reductions from suppliers to ensure their own profitability. This situation creates an inherent conflict of interest.
When a supplier considers making changes to reduce costs, a critical decision point arises.
Option 1:
The supplier can take a transparent approach, discussing changes with the OEM for system-wide validation. However, this means the OEM becomes aware of cost reductions, potentially leading to demands for price cuts.
Option 2:
The supplier might implement changes without OEM consultation, potentially retaining cost savings but risking expensive quality issues that could damage reputation and relationships.
While the temptation to implement undisclosed changes may exist, the ethical and practical course of action is clear: transparency and collaboration with the OEM are essential.
This approach ensures product quality and system integrity, maintains trust in the supplier-OEM relationship, mitigates risks of costly quality issues, and aligns with long-term business sustainability.
Although it may be challenging to resist short-term financial gains, the long-term benefits of maintaining transparency and quality far outweigh the risks of unilateral, undisclosed changes.
In the end, open communication and collaborative problem-solving between suppliers and OEMs are crucial for navigating these in-production challenges successfully.
The evolution of OEM-Supplier relationships in a changing global landscape
The increasing complexity of products and the intensification of market competition have made the inefficiencies of the traditional OEM-supplier relationship less and less sustainable.
A re-evaluation of established practices and an exploration of new paradigms are required to address this shift.
Looking at the Chinese market, the degree of vertical integration at OEMs is much higher than in the West.
However, it's important to recognize that the current Western model didn't emerge by chance. Despite the disadvantages discussed earlier, it has persisted for decades due to numerous significant advantages.
This situation prompts several critical questions about the future of manufacturing and supply chain management:
* Will we witness a return to higher levels of vertical integration in the future?
* Will the current trend of specialization and division of labor continue?
* Can we develop innovative solutions that combine the advantages of both models while mitigating their drawbacks?
These questions are not merely academic; they have profound implications for the future of global manufacturing, supply chain resilience, and competitive strategies in the automotive and other high-tech industries.
I invite you to share your thoughts and perspectives on these crucial issues.
How do you envision the future of OEM-supplier relationships evolving in response to these global trends and challenges?
Your insights could provide valuable perspectives on navigating this complex and changing landscape.
Let's discuss it in the chat! I'm curious to see what you think.
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