Make to Desire: How New Technologies are Revolutionizing Lifecycle Management
Introduction
As competitors focus on core competencies and outsource non-core processes to trading partners, information technology tools that support product lifecycle management (PLM) will become make-or-break IT investments. The familiar cycle of rapid reinvention for electronics products will be increasingly common in manufacturing sectors from automotive to consumer packaged goods (CPG). Tools to capture, analyze, and act on market and customer desires are vital. The notion of "make to desire" takes new product development from an engineering centric approach to a customer centric model in which products represent more than a one-time purchase. Make to desire means achieving resilient consumer preference for CPG companies looking for returns on branding investments. It also means converting purchases into a stream of revenue to the manufacturer from service and support. The unifying mission is to make products that people really want, profitably.
New technology makes this possible. Internet communications, coupled with massive advances in processing power, allow fragmented teams of experts to collaborate on complex problems with powerful tools for simulation, visualization, and analysis. Above all, new PLM technologies will help speed manufacturers processes which will contribute margin and foster growth.
PLM is About Competitiveness
Information technology is transforming the lifecycle management of manufactured products to create billions of dollars of new value for manufacturers and their customers. By turbo-charging the productivity impact of traditional engineering applications, like CAD and product data management (PDM), Internet-based technologies that enhance process management, decision support, and constituent feedback will provide a burst of speed in new product development efficiency and effectiveness.
For individual companies, this means a competitive imperative to stay ahead of the pack in the most fundamental way—by offering a better value proposition to customers. AMR Research spoke to IT, engineering, R&D, and design executives at 50 manufacturers to understand how PLM strategies are evolving and being rolled out. The top three key performance indicators targeted in companies' PLM strategies illustrate the competitive importance of speed in the face of complexity (by percentage of respondents):
• Engineering change cycle times and collaborative execution—62 percent
• Time to market and process streamlining—49 percent
• Design reuse to reduce costs—33 percent
Figure 1—Reasons for Product Lifecycle Management
Unlike many enterprise applications, PLM software and business processes focus on the renewal of companies' competitiveness by concentrating on the job functions and information associated with product innovation. Consider the impact on profitability and market share when hot new products are introduced at the right moment—the success of Chrysler's PT Cruiser or the failure of Palm's flagship Pilota after a late release last fall. This focus on innovation makes sense.
The idea of PLM has been gaining momentum as product lifecycles have grown shorter, outsourcing of design, engineering and manufacturing has accelerated, and cross-functional teams have shown their value in delivering superior products to market. Pioneers like Honda and Toyota showed the potential of attacking the new product development process and, in so doing, forced their U.S. competitors to reduce new product development cycles from about 60 months in the 1980s to as little as 36 months by the mid-1990s. Today, the state-of-the-art has reached new levels in high-tech and electronics where super-short product lifecycles have forced companies to take these lessons further with product development and introduction processes that rely heavily on a virtual company model.
Figure 2 New Product Development Evolution
The potential value of combining these new technology tools with emerging core competence-based strategies and operating philosophies is huge. The major sources of new value fall into three categories: revenue enhancement, cost reduction, and capital efficiency.
PLM Technology Creates Money
To determine how large the potential value is, AMR Research took a closer look the automotive sector. We saw plenty of reasons to feel good about the long-term value of emerging PLM technologies in the design and lifecycle management of cars and light trucks. Combining engineering complexity similar to aerospace with market volumes like the consumer electronics industry, automotive manufacturing may be the world's hottest market for collaborative PLM.
• More than 75 percent of product cost is up-front in the conceptual design phase.
• 50 percent faster time to market cuts typical new vehicle program expenses by 20 percent to 30 percent, and reduces the risk of missing demand windows.
• 30 percent of long-term revenue potential per vehicle is in the $40 billion aftermarket; margins there are typically between 40 percent and 60 percent.
• Design reuse can reduce new vehicle program expenses through lower warranty costs, engineering time, tooling, testing, documentation, and errors.
By unbundling these broad benefits, we can take a more detailed look at where value is created. The long-term potential is very encouraging —$1,600 per finished vehicle—but the immediate prospects for payback are uncertain. Similar analyses applied to different sectors indicate comparable potential gains and challenges. Across all manufacturers worldwide, the impact of this technology wave appears ready to create hundreds of billions of dollars in new margin.
PLM Technology Is More than an Application
The technology toolset that is forming around this problem consists of five major components of software functionality, each addressing a different process or information element of new product development and introduction. The five pieces are:
• Collaborative Product Design—Creation and development of executable ideas
• Direct Material Sourcing—Managing input from suppliers
• Customer Needs Management—Managing demands from customers
• Product Data Management—Maintaining a logical history of all product definition information
• Product Portfolio Management—Decision support for new product development and introduction function
Figure 3 Product Lifecycle Management Functionality Footprint
Technology buyers will need to approach the PLM market differently from other large enterprise technology suites, like ERP or CRM. For one thing, the most familiar and widely used application in this area is CAD and its related engineering desktop productivity tools (CAPE, CAM, CAE, etc.). The market for this class of software is regarded as mature, with near saturation among engineering groups in Fortune 1000 companies. These users are not going to embrace a new work interface. The implication is that PLM applications need to work with these established CAD packages as an enhancement to the process, rather than a replacement. Modular approaches to buying and installing software that links to the CAD model is necessary.
Also significant is the extraordinary breadth of the product development problem. Because it encompasses essentially all functional specialties in the manufacturing company, the product development process requires tools that allow access to widely different types of information with tremendous interdependency for better and faster decision-making. This problem can have such broad scope that meaningful progress is impossible; this is one of the most common pitfalls of PLM. While ERP systems called for a comprehensive look at financial management, at least the problem was deterministic. PLM is at least as wide as ERP, but essentially problematic. It needs to be tackled in a series of small steps, and incremental organizational learning should remain the goal.
Where customer relationship management systems focus on the customer and supply chain management systems focus on the order, PLM systems will be defined by their ability to give businesses a history of all their products. For this reason, no decision is more strategic than choosing which product data management package to deploy. PDM replacement is rarely a burning issue, but using a clumsy, coding-intensive information repository is potentially crippling to companies whose competitors have a grip on collaborative PLM. As the eventual system of record for all product data, the PDM system must provide secure but flexible access outside the firewall to many kinds of users.
A useful guide to assessing PDM system scope for the long term is to consider product data beyond that associated with the traditional engineering and manufacturing bills of materials. Every individual product is initiated with some core concept typically rolling in marketing, strategic, and technology factors. These are generally unstructured data linked through people making preparations for some sort of review meeting. At least some of this information should be connected to the more structured data created during later engineering phases.
At the other end of the process, each unit is sold with a customer-specific configuration including the physical BOM as well as the contractual terms between manufacturer and consumer—extended warranty or service plans are the obvious examples. With deeper information and service penetration into the ultimate lifetime revenue potential for everything from appliances to machine tools. (e.g., Telematics or other embedded software), the need for customer-specific BOM management becomes apparent. Also significant is the possibility to close the loop back to idea formation with model and customer-specific tracking and warranty management.
Finally, lot tracing requires that manufacturers know what was put into their product in the event of a performance failure or safety problem. Firestone's problems with the Ford Explorer SUV is a well-known example of the potential disaster that accompanies delay in identifying product problems. This concern is critical to consumer goods manufacturers, aerospace contractors, and medical device makers. For many, compliance with regulation, such as the FDA's 21CFR Part 11 standards that are imposed on pharmaceutical companies, makes PLM upgrade a necessity.
Figure 4 PDM and the Widening Bill of Materials
PLM Strategy Starts with Product Strategy
Whether looking to improve new product introduction success rate, time to market, or manufacturing costs, PLM technology can help. PLM strategy is all about product strategy and the business structure to support that strategy. Almost all product companies can tie their strategy to some core competence that will differentiate them from competitors in customers' eyes. This should be the starting point for developing a PLM strategy.
At the higher level of theory, new product development and introduction (NPDI) processes can be broken roughly into two dimensions: length of development cycle and length of product lifecycle. For those manufacturers dealing with long development and product lifecycles, the predominant challenge is data management. This involves coordinating massive amounts of detail among hundreds or thousands of individual contributors, maintained over many years. In this environment, compromising on core PDM capability is not wise. Project management applications may provide a faster return on investment, however, by reducing immediate expenses like labor overtime, project overruns, and expediting costs. These issues characterize the project-driven manufacturer.
For companies with long development cycles but short product lifecycles, technology often dominates. In such situations, knowledge management offers value, as new product development cycles generally need to overlap. Semiconductor makers face this issue, as overlapping research and development efforts must be managed with an eye toward technology maturity and the resulting market window timing for design wins.
Companies with short development cycles but long product lifecycles are generally marketing-driven, and they need business intelligence tools to tie consumer preference to product specification. Recipe management and regulatory compliance is also critical in the longer term to support the traceability of products in the distribution and retail supply chain. Short-term gains can be had from better and quicker identification of existing formulas or other design documents. Long-term competitiveness, however, will come from enhancing the marketing competence of the organization with tools for customer needs management and portfolio management. The central performance metric here will be the new product introduction success rate.
When both development cycles and product lifecycles are short, the top issue is manufacturing responsiveness. The classic example is consumer electronics, in which innovation cycles are extremely rapid and market price erosion penalizes companies that are unable to ramp to volume quickly when demand is high. The premier PLM point application has been change management, and the core competence is manufacturing responsiveness. The most important performance metrics are time to market and time to volume production.
Common to all these broad types of NPDI processes is the problem of portfolio management. Specifically, management decision-making fails to prioritize projects rationally. Professor Bill Lovejoy of the University of Michigan, a specialist in NPDI processes, said "The real problem right now is portfolio management. What projects do we want?" Failure to realistically assess resource constraints and risk factors still gets bad projects greenlighted and good projects stopped.
AMR Research looked for a causal link between growth rate in R&D spending from one year to the next and growth rate in revenue in later years. Taking 10 years of data for 600 public U.S. manufacturers and using ordinary least squares regression analysis we expected a positive and significant correlation. The result was mildly positive but decidedly insignificant, indicating no reliable causal relationship. This outcome was true across industries, individual companies, and various time lags.
The culprit is product portfolio management. Companies have been shifting away from the pure research environment of the old Bell Labs as corporate investment criteria have tightened. But for such a large investment (typically five percent to 15 percent of revenues are spent on R&D) to generate such unreliable returns is a clear opportunity to employ better portfolio management techniques. With portfolio management, the benefit can be quickly realized, because the tools allow users to make rational decisions about where resources are best deployed across the enterprise's entire pool of development spending. This allows for smart budget cutting or resource reallocation. The benefits should also persist over time, as incremental technology investments can be assessed by their ability to solve execution problems across the portfolio of projects.
Conclusion
Manufacturers need to begin evaluating how emerging collaborative PLM applications can improve their product innovation. The Internet will impact product development and lifecycle management more powerfully than it will any other strategic business process, and companies that learn to use it will outperform those that don't. Companies that succeed will consider several factors, including these:
• PLM is still evolving as a software product category. Avoid buying based on vendor vision alone.
• Point applications within the PLM category are available and valuable. Start with a single product addressing a single problem.
• A nine-month rollout and payback in the near-term budget period is possible.
• Heavy product data management users should first consider vendors with an engineering heritage.
• All users should investigate portfolio management products.
