Spend Matters welcomes this guest article by Sachin Yadav of GEP.
Engineering services is a complex marketplace with a mix of large, cross-discipline scale and deep specialization. Major players can provide for all engineering requirements, due to consolidation in the market. The industry is completely driven by talent, which is rare and transferable. Barriers to entry are low, because anyone with a group of people with specialized skills can start an engineering services firm.
Engineering service providers (ESP) are a major driver of capital expenditures for most manufacturing companies in the United States. Engineering services (internal and external) makes up to 35%–40% of cost for a typical capital project. The complexity of a capital project usually depends on the industry and the manufacturing process across every plant. Most capital/engineering projects need innovative engineering solutions, which makes it imperative for firms to have best-in-class talent at their disposal. Mid-size consumer packaged goods (CPG) companies face many challenges in sourcing engineering services from third-party providers, such as:
- How to get best-in-class engineering talent
- Whether they should contract global engineering firms or regional suppliers
- How to manage “suitcase costs” (travel/lodging/food) for ESPs
- Whether they should execute all engineering projects in house. If so, what is the cost?
- How to handle high switching costs due to knowledge management issues
To help with your strategy regarding capital project implementations, a basic framework to prioritize your approach can help organize and compare the best opportunities.
Alignment with business strategy: ESP management strategy should be completely aligned with business strategy of the firm. Not every engineering project needs to outsourced. Although specialized skillsets will always be hired from outside the firm, core competencies should stay in-house. Companies need to make sure that only high-value activities are performed by high-value resources. Periodical value-add analysis should be done through audits for all engineering service providers.
Choose right fit/function suppliers: Supplier selection will have a huge impact on the cost of engineering services to every firm. Big engineering firms focus on engineering-focused industries like construction, energy and utilities. When small and mid-size manufacturing firms hire big engineering firms for services, they don’t get access to the best talent and they also pay significantly higher costs for services, travel and overheads. Mid- and small-level manufacturing firms should focus on smaller engineering firms to drive maximum value. It’s also important to do business with suppliers within geographical vicinity of manufacturing plants to reduce suitcase costs. Cost benefit analysis of volume discounts versus extra travel costs will help your firm reach the right decision.
Offshoring: Companies should always be open to exploring the option of offshoring non-value-add activities for which onsite presence is not required, such as computer-aided design (CAD) operators and admin staff. Offshoring is a much more effective proposition when engineering projects are executed repeatedly. ESPs can use knowledge management techniques to reduce the cost of such projects by using offshore resources. New engineering projects usually require onsite presence.
Efficient contracting: Engineering contracts should be reviewed periodically along with spend on engineering services to review the efficiency of the contracting process. Some of the key points that need to be evaluated are:
- Supplier performance in terms of project execution/completion
- Compliance to contracted billing rates and overtime usage
- Travel costs
- Distribution of effort among engineering resources
- Knowledge management use
Some of these data points will help your firm devise the right strategy for sourcing engineering services and improve overall execution of capital projects at the right cost. Getting the right strategy and right set of suppliers is imperative because the switching costs for this category are really high.
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