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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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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.

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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.

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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

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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

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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

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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.

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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).

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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.

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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

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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.

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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.

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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

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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

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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

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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

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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

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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

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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

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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

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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

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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

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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.

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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

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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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