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Everyone hates non-recurring engineering (NRE) charges and it may seem like a pleasant surprise when a contractor with design engineering capabilities offers a discount that eliminates some or all of these charges. If the work stays at the contractor, there may be no downside.

The issue comes if the customer chooses to move to another supplier. Why? Because often the customer does not clearly understand that the discount occurs because the supplier is only licensing proprietary parts or design elements. If the project moves, the customer doesn’t own the elements that were licensed.

Licensing to minimize NRE or tooling charges, has long been a common practice in consumer electronics built in Asia. Companies would often opt to use generic housings to eliminate tooling costs. In some cases, subassemblies were licensed, as well.

The downside was that moving the product often required redesign or reverse engineering, since the licensed enclosures or subassemblies were no longer available through the new contractor. When subassemblies such as a display were licensed, the end manufacturer’s decision to modify size of products offered as market trends changed over time could create obsolescence issues in products with lifecycles longer than two years.

However, more recently, a variation of this practice has been found in some U.S. firms that offer design and contract manufacturing. Again, there is nothing wrong with the practice of getting a discount on design in exchange for manufacturing with that company, as long as both companies understand that the tradeoff is being made. Difficulties occur if the customer doesn’t completely understand what files are owned vs. licensed.

How can surprises when outsourcing design and manufacturing be avoided?

Here are four things to consider:

  • Evaluate What Your Competitors Do – Some industries, such as networking and telecom, have niches of very short lifecycle products that utilize licensing-based models to cut product development time and costs. In those cases, a licensing-based model may work best, because the short lifecycle mitigates obsolescence risk and need for ongoing cost reduction.
  • Understand Which Business Model Works Best for Your Requirements – Although, licensing can initially save time and money if you are prepared to work with that firm for the life of the product, it also locks out competition and any incentive for the contractor to reduce costs over time. Paying full price upfront gives you the flexibility to switch suppliers and provides greater incentive for a contractor to find ways to reduce cost over the life of the product. This can be particularly important with longer lifecycle products.
  • Contractually Specify the Deliverables – The best way to ensure that you own the design and the entire product is to specify what you own in any contract you and the supplier agree to. This should list all file sets and tooling by name.
  • Keep Current Copies of Documentation – The ability to share current revisions of documentation electronically has never been better. That said, many customers never request their documentation until they are planning to leave a supplier. Maintaining good revision control can eliminate any potential documentation transfer issues at the end of relationship.

Defining a List of Deliverables

Here is the typical list of deliverables commonly provided at the product design level:

  • Schematics
  • Gerber files with PCB fabrication specification
  • Computer-aided design (CAD) PCB layouts
  • Net lists
  • Assembly drawings
  • Bill of materials (BOM) with detailed component specifications
  • Test specifications.

If software is developed as part of product development, ownership of the code should be clearly defined as sometimes this type of software development may include the design firm’s proprietary code.

At a manufacturing level, production tooling, test fixtures and test software ownership should also be defined.

Is Any Support Provided without a Catch?

While practices vary among contractors, design for manufacturability and testability (DFM/DFT) recommendations are generally provided at low or no cost. Burton Industries typically provides this at the quoting stage, because product that is difficult to manufacture or test generally carries hidden costs to both the customer and contractor. Identifying those issues prior to production start is usually much less costly to correct than addressing them once production has started.

While a detailed product lifecycle management (PLM) analysis will likely carry a separate charge, some level of BOM scrubbing to identify components near end of lifecycle or recommend alternates in cases of sole-sourced components may also be done as part of a new product introduction process (NPI) process. Similarly, feedback on any lessons learned in the first article production process may be included.

Since these practices can vary by contractor, discussing which services are included or available for an additional cost may be valuable during the contractor evaluation process.

Clearly defining ownership of the outputs of any contracted design process, tooling and production related NRE activity will add flexibility to your outsourcing process. While there is nothing wrong with making a decision to license rather than own if the end result is a true cost savings, it should be the result of a conscious decision rather than a surprise when trying to move the project.

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