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Performance Specifications
Target Costing Creating Incentives Continuous Improvement Development Contracting Revenue Sharing Partners |
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Many aerospace products are now made by a team of revenue sharing partners, or 50% to 80% of the parts are contracted out to suppliers. Even if your design team can coordinate its design to optimize all in-house components to a single objective, you will need additional technology to bring partners and suppliers into step with your design. Traditional sourcing approaches utilizing performance specifications and even target costing generally do not produce optimal designs. Correct use of contract incentives will optimize your product and encourage your supply chain to continually improve their parts and components throughout the product life cycle. DFM Consulting research has shown that the same strategy of contract incentives can be used by government program managers to create a synthetic free market for sole-source system acquisitions, leading to the same kind of pressure for design optimization that naturally occurs in competitive markets. |
Traditional systems engineering methods specify the performance of subcontracted components and parts, such as the weight and reliability of a temperature sensor. When the subcontractor designs the part, this approach will yield an inferior design. The only way that performance specifications can achieve the optimal design (the best design) is if the purchases knows the optimal design ahead of time and specifies the performance of the optimal design. However, the optimal design is only uncovered during the design process. Since the subcontractor is executing the design, only the subcontractor can find the optimal design. In particular, only the subcontractor knows the manufacturing cost implications of design alternatives, so the purchaser has little chance of guessing the optimal performance levels.
Target Costing is essentially an effort to specify cost as a performance parameter. Like other performance specifications, it will lead to the best design only if the purchaser can guess the specifications of the optimal design before initiating the design optimization process. While target costing is an improvement over strategies that ignore cost, it is no substitute for encouraging the subcontractor to find the best balance among performance measures and cost.
DFM Consulting's distributed optimal design technology can find a design objective for every component or part of your product. Each design objective is a mathematical expression that combines all measures of performance and cost into a single measure of value to your business.
Contracts with suppliers can incorporate incentive clauses that modify the price based on performance, so that the subcontractor earns more profit as the part brings more value to your business. The incentive clause is derived in a simple way from the design objective for the part. Suppliers will optimize part designs to maximize their own profits.
The real power of contract incentives, whether in supplier contracts or government prime contracts is that the contractor will continually improve performance and decrease manufacturing cost to improve its own profitability. The aerospace industry suffers from exponentially rising costs, primarily because the organizations with the greatest hold on costs have no motivation to reduce costs. DFM Consulting's incentive technology will reverse the trend by making reduced cost a primary interest of every firm in the supply chain.
Even though incentives are tied to production prices, contract incentives must be introduced prior to development so that component designs can be optimized by suppliers. DFM Consulting can show how to structure contracting relations to achieve optimal designs and find the best balance of risk-sharing and financing during development.
Revenue Sharing Partners typically earn a percentage of sales rather than a fixed price for their component. To align their profitability with the optimal design requires a different calculation of contract incentives from design objectives. DFM Consulting can show you how to do this as you establish your revenue sharing agreements.
Call DFM Consulting to develop contract incentives for suppliers and revenue sharing partners to create optimal designs on your program.
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