Specialized Prototype Supplier: Separating Prototype and Serial Production in Industrial Networks

One of the biggest challenges for Original Equipment Manufacturers (OEM) today is to build and manage their global networks. There will be production in industrialized countries also in the future, but more and more goods are produced closer to the developing end customers. Academics have, for decades, argued that in industrialized countries companies should move into high value adding activities (Skinner 1974, Ferdows 1997, Pavitt 2002). Pavitt (2002) suggests that R&D services could be one of the primary sources of competitive advantage in highly industrialized countries. Empirical observations regarding company strategies also point the same. A recent study that focused on activities off-shored from Finland pointed out that R&D is still located mainly close to the company head quarters and not in LC (low cost) countries close to the end customer (Ali-Yrkkö 2006). These changes and trends raise the research question of this paper: Could there be potential for certain supplier companies to specialize into prototype production? This paper will discuss how a traditional serial production supplier company could specialize into prototype production and what could be the role of a prototype supplier in an industrial network. We conducted a case study regarding one global equipment manufacturer and its supplier network. We analyzed the research question from both the OEM's and the supplier's point of view. For the case OEM, a specialized prototype supplier means separating different manufacturing processes in the manufacturing network (Figure 1). The primary drivers for process separation are increased manufacturing volumes and assembling serial products in production line. Separating the processes to different suppliers would support OEM to separate R&D and production geographically. In the geographical areas that are not involved in R&D activities, suppliers could specialize into serial production and at the one area where R&D is located suppliers could transform their resources towards new product development. Figure 1: Separating different manufacturing processes in the manufacturing network Could prototype manufacturing be then good business for supplier? So far prototype manufacturing has been an underpaid task that suppliers have done pretty much in order to get the serial production orders. If there were specialized prototype suppliers, the case OEM should commit to compensate enough for prototype parts and concepts. The logic of this change is to pay more for the high value adding prototype parts and less for the serial product parts and get the cost benefits in the long run through increasing serial production volumes. To specialize fully just into prototype parts would need several customers to keep costs moderate. In such geographical areas where many big OEMs have product development activities this kind of prototype supplier service could be in great demand. Depending on the resources of the supplier, prototype manufacturing could mean developing the product with the customer, manufacturing the prototype parts, optimizing manufacturability and conceptualize the manufacturing process for fast ramp-up in serial production unit. This paper contributes to earlier literature by introducing a set of attributes that affect the circumstances in which these processes could be separated. This distribution of work in the supplier network is possible but needs long-term commitment from both the OEM and the supplier company.