In the last blog entry of this series, we talked about how to find an “off-the-shelf solution.” (OTS) But if OTS is not the right solution for you, it’s time to figure out how to get the custom machine that fits your needs. The first step is to understand what type of customer you are.
From the perspective of companies that provide factory equipment, customers come in two distinct flavors:
- Original Equipment Manufacturers (OEMs) are customers for whom the factory equipment is their product. This includes companies that sell process or metrology equipment based upon specialized technologies or intellectual property (“IP”).
- End Users are customers for whom the equipment is for making their products. End Users are anybody who operates a factory; the equipment that fills the factory either came from OEMs or some flavor of custom equipment supplier.
Of course, often one company can have both aspects, so when searching out a custom equipment supplier. the first thing you should do is figure out which kind of customer you are for this equipment.
Whether you are an End User or an OEM matters for how you think about potential suppliers.
If you are an End User
For an End User (who will “use it”), the factory equipment is a means to an end; making your product. The equipment does not need to be fully optimized; it just needs to work. End Users want safe, reliable, inexpensive equipment of course, but in the end low ongoing operating costs (Cost of Ownership – CoO) is what really matters. Metrics such as cost per unit over the equipment lifetime, or ROI are important. Any distinction between NRE (“non-recurring engineering” to design or integrate the system) and the cost of the system itself is often irrelevant. The net cost to get the system is all capex and all goes into COGS (“Cost of Goods Sold”) as depreciation.
For many end users, the thing that is unique is the parts being handled, not the process per se. For customers who are not differentiated by their manufacturing technology, good enough is, well, good enough. The process is not complex and looks don’t really matter. In this case, the best choice may be the lowest cost supplier you trust to get the job done. For typical handling and assembly applications, systems integrators may be a good choice because they have a portfolio of components & sub-systems that can be inexpensively tweaked and integrated to perform almost any assembly manufacturing task.
If the process is truly novel or challenging, most systems integrators lack the specialized skills and capability to incorporate the process. A lower risk approach will be to work with a custom equipment company that has knowledge of similar processes and experience in integrating innovative processes.
If you are an OEM
For an OEM (who will “sell it”) the strategy is different and often fits well with the business model of custom equipment suppliers. The system IS the product (or part of it). NRE and unit cost are different things and need to be treated separately. NRE is a one-time development cost and assuming any decent volume of sales is not all that important. As we’ll discuss in another post, any NRE is cheaper than hiring, training and sustaining a suitable engineering team yourself. Heck, the NRE may even be a tax deductible R&D expense…!
The unit cost, however, goes directly into the product COGS and gross margin. This matters a lot. OEMs are often willing to spend more on NRE to get the lowest possible unit cost, a more attractive system, better performance or a finely optimized design. For OEMs, vendor design and manufacturing skills, their ability to ramp (up and down) with your needs, compatibility with the internal product design teams and knowledge of the OEM’s industry requirements is crucial. An OEM differentiates on the performance (hopefully not just cost…) of their product. It is not acceptable to have part of their precious product be “merely OK”.
OEMs see the value of engineering expertise and flexible manufacturing prowess, and an ability to execute & refine prototype and pilot builds. Custom “design & build” firms that have the right skill and experience with the OEM’s industry make a lot of sense.
If all goes well, and after the design is stable, they’ll need the custom equipment supplier to ramp production or help with the transition to a CM. These are specialized skills & services “buried” in the NRE, and OEMs see the value in that. OEMs typically don’t have any need for systems integrators, unless for their assembly lines, but then in that case they are an End User.
In summary, End Users and OEMs have significantly different needs when searching for a custom factory equipment supplier. Knowing which type of customer you are and your key needs will simplify your final decision.
Our next article in this series will focus on the needs of the End User. Follow us on LinkedIn for our next blog update. If you have questions or comments on the blog or have need for custom manufacturing equipment, feel free to contact us and one of our team members will be happy to help you through this process.