Build or Buy?
Consumers are faced with key decisions whenever they make a purchase. Brand name or generic? Manual or automatic? Paper or plastic? Manufacturing engineers also have an important decision to make when confronted with an automated assembly project: whether to buy a turnkey system or build the system in-house.
While assemblers can benefit by building their own equipment, with advantages such as potential cost savings and a competitive edge, an in-house strategy also creates many headaches, such as time and resource allocation issues. The numerous pros and cons must be carefully examined before acquiring assembly machines.
There is no universally correct answer to the build or buy question. Indeed, the answer depends on factors such as time constraints, the size and structure of the manufacturer and its engineering department, the assembly application and the type of machine. And a decision to build a machine in-house one time doesn’t mean that a company shouldn’t turn to a machine builder or a systems integrator for its next project.
"You should never approach the build or buy decision lightly," warns Richard P. Bodine Jr., chairman of Bodine Assembly and Test Systems (Bridgeport, CT). He says every assembly automation project is unique. "No decision should be made without a thorough cost analysis," adds Bodine.
Paul Schnizler, president of Industrial Profile Systems Inc., a division of Parker Hannifin (Houston), agrees. He also believes it’s very important for manufacturing engineers to carefully evaluate all internal capabilities and external resources before deciding to build or buy assembly machines.
"Make sure you analyze the processes and requirements so you don’t step into something you can’t handle," Schnizler advises. "Never rely on an emotional answer to the build or buy question. Make sure you carefully rationalize all decisions."
In-House OptionsManufacturing engineers typically consider building equipment internally for three reasons: cost, control and competitive edge. But, do-it-yourself projects tend to tie up personnel, facilities and development time. There are four different in-house build scenarios:
- Design, produce and assemble all components internally. This option requires an existing in-house machine shop that is capable of making high quality parts, plus a fabricating shop for cutting, welding and assembly applications.
- Purchase modular, off-the-shelf components, such as controls, conveyors, index tables, motors, multiaxis stages, parts feeders, pneumatics, robots and vision systems, from an assortment of vendors and then assemble the pieces in-house. Modular process platforms can also be used to simplify the process.
- Design a machine internally, but then turn the drawings and schematics over to a machine builder or a systems integrator for actual construction.
- Purchase an integrator or a vendor that has expertise in a specific manufacturing technology or process, such as robotics.
Most in-house build strategies reflect the second and third scenarios. In each case, the engineering department acts as an in-house integrator. The widespread availability of modular aluminum profile systems has made it easy for engineers to produce "home-built" equipment. Modular profile systems enable assemblers to bolt together framing components to tailor workstations and machines to specific processes or floor space requirements. With aluminum extrusions, engineers can reconfigure assembly lines quickly and easily while minimizing capital outlay.
Pre-engineered platforms offer another in-house option for manufacturing engineers. Designed as customizable building blocks, platforms come equipped with mechanical, control and software architecture already in place. Process-specific cells come already tooled for assembly applications, such as liquid dispensing or soldering. The easily expandable platforms can be configured many different ways.
The fourth scenario—purchase an integrator or form a strategic alliance—is more likely to occur in an industry that is highly competitive or secretive, such as fiber optics. For instance, JDS Uniphase Corp. (Ottawa, ON) acquired Optical Process Automation Inc. (Melbourne, FL) in February 2001 to develop "higher and more diverse levels of automation" in its manufacturing processes. That company now serves as the "internal automation organization" of JDS Uniphase.
According to ASSEMBLY magazine’s sixth annual capital equipment spending survey (December 2001, p.30), manufacturers have been gradually increasing the amount of assembly equipment that they build in-house. In 1997, manufacturers fulfilled 34 percent of their assembly system needs with equipment created by captive machine-building departments. In 2001, manufacturers met 41 percent of their assembly system needs with in-house equipment.
"Generally, small- to medium-sized companies seem more likely than larger ones to build in-house," says Walt Hessler, vice president of sales and marketing at PHD Inc. (Fort Wayne, IN). The ASSEMBLY survey confirms that theory.
During the past 5 years, companies with 1,000 or more employees fulfilled an average of 28 percent of their assembly system needs with equipment created in-house. Conversely, companies with less than 100 employees satisfied, on average, 42 percent of their system needs with equipment built internally.
Pella Corp. (Pella, IA) is one example of a leading company that maintains an internal machine building department. The $900 million window and door manufacturer has a dedicated group of 80 machine builders who design and build equipment in-house.
"Machine builders are trained to develop all the skills required to build a machine, from estimating and design to machining, assembly, wiring, plumbing and even programming," notes Anand Sharma, president of TBM Consulting Group Inc. (Durham, NC), and an advocate of in-house machine building who helped Pella implement lean manufacturing initiatives. Besides gaining a competitive advantage, Sharma claims Pella is able to shave 3 to 6 months off the time it takes to go from concept to production-ready machines.
Economic ImpactSoft economic conditions typically spark a build-it-yourself mindset among cost-conscious manufacturers. But, many downsized engineering departments simply find it more advantageous to use machine builders and systems integrators.
"In general, the least expensive approach is to build equipment in-house," says Hessler. "This assumes that you have the time and talent in-house, a situation that seems to be increasingly uncommon."
Some machine builders contend that it costs twice as much to build in-house. They argue that actual costs always end up getting lost in overhead rates. Nevertheless, there is a tendency during an economic downturn to say, "we can build it ourselves."
Indeed, some engineers are under more pressure to build equipment in-house these days as a way to reduce costs. "The issue is one of survival rather than convenience at the present time," notes Don Krueger, manager of business development and marketing for the Automation Div. of Remmele Engineering Inc. (St. Paul, MN).
"Today’s economy has led many companies to tighten their budgets," adds Mike Perreault, vice president of Midmac Systems Inc. (St. Paul, MN). "Often, custom equipment and automation are the first expenditures to be cut back. In a tightened economy, companies tend to try to build equipment on their own, often with the understanding that the sacrifice leads to a piece of equipment that may function, but that has not been developed for longevity."
According to Perreault, the companies under the most pressure to reduce costs by building in-house are small manufacturers. He says they generally try to develop new or short-lived products that can be brought to market as economically as possibly. "Established companies generally go outside of their own facility, especially with a product that has an extended marketing life," Perreault points out.
With the exception of the current economic slowdown, Perreault believes manufacturing engineers tend to buy equipment more often than they build it in-house, as in the past. "Many companies have learned a lesson from the numerous unforeseen costs that add up when equipment is developed in-house," claims Perreault. "Most of the time, equipment built in-house is done in a rush and does not allow the engineers to do the correct calculations or have the experience to develop equipment that will last a significant amount of time."
Even if they wanted to, some manufacturers no longer have the internal resources needed to build equipment in-house. They are forced to buy equipment because of staff cutbacks. Indeed, most engineering departments no longer have enough excess capacity to handle internal projects.
"Recessionary Arial would suggest that people would be more inclined to develop their own machines in-house," says PHD’s Hessler. "However, many organizations have made themselves so lean that they may not be able to do this sort of work for themselves anymore."
The slow economy may also be an incentive to buy turnkey systems from machine builders and systems integrators. "Right now, anyone who builds equipment is ready to practically give it away," notes Don Ewaldz, director of the Bourton Group (Carmel, IN). "The buyer’s negotiating strength is tremendous. With most engineering staffs pared down to the bare bones, I’d really have to be convinced before I would sign off on an internal machine building project."
Inside AdvantagesIf all things are equal, most engineers will naturally gravitate toward building machines in-house. "Engineers always like to experiment and play with expensive toys," says Remmele’s Krueger. "All mechanical engineers think they can do anything," adds Ewaldz, who is a mechanical engineer himself. "It’s a character flaw that all of us share," explains Jim Story, president of Spectra Technologies Inc. (Euless, TX).
Aside from the universal do-it-yourself predisposition shared by engineers, there are several advantages to building equipment in-house. Traditionally, the biggest benefit has been the competitive edge that can be gained from proprietary systems.
"Companies that feel that they have trade secrets seem more prone to creating their own equipment," says Hessler. Those manufacturers believe they cannot trust outside resources with their highly proprietary processes.
"If you possess specific expertise, there are advantages to building in-house, especially if you are developing a new product or manufacturing process," adds Greg Fisher, manager of product marketing and engineering at Bosch Automation Products (Buchanan, MI). "It protects free public exchange of technology until you’re well ahead of the curve."
According to Brian Hoffmann, vice president of engineering and operations at Danaher Precision Systems (Salem, NH), different levels of paranoia exist over confidentiality and proprietary technology. "It depends on the maturity of the industry," says Hoffmann, who has seen manufacturers put walls up around equipment in an attempt to maintain secrecy. "Some manufacturers in the photonics industry are almost psychotic about security. In those types of environments, engineers are not willing to risk taking a chance that their production methods will leak out to a competitor."
However, since most machine builders honor nondisclosure agreements, the "proprietary argument to build in-house holds little merit," Richard Bodine points out. "Most companies build in total confidentiality."
"The old days of building walls around equipment are over," adds Jim Story, who says systems integrators also uphold confidentiality agreements.
Another benefit of in-house building is greater control over the design and specification of components. Many decisions are not left in the hands of a machine builder. Engineers are able to redesign or modify equipment immediately. "You can incorporate new knowledge at any point in the development process," says Hessler.
"An intangible advantage is that building equipment in-house often expands understanding and capabilities that show up later as product or process innovation," adds Hessler. Many engineers see it as an opportunity to learn new things and hone their technical skills. By building the equipment themselves, they get an intimate knowledge of the system. However, machine builders and systems integrators argue that manufacturers are better off having their engineers focus on developing new products and improving existing production processes.
Another intangible benefit of internal machine building projects is that they keep engineers busy during slow periods. "In a down economy, a company can utilize some of its engineering talent, which would otherwise go underutilized, or be let go, to improve its operations," says Krueger. Indeed, many engineers view in-house projects as a good way to justify an internal automation group and guard against layoffs.
Hidden CostsEngineers traditionally believe the do-it-yourself approach to machine building is less expensive than buying turnkey solutions. But, many observers say that type of thinking can be a big mistake.
"Engineers are often optimistic as to their availability to work on the project; their ability to stay committed to the project; and costs of materials such as plating, fitting, wiring, hoses and other components that are not obvious, but which can comprise a major portion of the functionality of the equipment," says Midmac’s Perreault. "Often, purchasing equipment rather than building it in-house is less expensive to the company in the long term."
Insufficient budgets and cost overruns hamper many in-house machine building projects. There’s a tendency to overestimate internal capability and underestimate the time needed to get the job done. To avoid potential headaches, in-house projects should evaluate return on investment, total material, labor and overhead costs, expected production volumes and amortization.
"People tend to overlook the hidden costs and that can be a big mistake" says Bosch’s Fisher. He believes many well-intentioned projects suffer from artificially low in-house costing estimates.
"There are a lot of hidden costs that people don’t consider," explains Danaher’s Hoffmann. "Many engineers focus on materials and parts costs, but overlook the cost of ownership. They don’t consider start-up costs, warranties or applications support. Those are big costs that are often hidden when equipment is built in-house." For instance, debugging time often is understated or unaccounted for.
"Cost structure often becomes blurred with internal projects, because overhead is overlooked," says Industrial Profile Systems’ Schnizler. "But, when you buy turnkey systems, you know exactly what the cost is, and there are well-defined responsibilities."
Labor is often the biggest cost of building an assembly machine. "It’s not unusual for engineers to overlook that," adds Spectra’s Story. "There is a tendency to say, ‘I’m here anyway’ or ‘I have that expense anyway. All I have to worry about is what it costs to buy parts and material.’ Smart engineers recognize their real internal costs."
In addition to hidden costs, in-house projects run the risk of using old ideas and old technology. For instance, designs tend to follow similar automation themes that are part of the culture of the company. By using outside services, technological advances as well as alternative automation approaches can be explored. In fact, they may provide an automation concept that may not have been considered in-house.
With a build-it-yourself mindset, "you will always get what you have always got," says Krueger. "The machines become a variation on a theme.
"Companies can take advantage of the intellectual property of the supplier who designs and builds state-of-the-art machinery every day of the year," notes Krueger. "That knowledge is never available in-house."
With in-house machine building, "you don’t know what you don’t know," adds PHD’s Hessler. "Often, a concept seems simple but there are quite a few hidden ‘gotchas’ that don’t become apparent until you actually try to implement a new design." He says systems integrators and machine builders usually have more up-to-date knowledge and may be able to provide a better solution.
"With technology changing so fast, it’s hard to stay fresh and current," notes Spectra Technologies’ Story. "But, this is all we do. Integrators see a lot of different industries and are exposed to other products and production processes."
Fisher believes integrators are the "common thread that ties ideas across industries. The cross-pollination of new ideas often comes from a different product segment or industry." According to Fisher, many in-house builders "see the world through their own eyes and ignore existing ideas or experience."
Buyer’s MarketMachine builders and systems integrators question why anyone would even consider building equipment in-house today. They claim that the benefits of buying turnkey systems outweigh any internal arguments. In addition to injecting new ideas and concepts, utilizing outside services or purchasing equipment from one source:
- Maximizes productivity. If correctly specified, responsibility is clear and the buyer’s employees can concentrate on their core business. The systems integrator or machine builder assumes day-to-day project management responsibilities.
- Provides for single-source accountability to assure that interaction between devices, components and machinery is one party’s responsibility.
- Assures continuity in controls and mechanical design that provides for a smoother operating system.
- Minimizes the risk requirements and management requirements for in-house engineering to bring the equipment online.
- Ensures that warranty and maintenance issues are handled at a single source. The buyer can say, "My product isn’t being assembled correctly. Please fix it."
- Allows the buyer to spread expense and depreciation over time. By buying turnkey systems, lead Arial can be shortened and overall total cost of ownership can be reduced.
Despite numerous benefits, buying equipment can pose some challenges to engineers. For instance, there is always the risk of selecting the wrong systems integrator or machine builder. And, since the buyer loses design and specification control, it may mean higher up-front costs.
"Most people underestimate the amount of time required to develop a new equipment specification," warns Hessler. "There is also considerable time required to collaborate with the machine supplier that is usually ignored."
Many engineers also fail to fully define exactly what the equipment is to do. If they are not specific enough, the machine may not perform as required. "Some people go to the opposite extreme," says Hessler. "They overspecify details, but not the actual performance requirements.
"This results in a machine that costs more than it needed to and usually takes longer to place in service than if the necessary performance criteria were clearly defined in the least complicated manner possible. This problem is common on both equipment built in-house and purchased from an outside vendor."
If you still insist on building your own equipment, most observers say to keep it simple. "It’s one thing to build fundamental equipment, such as gauges, fixtures or jigs," says Bourton Group’s Ewaldz. "But, it’s unrealistic to think that you can build sophisticated technology internally."
Hessler suggests focusing any in-house efforts on smaller projects. "A simple workstation or cell is much easier to build than an entire automated assembly line," he concludes. "Just make sure that you have the internal capacity and capability to get it done."
Conduct a Financial AnalysisCareful financial analysis should be conducted when examining the build or buy question. All the costs associated with an in-house project need to be compared to the total cost of buying equipment from an outside vendor. For a true comparison, the factors of increased time to market and lost innovation must be added to the in-house costs.
Mike Perreault, vice president of Midmac Systems Inc. (St. Paul, MN), recommends looking at engineering issues, risk, warranty issues, liability issues and delivery. "True value to the company should be determined by completing a full financial analysis relative to the impact on the company," he points out.
Engineering IssuesIn-house engineering should estimate the hours required to complete the equipment. If bids are requested from outside services to buy the equipment, request a breakdown of engineering hours, manufacturing hours and assembly hours. This should provide a beginning guideline of the amount of hours in-house engineering will require to develop the equipment. However, Perreault says those hours should be multiplied by 1.5.
"Engineers will most likely have other responsibilities and cannot dedicate 100 percent of their time to one project," explains Perreault. "An outside provider will be able to devote the required time to the project."
Numerous starts and stops during a project add to the likelihood of errors. "It is important for a company making this evaluation to be cautious as to the amount of hours its engineering department estimates for developing the equipment since this issue of continuous time available to spend on a job is usually not taken into consideration," says Perreault.
"Whenever dedicating in-house engineering to develop equipment, the amount of time estimated to develop the equipment will detract from their usual requirements," he points out. "These other requirements will need to be fulfilled and the costs of either ignoring those responsibilities or acquiring additional resources to fill those responsibilities need to be added into the equation for the internal costs."
RiskThe in-house builder assumes all of the risk for equipment that may require redesign and debug. "Most builders add in 15 percent to 20 percent of the cost of the job to accommodate the unknown and debug issues that are required when finalizing a proposal to a customer," says Perreault.
Warranty IssuesWhen machine builders estimate the cost of a job, there is generally a percentage included within the sale price to cover warranty expenses. In general, 2.5 percent of the cost of the job is used for a 6-month warranty; 3.5 percent of the cost of the job is used for a 12-month warranty. Perreault claims that warranty issues are often overlooked when engineers consider building equipment internally.
Liability IssuesOften, equipment built in-house does not meet OSHA requirements and exposes the company to liability, warns Perreault. When equipment is purchased from an outside source, the liability for the safety of the equipment is the responsibility of the supplier. The equipment is provided with the correct safety requirements. According to Perreault, "there is often a requirement for added insurance costs for the company that builds equipment in-house."
Delivery"Most companies that embark on building their own equipment miss their implementation dates by a significant factor," claims Perreault. The usual reasons for missing completion dates are other responsibilities within the company, unavailability of support personnel, purchasing problems and inexperience managing projects.
When purchasing equipment from outside vendors, many manufacturers structure contracts with progress payments tied to specific project milestones and deadlines. By missing the target implementation date, the cost justification of the equipment may be delayed for several months or longer.
"The best time to decide to buy is in an environment where a product is established and the product marketing life is greater than 5 years," says Perreault. "When the product life exceeds the payback of equipment by two to three Arial, there is an advantage to purchasing equipment that will meet or exceed the marketing life of the product."