In rocket science it makes often sense to use multi-stage rockets. The idea is simple: once a propulsion stage has been depleted you can get rid of the dead weight.
If you work the Tsiolkovsky equation you will findthat the optimal solution is to have a 3-stage rocket.
If you are a system house (a.k.a. Prime) your role is to satisfy a customer with a system.
For historic or competitive reason your system house will supply part of the system to suppliers.
There are two approaches that can be mixed:
1) The system Prime purchases equipment’s that are integrated in-house in the system.
2) The system Prime purchases sub-systems that are integrated in-house in the system. The sub-system house procure then internally or externally equipment’s.
In most cases equipment’s manufacturer will procure parts (component, cable, etc.) to suppliers following bulk production logics. It is interesting to note that in many cases different equipment and/or sub-system designers actually procure their parts from the same manufacturers!
To illustrate the 3-stage rocket equivalent for the supply chain:
To qualitatively compare a 3-stage supply chain versus a more-than-3-stage supply chain I will follow a bottom up analysis of the 3-stage supply chain solution and explore if one would add value in introducing sub-levels.
Parts bulk producer – the quantity factor
Bulk production is the best solution to benefit from quantity cost reduction that is by minimizing the non-recurring cost of each sold part. In the automotive and aerospace sectors, industry-wide accepted standards are developed. A part manufacturer can then deliver from his production line to any potential customer in the industry.
This stage is best kept separated from the rest of the supply chain to maximize the quantity and to avoid conflict of interest. Indeed, if a part manufacturer is absorbed by an equipment or a sub-system house then competitors might decide to change their source, then killing the quantity savings.
Equipment designer – the expertise factor
If a car manufacturer wants to procure headlights or if a telecommunication manufacturer wants to procure batteries, this is better procured outside.
Contrarily to parts, equipment’s will be customer specific to fit into the system. For energy or light technologies which are not core to the automotive or telecommunication industries, this expertise is best outsourced.
For a system Prime to stay on the edge of a non-core technology it is best to outsource the equipment’s. This is best understandable in the battery example: to get access to new cells generations a system Prime has better outsource this equipment.
System Prime – final customer solution oriented
The last stage is the system Prime that combines equipment designer’s technological possibilities into innovative solution to a final customer. The final customer will then use the system for his own use or for a service.
Whether you purchase a phone, a car, or a satellite, you are dealing with a system Prime that answers your needs.
Nothing prevents you from buying later on equipment directly like getting a new battery but this doesn’t invalidate the need for a complete system solution.
Now let’s have a look at pros and cons of adding “stages”:
Assembly designer: between equipment and parts houses
For specific technology to be integrated into an equipment, an equipment designer might go through an assembly designer house.
Typical example are Application-Specific Integrated Circuit (ASIC), there can be manufactured purchasing memory block. The ASIC is regarded as a part, but it is also an assembly containing the memory as a part.
This 4th layer is an exception, but in the aforementioned example it is the best configuration as one gets quantity savings on memory and on ASIC.
Sub-system designer: between system and equipment houses
As demonstrated in another post, it is hard to share the risk with suppliers. Hence if you want to introduce a supply chain layer you have to make sure that the risk you add in the chain is compensated by cost or schedule saving or by expertise you cannot have in house.
A system house could decide to sub-contract externally the whole power sub-system. This can bring expertise in the system that the Prime doesn’t have. As this solution has a high risk the Prime will need to establish shadow engineering hence removing man power saving advantages. On top of that, outsourcing a sub-system leaves little room for schedule and technology flexibility. Therefore outsourcing a sub-system is usually a transitory stage until the system Prime has acquires the expertise to take over the sub-system design ownership.
After a qualitative look at typical supply chain in the automotive or aerospace industry the most efficient separation appears to be: system – equipment – parts.
The system level provides the elaborate solution, the equipment level provides expertise solution, and the part level provides the quantity factor savings.
This 3-stage level approach seems to bring with each stage: customer satisfaction – up-to-date technology – quantity leverage