The Difficulties of Modular Product Development
Integration is always a bigger battle than your PM says
What do the Ford Escape PHEV, the Ford Mustang PHEV, Boeing SLS rocket, and Boeing 787 have in common? They are all being delayed. Some have now been delayed for years.
All these products also have the commonality of modular construction. Indeed, this seems to be their common flaw or at least the reason for delays. Ford is facing fires in the batteries for their hybrid electric vehicles in Europe. The batteries for all Ford PHEV vehicles are sourced from Samsung, as are some BMW vehicle batteries. The Boeing SLS rocket being developed for NASA is facing delays due to software testing and integration issues (like with the Boeing 737 MAX) that resulted from using multiple suppliers (Lockheed, etc.) for the hardware rocket components being controlled by software. Likewise, the Boeing 787 Dreamliner was officially unveiled in 2007 with a projected ship date for the first plane in 2008. That date was delayed through 2011 due to integration issues. Even now, deliveries of the 787 are still regularly delayed by parts shortages, integration of each plane, and warping issues (quality control) that all ultimately stem from Boeing having mere contractual control over its supply chain.
The move to modular manufacturing grew out of the just-in-time manufacturing spearheaded by Japan in the 1980s. While just-in-time manufacturing (i.e. low parts inventory) has its own problems which in part are contributing to the parts shortages of the 787 Dreamliner, this article deals with modular manufacturing. In Japan and Germany, modular manufacturing has reached success because the contractors are local (e.g. for German Auto: Dspace integration testing, Fraunhofer batteries, etc) and oversight is easier and stronger (contractually and culturally). In particular, both countries have the self-oversight mechanism of a culture that demands perfection and timeliness (e.g Japanese and German train timing vs rest of the world). The success found by manufacturers in these countries cannot be generalized for globalized supply chains.
For instance, if quality control of components is imperfect, then the initially integrated and tested product may fail with later runs of the component from the contractor. If the manufacturer is new or the component novel or production capacity is low, then increasing production contracts with the supplier after the initial contract / development may be impossible if competitors have already locked in their orders of the component. If a component is sourced from several competing suppliers, then manufacturing differences and integration issues abound. If a single-source supplier is used, then manufacturing is at the mercy of contractual rights and even then a contract cannot produce parts. Thus, modular construction of product presents a long-term integration and quality control problem and a continuing contractual imbalance that reduces control over the product and its price.
With these difficulties quite clear now, even to the big consulting firm types, why is this type of manufacturing still the dominant type for physical products (not software interestingly)? I believe it is for two reasons. First, corporations have long since jettisoned their massive R&D budgets that enabled them to vertically integrate. This change occured some time in the early 1990s, after just-in-time manufacturing but before global supply chains. Now CEOs cannot justify dropping half a trillion dollars on development of better components without a headline product to launch. This means that CEOs are reliant on their component manufacturers to innovate rather than being able to seek it out themselves. How Boeing CEOs were ever convinced that technological “specialization” meant having others manufacture most of the components for their primary product (airplanes) is beyond me, but no doubt efficiency experts were involved.
Second, many of the big name manufacturers are seriously behind the curve of innovation. For instance, Ford, GM, and Fiat had no internal electric vehicle development that did not rely on batteries from elsewhere, electric motors from elsewhere, etc. For conventional vehicle manufacturers which typically got their start as vertically integrated manufacturers, the expectation was that when the EV market kicked off, they could spend their way into an electric vehicle. In other words, they expected a full EV supply chain to give them first dibs once the market became viable and the Ford/GM execs saw fit to build one of their own. The problem with this thinking is that it implies a strong bet that there will be top-of-the-line component manufacturers in the space when you need them. It ignores the possibility that the top EV producers will be entirely vertically integrated and will not want to “share”. In that case, the legacy manufacturers would be left out in the cold. In part, this is happening with Tesla and Chinese EV manufacturers leapfrogging in battery development, control systems, and electric drives while legacy manufacturers are stuck with Samsung and Panasonic. The problem is that once this bet on available component manufacturers is made, it increasingly becomes harder to catch up. Thus, each year the value proposition of the R&D catch up costs becomes more prohibitive even if the chances of being frozen out increase. It is the inverse problem of sunk costs.
Due to these corporate strategy mistakes, vertically integrated companies are beating out legacy manufacturers with better products and cheaper manufacturing. For instance, SpaceX is out-competing Boeing at an old Boeing specialty: NASA contracts. They are doing this by demonstrated vertically integrated capabilities that make them cheaper and on time. Boeing on the other hand is delayed on almost every headline project (i.e. 737Max, 787 dreamliner, KC-46A, and NASA SLS). In each case, a lead cause is that Boeing no longer has the best of the best in talent nor the internal manufacturing or prototyping capabilities to develop on their own. Meanwhile, SpaceX is developing brand new materials, welding techniques, rocket engines (using novel fuels like methane), rocket recovery/control techniques, and other innovations that rely entirely on manufacturing skill, trade secrets, and vertical integration.
Similarly, Tesla is winning over entire countries (e.g. iceland, norway, etc.) before competitors have even rolled out an EV product. Catching up to a vertically integrated company is difficult if not impossible.
Similarly, AMD, a CPU manufacturer, is taking tons of market share from Intel by being closer to manufacturing and innovating faster. Perhaps a different story can be told about AMD, but Intel’s decision to move chip manufacturing to Taiwan where AMD is based, certainly shows how Intel has lost the edge in manufacturing.
Numerous legacy industries are vulnerable to this type of play towards vertical integration, whether it is made by a new entrant or a new strategy at an old player. Either way, component manufacturing strategies have held back innovation in many industries (e.g. materials science, areospace, healthcare IT, IoT, UAVs, and shipbuilding) which makes groundbreaking products by start ups easier and easier. If these new companies are fully vertically integrated, then the legacy competitors will be frozen out of the new developments with no way to catch up.