MTS Systems had a number of challenges, including decreasing profitability and increasing lead times; a proliferation of products and parts that was scaling with growth; and competitors that were offering “good enough” products with lower prices and shorter lead times. MTS decided on a transformative change.
Beginning in 2002, market growth for test equipment was fueled heavily by newly developing countries where local companies were starting to design and manufacture higher quality, higher complexity products. MTS, who had established themselves in these markets years prior, was well positioned to take advantage of these new opportunities.
As leader of this niche market and inventor of the core technologies, MTS had seen many years of strong profitability. Customers were willing to wait a long time and pay a lot of money to buy a system from MTS. As new competitors entered the market and existing competitors chose new ways to compete, a new level of products was introduced with “good-enough” performance, lower price and shorter lead times. Some customers could no longer justify the additional time and money required to purchase from MTS.
The company was organized into groups around small market niches that included automotive shock absorbers, aerospace aluminum, asphalt road materials, artificial knees and many others. Each group managed a separate profit-and-loss perspective and controlled profitability of every order using margin-based pricing. Over the years, this arrangement led to the branching of MTS’s core business approach toward the optimization of price performance for the narrow slices of the market. It also led to the proliferation of product variations within product areas that required an increasing number of parts to produce. Operations had a very difficult time gaining leverage, and it was hard to identify opportunities for improvement to the overall business.
Continued growth in the market was limited by MTS’s ability to address the demand for lower prices and shorter lead times. Their project-based operational model became ineffective resulting in increased cost, lead time and quality issues. Operations were pushed to capacity, and the scaling-up of the current system was not a viable business option. A new approach was required to meet the broad range of customer requirements while maintaining long-term profitability.
Product Marketing & Management
A small, disconnected marketing team at MTS attempted to manage the full breadth of markets, products and customer applications that formed the niches. Each area generated new requirements and potential changes to the product, but it could be five or more years before development resources were available to make changes. It was very difficult to keep products fresh once they were launched.
Sales teams were organized by niches, and they consisted of both sales and application engineers. The teams were capable of gaining a deep understanding of what each individual customer needed and would go out of their way to deliver exactly that. Their pursuits were sometimes detrimental to the company in how they consumed time and resources. The teams often knew more about an application than the customer and needed to coax decisions in order to configure a test system. The consequence of this structure was that it led to a broad range of different product configurations. Test systems were built for additional customers within niches, but there was almost no repetition across niches.
In order to improve the efficiency of selling, a product configurator was created for a few product areas that included a range of product performance, features and options. It greatly improved the accuracy of the communication between sales and engineering, but it made no improvement to operations or product management. The configurator included all reasonable product properties that customers may want, but there was no predetermination as how the product would be produced, if it had been built before, or if it was a profitable configuration. Since there was no active connection between the sales configurator and operations, sales people configured whatever the customer thought they needed, and engineering decided how it was designed and manufactured.
Product Design & Engineering
The product design function at MTS was closely coupled to project engineering. Each customer project had an engineer assigned to follow the order through the system and to troubleshoot when something went wrong. The planning of projects always included a contingency for schedule and cost both of which were burdened by the customer. The goal was to ensure project profitability and deliver it on a promised date even if the date was later than what the customer originally requested.
Each customer project was accompanied by a new set of paper documentation. Little efficiency was gained in engineering even when the sales teams were able to sell close copies. After customer projects were completed and quality problems were resolved, the design teams could then focus their efforts on new product development. Consequently, development activities took a back seat and they were risky activities for product teams to propose. Most of the innovation and new designs occurred on customer orders with the risk built into the price and schedule.
Efficiency gains in engineering were realized only with individual people. Based on their own experiences, each would develop processes to optimize their efforts. In many cases, it was easier for individuals to start from scratch on a project versus reusing someone else’s documentation. This mode of operation covered-up the system-wide challenge because people were doing their jobs well. Problems occurred only when the system of people was disrupted.
Since every customer test system was new to some extent, many issues during manufacturing became science projects. Each took a lot of time and brainpower to resolve, and involved highly skilled and experienced people. The learnings from issue resolution were stored in the heads of the people who worked on the problem because there was no process to share across the company. Project engineers would try to pick the same operational resources each time they needed to build a system in the same product area.
The wide range of components supported by the supply chain was managed without the support of forecasts or the ability to buy anything in volume. The lead time for projects was established by the component with the longest lead time, and the low volumes offered MTS little buying power and control over prices or designs. Components that were available one year may not be available the next year.
In 2002, MTS was focused on improving the efficiency of their operations by reducing the effort for individual projects. They needed to meet the lower cost levels required by the evolving market. The organization was over-burdened and stressed, but the business proposition to scale-up operations in its current state was not attractive. A new approach was needed to regain control of the system and meet the changing requirements within the market.