Modularization excels in high-volume industries such as automotive, but does it offer tangible benefits for companies that tackle just a few, extremely complicated projects each year? The builders of steel plants, chemical plants, paper mills, wind parks, packaging lines, or power plants fall into this category, completing a handful of highly specialized solutions every year that feature very specialized components. New research—laid out in our report Smart platforms: Cracking the complexity challenge of project industries—affirms that, if done right, a modular platform strategy can deliver significant value quickly in these situations to fix the complexity challenge.
In industries focused on large projects, companies typically face four key challenges: customization at low prices, delays and cost overruns, long payback times due to low volumes, and flexibility between customers and suppliers. And lacking rigid product management systems, teams often develop new solutions based on prior projects. Consequently, each new project creates new variants, making a well-structured product portfolio unachievable—with products that may include “historical” features that the customer at hand does not value. As such, many project industry players find themselves stuck. Can modular platform strategies address this complexity, and can companies monetize the savings more quickly than the usual three- to five-year time span? Exhibit 1 suggests the possibilities.
It can be done. But to succeed, project industry leaders must first overcome their skepticism of smart platforms. Doing so, and embracing a smart platform strategy, can help them achieve substantial impact in as little as three to five months. Players could, for example, significantly reduce direct costs or shorten project lead times by 30 to 50 percent by improving project quality, clarifying technical concepts, and boosting execution stability. Beyond immediate effects like those, a smart platform strategy can also enable further improvement initiatives: moving opportunistically from the partial reuse of existing parts to the integrated planning of product platforms sets the foundation for structured improvements along the product hierarchy.
This article is adapted from the full report, focusing on three crucial aspects for project industries.
The first step in making smart platform strategies work is to develop a modular, competitive portfolio, which requires an integrated approach combining modularization, standardization, and design to value.
Hitting the portfolio target
The goal of the platform strategy approach is to minimize the time and resources needed to offer, develop, and deliver a product with a customized front end but standardized back end. First and foremost, smart platforms involve a whole new way of working in sales and engineering.
By using configurations consisting of predefined building blocks for presentations, layouts, specifications, and commercial calculations, sales staff can quickly respond to customer inquiries. Doing so also ensures transparency regarding how special requests will influence price and lead time. High cost transparency enables sales people to negotiate more effectively while making sure they do not sell anything at prices below the target margin, and do not offer overspecified products that cannot compete regarding price. Since the configuration follows previously defined and cross-functionally aligned rules to link customer requirements to component variants, the basic design is 100 percent clear at contract signing (Exhibit 2).
Engineers can take clearly defined, field-proven modules off the shelf, combining them flexibly in a master layout. Due to clearly defined interfaces, companies can purchase or manufacture these modules already while engineering works on other areas that require customization—or focus their efforts on project-neutral optimizations and innovations.
Products are configured, not individually designed for each new project.
Smart platforms do not only provide benefits internally—customers will benefit greatly as well. Customers benefit from more reliable products based on field-proven modules. The cost transparency regarding add-ons and other features can enable them to adapt their specifications to tailor equipment costs according to their needs—and enable them to buy upgrades later. Beyond that, they benefit from predictable, stable processes and shorter, more reliable deadlines due to ready-to-use solutions. They also need to store fewer spare parts on-site if they can use the same component in several different machines. Furthermore, they will need less staff training when the principles and key modules are the same across products. And, since their equipment is based on widely used standards, they have a better chance to sell it as the opportunity arises.
Creating a competitive portfolio
To create such a competitive portfolio based on a smart platform strategy, project engineering companies need to combine three elements that, like three pieces of a puzzle, only unfold their true potential in conjunction: modularization, standardization, and design to value (Exhibit 3).
Without modularization, there is no reuse. A modular platform is a set of interfaces, parts, components, modules, and subsystems that form a common structure from which a stream of derivative projects can be efficiently developed and produced. It comprises a common core that allows for controlled interchangeable adaptation. This applies not only to mechanical parts, but electronics and software modules as well.
The goal is to create a customer-focused modular system that links customer input to modular building blocks, cross-functionally aligned and supported by ready-to-use documents.
The goal is to create a customer-focused modular system that links customer input to modular building blocks, cross-functionally aligned and supported by ready-to-use documents. Companies need to assemble a library of defined modules from which they can select appropriate solutions based on customer requirements for each project.
Companies should define the modules in ways that enable them to serve most of the target market segments (typically about 80 percent) with the optimal number of variants to reduce the cost of complexity and at the same time product cost. This means that the modules must have standard interfaces, while the product itself has a master layout that can combine the modules in different combinations. The modular system should not aspire to meet rare special requirements if they make it more complex and expensive than economically reasonable.
Standardization enables companies to reuse identical parts and components. Each module should feature as many standard parts as possible—even across different products, product lines, and business units. It makes sense to define standard parts on a company level to minimize total cost (including efforts to source, store, and administrate different part numbers compared to their purchase price alone). Companies may have preferred suppliers in place that can deliver the standard parts at competitive prices. They should also consider using analytics tools to monitor and optimize the use of standard parts continuously as the portfolio evolves.
Design to value
Methods from the design-to-value toolbox enable companies to optimize their products both technically and commercially, which becomes even more important since smart platform modules are continually reused. The product and its modules are competitive with other products in the market, their performance meets (but does not exceed) customer requirements. With design to value, the price paid to suppliers is close to the cost of the optimal manufacturing process, and the cost of products continually decreases due to a structured continuous improvement process. Companies can support work with analytics tools such as parametric should-costing, digital benchmarking, and digital procurement.
Developing modular platforms systematically, in seven steps
To create a competitive modularized portfolio in the project business, companies can follow these seven steps that have been pressure-tested in various situations (Exhibit 4).
Key questions underpin each step:
- Module structure. How is the product portfolio structured into modules, submodules, and components, and what did they cost prior to the modularization effort? Here, the high-level structure of the module, with submodules and clear boundaries, as well as its interfaces with other modules, are defined as a starting point.
- Existing variety. How many variants currently exist for the components of a module—prior to the modularization effort? The second step involves creating an exhaustive, transparent picture of all variants, submodule by submodule. This ensures the complete portfolio is taken into consideration in the analysis, so that ultimately the modular system is in line with customer needs.
- Variety drivers. What are the customer needs and how do they drive complexity—what share is internally induced? To decrease complexity in the typically vast landscape of existing variants, the next step is to understand the market from a customer perspective by investigating customer needs and buying criteria as well as the respective trends involved. Companies should then derive customer requirements and translate them into product variety drivers.
In many cases, modularization is the first step to professionalizing areas beyond product development and engineering—providing the basis for increasing cost competitiveness in the entire organization.
- Future system. For every submodule, what is the optimal number of variants, and what are the most efficient step sizes to fulfill relevant customer requirements? In a stable market environment, companies define the building blocks of the future modular system based on the existing variety list in conjunction with variety drivers. However, in a disruptive market environment, companies should not only focus on existing variety but also include white spots in the market that they want to address.
- Design to value. How can companies position the platform at its cost optimum while meeting all relevant customer value requirements? Methods from the design-to-value toolbox enable companies to optimize the modules from the future system both technically and commercially to ensure the modules that will be reused are designed to be as competitive as possible.
- Rules. How are customer input and requirements linked to the different variants of the modular system? After having defined the variants of the future modular system, companies need to establish rules that have a clear logic for selecting variants based on customer input and the variety drivers. Organizations can implement these rules in a digital configurator in which staff can easily configure modules and layouts based on customer input.
- Interfaces and master layout. How can we ensure that modules or submodules within the module fit together, independent of customer needs or design changes? Defining the critical interfaces between modules ensures that variants of “neighbors” are compatible with each other and add-ons can be flexibly used. This, in turn, allows independent work focused on the development of different modules, submodules, and items. The master layout allows the flexible exchange of any of the building blocks and is used as the starting point for every project—different master layouts may exist for different product lines.
Ensuring success in creating competitive portfolios based on smart platforms
Experience suggests that several factors are crucial in making the process of creating modular, smart platforms a success:
- Work in waves and prioritize modules based on expected financial impact. To design a competitive portfolio with limited resources, launch the rollout in consecutive waves, starting with prioritized high-impact modules.
- Take decisions based on financial rationale. All decisions within the project should reflect facts and financial quantification. Companies need to adopt an 80/20 mind-set in early project phases, permitting some level of inaccuracy and iterations—in service of prioritizing and making decisions regarding the allocation of resources.
- Practitioners must differentiate complexity. They must reduce internal complexity as far as possible, while external complexity should address customer needs (but only if doing so increases value).
- Complexity reduction represents a grey area. In between full customization and focus on a single variant, several options allow projects to find the optimal complexity levels for the given situation (Exhibit 5).
- Define only the concept; carry out detail engineering later with the first customer project. Define the concept, principles, and guidelines of the modular system in this phase and make sure the platforms are cross-functionally aligned. The detail design should be done alongside the next order, which minimizes up-front engineering costs.
- Use a field-and-forum approach. To apply the methodology and ensure the effective use of resources, a field-and-forum approach is suitable. In weekly workshops (forums), the team applies the methodology in practice; team members receive task assignments and the overall team agrees on the next steps. In between weekly workshops (fieldwork), the team splits up and works separately on clearly defined and assigned tasks.
- Rigorous tracking and clear governance. A rigorous indicator tracking system should accompany the methodology, along with clearly defined governance policies with assigned roles and competences, and a defined meeting cascade and decision processes.
- Involve the organization. This is not a pure engineering effort—developing effective modular platforms requires the input of multiple functions, especially sales, procurement, manufacturing, product controlling, and so on. All of them have an active role from the beginning.
Rapidly implementing smart platform strategies in real projects ensures they can be quickly monetized while serving as an early proof of concept. Here’s what can help forestall challenges in the implementation process.
Implementing live at an early stage of the development process
Rapid, live implementation is crucial in project industries at an early stage of the process of developing smart platforms—more so than in most other sectors. It focuses on three specific goals: achieving immediate impact on the profit-and-loss statement, demonstrating proof of concept, and developing ideas for improvement (Exhibit 6).
For running projects in the execution phase after the contract signing, project conventions are an effective format for reviewing the concept end-to-end. Project conventions typically focus not only on technical topics, but also on process aspects, for example, to ensure on-time deliveries. They use a one-week format structured into several deep dives. One key element is the daily presentation of ideas to management, which makes immediate decisions on implementation.
While live implementation is key at an early stage, there are three more actions required to implement smart platforms effectively: creating a lean modular sales portfolio, establishing intelligent pricing, and driving a modular execution process.
Creating a lean modular sales portfolio
Achieving an effective modular portfolio for sales requires adhering strictly to modular principles, defining a clear, unique selling proposition, and using lean scoping to maximize margins:
- Adhering strictly to modular principles. In the process of developing smart platforms, it is crucial to adhere to modular principles. Companies should set targets so that customer projects use at least 80 percent modules. Furthermore, they should base budget offers entirely on existing modular building blocks that reduce time and effort. Enforcing adherence can be facilitated by reversing the burden of proof: nonmodular offers follow a nonstandard request process that requires explicit management approval, including decisions on whether they should design the customized solution as part of the modular system in the future.
- Defining a clear, unique selling proposition. Having a unique selling proposition will be key to communicate the value of the modular portfolio to customers. The modular system’s value proposition must be transparent to customers based on unique, clearly documented selling points (USPs). Compared to projects developed from scratch, smart platforms offer significant advantages as far as communicating USPs to customers. Companies must tailor a platform’s customer strategy to target markets and channels depending on their specific needs, using the full breadth of the modular system.
- Using lean scoping to maximize margins. Lean scoping offers opportunities for companies to achieve margin growth by optimizing project parameters before responding to a request for quotation (RFQ). Overscoping is a common pitfall in RFQs, but lean scoping optimizes the offer. The approach delivers a competitive price that should win the RFQ, while any upselling opportunities or subsequent scope changes are priced separately, resulting in both a competitive price and high margins. This way, lean scoping actively avoids loading the specifications with peak requirements, unnecessary features, or cost-increasing step changes at the design limits. Experience shows that lean scoping can provide 20 to 30 percent more gross profit compared to a fully scoped offer by focusing on the most valuable elements from the customer’s perspective and simplifying the value story. It takes calculated risks to reduce the price and win the deal, and companies can use it as a last resort, increasing risk if no competitive offer is possible otherwise.
Establishing intelligent pricing
Intelligent pricing and markups translate the opportunities a modular structure offers based on a modular pricing structure combined with value pricing.
- Developing a modular pricing structure. Add-ons help the project achieve full performance or take the form of enhancements, such as automation or digitization. This allows project engineering companies to address different customer segments according to their specific needs (Exhibit 7). One advantage of modules is that project engineering companies can precalculate prices. The extra price for options explicitly lays out all relevant cost drivers—not only for materials but also for building, transport, and other expenses.
Smart platforms usually only offer customization or the inclusion of new developments under specific conditions, for instance, with top management approval for a new feature or the customer insisting and willingly paying for the additional complexity and risks. In such cases, the project engineering company prices to reflect high-risk provisions, and provides only limited performance guarantees. Companies can define some options as “strictly not offered” to exclude elements that could interfere with the modular platform strategy. Companies should distribute their initial efforts at modularization over several projects to offer cost-competitive base prices from the beginning of negotiations, even if efforts to create modules are still underway.
- Focusing on value pricing. Value pricing ensures companies price smart platforms to capture the maximum the customer is willing to pay, not just some random value derived from a simple cost-plus margin logic. Consequently, total direct costs (including complexity costs) represent only the minimum price, while the actual asking price reflects the true customer value on offer. Value pricing requires a quantitative perspective on customer value (Exhibit 8). Moving from a purely qualitative perspective on features and differences between options to a technical quantification is the first step in creating a fact base. Essential, however, is to further quantify the business value from a customer’s perspective behind the technical data to determine just the right price. Beyond pricing, quantifications are also powerful in substantiating USPs as a fact-based way of customer communication.
Driving a modular execution process
Executing the modular approach across all functions will make sure that the project engineering company infuses this way of working into the DNA of the entire organization. This approach also ensures the company reaps all the benefits smart platforms can provide.
Usually, the primary focus is sales and engineering. Following sales and engineering, the other functions should also move toward smart platforms, adding initiatives beyond the platforms themselves. In R&D, for instance, managers can use the freed-up resources to improve existing modules and streamline the modular system to reduce non-value-adding variants and cover attractive new segments. And in another example, the manufacturing function will benefit from learning effects based on the repeated use of modular parts, with pretesting done as far as possible. Experience with repetitive parts allows for reductions in lead times and costs.
Beyond that, how do companies achieve real savings within a customer project? Does the cost of a customer project increase by applying the modular architecture?
The first time we presented our new concept to a customer, he was totally excited: a thought-out concept instead of starting with an old reference was very convincing.
Modularization and standardization will reduce the costs of complexity along the entire value chain, either through scale effects or reduced investments per part number—a difference driven largely by the nature of a specific industry. For example, scale effects typically lead to a cost reduction of 4 to 7 percent every time the volume doubles in manufacturing or purchasing. Material cost reductions often take the form of volume rebates from existing suppliers and the use of a broader range of supplier choices.
Manufacturing sees cost benefits from moving to larger batch sizes that require less setup time and enhanced overall equipment effectiveness. Interplant logistics improve with the use of better shipment routes and less complicated supply chains. Companies can attack inventory bloat by enforcing less variability and faster shelf turnaround of inventoried items and by keeping less safety stock on hand.
Organizations can also significantly reduce their investments per part number and strive to improve their design-to-value efforts. Other areas, from purchasing to tooling, can benefit from the smart platform’s ability to reduce both one-time and recurring costs. Beyond these areas, project engineering companies should also focus on testing certification, striving for more consistent reuse of proven solutions, easier homologation, and faster global deployment. Reducing or eliminating nonstandard cost via improved product quality and the reduction of penalties due to late deliveries, for example, can also generate solid savings.
To ensure sustainable impact, smart platforms need to be integrated into the organization’s day-to-day operations. Anchoring smart platform strategies in daily work throughout the entire organization can help. An adapted organizational structure with clear owners, efficient processes and IT systems, and an actively used performance management system with key performance indicators (KPIs) are as important as the right mind-set and capabilities.
As most companies in project industries are engineering-driven, they do not always focus on the organizational aspects of initiatives. Nevertheless, at least five elements are crucial to effectively anchor smart platforms in the organization and in daily work.
Organizational structures support the application and further development of the smart platforms
Organizational structures that can sustainably drive smart platforms can take various shapes and forms. However, the key ingredient is usually clear ownership. One effective setup consists of a single central smart platform lead working with several module owners for each application integrated into the organization (Exhibit 9).
The smart platform lead takes overarching responsibility for the module, and thus serves as the central owner of smart platforms, focusing varying levels of dedicated capacity on this role (for example, more than 50 percent of the lead’s time in the short term, and perhaps 20 to 30 percent in the longer term). This attention is critical to drive progress across all modules. Companies might consider integrating this role into the product management department (Exhibit 10).
The company assigns one responsible owner per module, who drives progress for the respective module with some degree of dedicated capacity. Companies can also integrate these roles into the product management department, or simply distribute them across the organization. They also collect feedback and take the lead in driving the module’s application in large projects. Companies do not have to appoint module owners right away, but in many cases, it is beneficial to name module project leaders with the prospect in mind of eventually making them module owners.
Processes ensure the application of smart platforms becomes completely embedded in daily work
Companies must adapt relevant processes to include smart platforms end-to-end from sales to execution, including project-independent processes, to ensure the modular system remains up to date.
- Sales process. Players need to embed modularization in the sales process, from first sales contacts to deal signing. They should formalize this process using quality gates and IT systems. As soon as a company decides to bid for a project, the applicability of smart platforms should be aligned in a first, cross-functional quality gate to determine the use of the modular system, explain and defend deviations, and draft the offer strategy in line with the customer type. The key to success involves reversing the burden of proof: participants need to explain and defend any deviations from offering smart platforms, and have management approve them, not the other way around.
- Execution processes. Companies should aspire to integrate modularization seamlessly, from deal signing to the end of order handling, formalized via quality gates and IT systems. Processes should include regular tracking of key performance indicators, predetermined escalation paths, and robust feedback loops.
- Module maintenance processes. Project organizations need to set up module maintenance processes, including continuous improvement activities. Doing so will keep the modular system up to date by including a cross-functional release and feedback process. The company should keep neutral versions of sales documents up to date for three to five strategically selected high runners based on the highest take rates. It should also create sales documents for nonprioritized products that are in line with those of up-to-date prioritized products (Exhibit 11). In most project industries, companies should not worry about creating and keeping neutral versions of execution documents up to date, as this typically is neither practical nor worthwhile.
- Portfolio review. Companies should regularly conduct higher-level reviews of the product portfolio, comparing it with customer segments and benchmarking it against competitors. During these reviews, participants challenge less profitable, niche solutions, assess white spots in the market, and integrate new developments and innovations based on customer needs. Portfolio conferences are one way to formalize these reviews (Exhibit 12). A portfolio conference typically takes place annually for one to two days. The sales team, the smart platform lead, and the module owners review the entire portfolio, based on latest market trends and needs.
IT systems integrate smart platforms into all relevant workflows
IT systems often require some adjustments to manage workflows adapted to smart platforms—particularly configurators that ideally integrate into sales document creation systems. For example, companies provide offers using a guided configurator based on the smart platform library. The configurator links customer input to modular building blocks based on a clear set of rules. Typically, configurators are used by experienced sales staff and not intended for direct customer interaction, unlike in high-volume industries.
Companies create sales documents automatically by means of the configurator based on a central library, thus ensuring the consistency of drawings, bills of materials, and other critical documentation. Organizations can use a variety of different “Configure Price Quote” software solutions available in the market to combine these workflows.
Beyond that, material master data management becomes more and more important, as component information is not only used for a single project but for multiple modular projects, spare part online Web shops, or digital twins. This is typically a significant hurdle for organizations that treated data as a necessary evil in the past.
Performance management ensures progress and effectiveness of all efforts regarding smart platforms
Performance management provides a basis for systematic performance dialogs to ensure progress and impact, and to define necessary actions. A KPI dashboard creates a fact-based overview of the current situation. Ideally, KPIs span four areas: financial impact, competitive portfolio, implementation in projects, and anchoring in the organization.
Combining leading and lagging KPIs allows the company to track historical performance reliably and to react at an early stage, for example, if progress begins to stall. Complementing quantitative KPIs with some qualitative indicators can help organizations grasp factors not easily put into numbers. Companies should not use KPIs only as a reporting tool; they should also factor in performance dialogs that define actions to improve and optimize the current situation effectively. Performance dialogs should therefore definitely play a complementary role to regular KPI reporting.
The biggest change for us was not the technical concept, but how we work together.
Smart platform lead
Mind-sets and capabilities are a crucial element beyond formalized structures
An organization’s collective mind-set and capabilities are critical to success beyond formalized structures such as processes and IT systems. Elements of this approach include guidelines, mind-sets, incentives, and capabilities.
- Guidelines. Organizations should regularly and visibly communicate a clear modularization story and guidelines that are in line with the company’s smart platform strategy. Several overarching guidelines make sense. For example, ensure smart platforms include clearly defined building blocks and rules, always base offers on existing building blocks, and get management approval for all deviations from these standards.
- Mind-sets. Smart platforms should be on the top of the management agenda; an integral part of the organization’s mind-set. The organization should support mind-set changes through strong communication campaigns and hold module days for every completed module to promote the new setup in the organization. It should train the sales employees in using the modular system and ensure capabilities are in place.
- Incentives. Companies should make sure there are incentives to drive modularization. Successful companies frequently apply a carrot-and-stick approach: they incentivize the use of the modular platform while discouraging deviations from the smart platform approach.
- Capabilities. Successful firms ensure smart platforms are codified, and they regularly assess and train employees to eliminate capability gaps. Beyond that, they use train-the-trainer concepts.
Companies tie all the above elements together to change mind-sets and capabilities by communicating. They should celebrate successes early, often, and explicitly. Structuring projects around pilot modules as “lighthouses,” for example, can ensure first achievements that pave the way in the hearts and minds of the organization if communicated systematically. Even in fact-driven companies, communication needs to involve the organization emotionally and address potentially underlying factors, such as unspoken fears.
For even more insight, download Smart platforms: Cracking the complexity challenge of project industries, the full report on which this article is based (PDF–1.68MB).