Optimal Outsourcing for Intellectual Property Protection and Production Cost Minimization John P Kim Karim Hamza Kazuhiro Saitou Dept. of Mechanical Engineering. Dept. of Mechanical Engineering. Dept. of Mechanical Engineering. University of Michigan University of Michigan University of Michigan Ann Arbor, MI 48109-2125, USA Ann Arbor, MI 48109-2125, USA Ann Arbor, MI 48109-2125, USA johnpk@umich.edu khamza@umich.edu kazu@umich.edu .Abstract – This paper presents a methodology for optimal outsourcing of products. Outsourcing of products can have the advantage of reducing the production cost, but often causes a risk that important technology may leak and get used by competitors. To help reduce the risk of intellectual property (IP) leakage, a model proposed in this paper assumes that it is possible to separate some of the important geometrical features on some of the product parts that are outsourced, and then manufacture them in-house. The model estimates the fraction of IP-value that is subject to risk of leakage based on patent claims and how they relate to the outsourced parts and/or features. Production cost is modelled by assuming a base cost for manufacturing parts in-house, and then a discount rate is applied if the decision to outsource is made. Separation of geometrical features from manufactured parts introduces additional cost, which is modelled as an overhead if the decision to separate features is made. The outsourcing management process is then viewed as a two-objective problem, with the objectives being the minimization of both the fraction of IP-value at risk of leakage, as well as the production cost. A case study of an auto-slide-hinge mechanism is presented, in which the two-objective optimization problem is transformed into a single- objective constrained problem. Genetic algorithm is then applied iteratively on the problem in order generate the Pareto-plot that visualizes the trade-offs between the two objectives. Index Terms – Intellectual property protection, Outsourcing management, Genetic Algorithm. I. INTRODUCTION Outsourcing is a practice often used by companies nowadays to reduce the in-house production costs, which aims at maximizing their profitability and maintaining a competitive edge. Maintaining a competitive edge can be greatly undermined however if a company’s intellectual property (IP) is leaked out, and its products are imitated by competitors. Leakage of IP can happen internally from within the company itself, or externally through suppliers that manufacture parts of the company’s products. Preventive measures for inhibiting internal IP leakage are fairly well established. Common practices include: e-mail, instant messaging and network protection [1-4], role-based data access [5], as well as researcher tracing systems [6]. Prevention of external IP leakage while taking advantage of outsourcing to reduce manufacturing costs is not an easy task. The main difficulty is the lack of control [7] on the IP security at the supplier end. Recovery of IP value is generally not impossible after a leakage occurs. Patents help protect IP. In the event of discovery and proof of unlawful imitation of a company’s product, the company could file a lawsuit that entitles it to compensation. An example is the die-casting machine of T-company [8], which has a pretty unique design developed in the 1980s, still has a decent market possession despite imitation. Proving that unlawful imitation had occurred can have varying levels of difficulty depending on the product type. Watermarking technologies [9,10] are used extensively in audio and video digital multimedia products. Special forms of watermarking have been proposed for three-dimensional geometry computer aided design (CAD) models [11-14], and thermal tags [15] have been proposed for electronic chips. Mechanical hardware products however, are possibly the most difficult to prove whether a similar product by a competitor is truly an unlawful imitation or not. The issue is further complicated in product like cell phones that have a very short lifecycle. This is because the product lifecycle of such products can be shorter than the duration of a lawsuit [16]. Hence for such products, it is of great importance to prevent the IP leakage during the product lifecycle. Reducing the risk of IP leakage and reducing the cost of manufacturing via outsourcing can be a tough decision to make. A number of articles in the literature [7, 17-19] have viewed outsourcing as a binary decision. In this paper, partial-outsourcing is considered, where some features of parts of a product can be separated thereby allowing outsourcing of the base part and some of the features, while using in-house manufacturing for the more important features and the final assembly. Outsourcing is posed as a multi-objective optimization problem of reducing the IP- value at risk of leakage and the manufacturing cost. This paper started with a motivation and brief review of relevant work in the literature, which concludes to the importance of the research conducted in this paper. The next section explains the modelling details of the IP leakage risk and manufacturing cost functions. A case study of an auto-slide hinge mechanism is then presented to demonstrate the proposed method. The paper then concludes with a discussion and future work. Proceedings of W2C.1 2009 IEEE International Symposium on Assembly and Manufacturing 17-20 November 2009, Suwon, Korea 978-1-4244-4628-5/09/$25.00 ©2009 IEEE