Technology Forecasters, Inc.
Global Consulting and Research for Outsourcing and the Environment
For one of the sessions at the TFI Quarterly Forum in April we asked the members to break into groups and discuss regionalization and whether a regionalization model for their product manufacturing would make sense.
We defined regionalization as “manufacturing products on the continent on which they are sold.” As Senior Consultant Charlie Barnhart, the session leader, aptly pointed out, regionalization was common practice before the mass migration to China in the last 1990s. Now with higher oil prices and exchange rates that weaken the US dollar, we wanted to know if Forum members - OEMs and Contract Manufacturers - were considering returning to a regional strategy and whether it would become more common practice in the future.
When the nine breakout groups reported back on their discussions, we heard a common refrain: “It depends.” Yes, we are considering/need to consider regionalization and yes, it will become more common in the future. On the “pro” side of regionalization the groups agreed that oil prices and exchange rates were having a major impact on costs, in particular logistics costs. Other benefits include greater customer responsiveness, and faster communication, proximity to developing markets, and environmental considerations.
On the “con” side, the groups agreed that regionalization doesn’t necessarily make sense for high-volume, low-mix production, especially when suppliers are onsite and integrated into the manufacturing process through VMI programs and other supply chain services. And regionalization may lead to higher overhead costs as it necessitates more duplication of effort, and more local management and oversight. Then there are quality concerns - with more manufacturing locations and more complex supply networks, maintaining consistent product quality may become harder.
The consensus was that a hybrid model will emerge. For some products and industry segments, one global manufacturing center makes sense. For others, regionalization is the way to go. It all depends on which way total cost tips the balance.
Let us know what you’re company is considering. Does regionalization make sense, and if so why?
For many reasons, Technology Forecasters has been predicting a return to the regional sourcing strategy that was the hallmark of electronics manufacturing before Y2K and the rush to build anything and everything in China.
(For example, see the May article by Bruce Rayner, TFI vice president and director of consulting and research, in Manufacturing Business Technology, or the conclusions from my presentation at the Spring Quarterly Forum last month: “Recalibrating the Cost of Outsourcing/The Changing Landscape of Outsourcing.”)
In this context, it is useful to review the assumptions – unfounded it turns out — that led the industry away from the regional strategy. I offered this view at the Spring Quarterly Forum last month. These unfounded assumptions, which became rationalizations to justify the move to China, have mistakenly become imbedded in the industry’s collective perception. A mindset correction is needed.
Here are the ones I encounter repeatedly.
Assumption: Systemic quality problems in Mexico and/or Eastern Europe, or products manufactured in Mexico or Eastern Europe are of poor quality. Fact: No statistically significant data has ever been found to support this assertion.
Assumption: It is always cheaper to manufacture products in China and ship them to their point-of-sale than it is to build them in a higher-cost labor region. Fact: Our Outsourcing Navigator Series modeling has consistently shown that on a TCO basis this isn’t true in all cases — and almost never true if materials are sourced at their point of lowest cost and assembly is done regionally.
Assumption: It is necessary to build in China to penetrate the huge potential market in China. Fact: A review of publicly traded global OEMs financial statements clearly indicate this approach has not come to fruition.
Assumption: Cross-hemispheric strategies (i.e., using emerging, remote lower-cost labor to build electronics) provide social and economic benefit to all parties involved. Fact: Given the state of the environment, the global electronics industry and most of the associated economies this presumption seems questionable at best.
Just because everyone else is doing something (like jumping off a bridge) doesn’t mean it is a good idea. Isn’t that something our mothers taught us?
You might know of other baseless assumptions – or you might disagree with these. Either way, let us hear from you.
With all the emphasis on outsourced manufacturing, the electronics industry should also be looking at other parts of the supply chain as candidates for outsourcing. For example, since oil prices are driving up transportation costs, OEMs need to consider not only how far flung they want their supply chains to be, but take a hard look at whether outsourcing transportation and logistics is more cost effective.
One of our Quarterly Forum reports last year examined outsourced logistics. In our study, nearly half of the OEMs reported that logistics were still the primary responsibility of an internal department, but they were keen to outsource it when the providers could prove they were up to the various tasks.
More recently, Technology Forecasters has been commissioned to conduct a benchmark study of the OEM logistics best practices. The client that commissioned the study would like to get as much input from as many OEMs as possible. So, we’re offering you a chance to participate in a survey that will take about 20 minutes.
There’s something in it for you, too, if you take the survey. The client will allow us to send you the executive summary, so you too can learn more about best practices in electronics supply chain logistics. Combined with our study of last year, we think you’ll have a good idea of the state of the art. So, please take some time and click to the survey.
Here’s something I encounter more often than I should. An OEM with an industrial product asked me to recommend some contract manufacturers. The product needed to be built for rugged environments, the OEM needed to quickly get into production, and it didn’t have a lot of money to spend vetting CMs. The executive asked me to recommend a short list. I gave him two names.
The next time we talked, he said he had a problem. The CMs I recommended were already doing the kind of work he wanted done and that made him nervous. Were the OEMs of these other products direct competitors, I asked.
No, he said, but the products were directly comparable. He said he didn’t want the “risk” of taking the job to a CM already doing this type of work for someone else.
I told him this was exactly why I sent him to these CMs. They know these types of products and therefore will have an easier time moving up the learning curve. Given his requirements, the last thing he should do is go to a CM with no experience. That would be a real “risk.”
Then I explained there are three reasons to use a CM with experience in like-kind products:
1. If the CM builds similar products you might get a better deal on materials because it will have established supply-chain relationships.
2. The CM is less likely to pad quotes to buy new equipment or hire needed expertise because it already has it.
3. The probability of failure of the supply solution – and therefore risk — is reduced, not increased, by experience and like-product know-how.
When I explained the reasons he seemed to get it and, as of this writing, was reconsidering my recommendations. Common sense? Maybe, maybe not. The outsourcing landscape is complex and caution is justified. This is one of many topics we discuss in the Outsourcing Navigator Series. So check it out — you’ll feel better!
And if you have any experiences with CMs manufacturing products similar to those from other OEMs let us hear from you.
The last time you made an outsourcing decision did you consider the Blizzard of ‘08 in China? Of course you didn’t. Why would supply chain managers have a better crystal ball than the weather forecasters, who didn’t see it coming until it was too late?
Unlike weather forecasters, supply chain managers need to consider the worst case risks of their decisions even if they can’t predict when the risks might occur. If the Blizzard of ‘08 caught you off guard, it says something about your risk management assumptions.
China’s worst weather in 50 years (a series of storms in the past two weeks) has tied the infrastructure in knots, stranding millions of migrant workers who were traveling to visit their families to celebrate the lunar new year, shutting power plants due to delayed coal deliveries, and snarling a rail and highway system already on overload.
As for the impact on the electronics industry, the only evidence is anecdotal. Technology Forecasters consultants have heard stories of lost productivity, delayed shipments (weeks not days), and suppliers not returning calls or emails.
The implication for risk management is clear to Jon Gilbert, TFI logistics consultant and principal of the Gilbert Group:
“When you outsource to a foreign country you’re not just buying the capabilities of the plant, but the whole distribution network in that country, and the infrastructure that supports it. We should not be surprised when we hear about large-scale transportation interruptions in China from this snow storm because their infrastructure is challenged even under normal conditions.”
“Reduce excess inventory,” is the electronics industry mantra when planning supply chains, but the flipside is having too little inventory due to delays caused by weather, fires, earthquakes and human-caused destruction. The challenge is to find the proper balance between the risk of excess inventory and the risk of being caught with none.
At this stage in the industry’s maturity, it is easier to take inventory out of the system than to be more cautious; supply chain managers get incentives for the former, not the latter. At the very least, they need to ask the right questions. Our experts can help.
How do the decision makers in your supply chain balance inventory risks? We’re interested in hearing from you.
Even the best medical doctors consult other experts. Shouldn’t electronics OEMs that spend millions of dollars on outsourcing do likewise? The following illustrates some of the risks of the insular approach.
I recently conducted a review for a large medical electronics OEM on their request-for-quotation (RFQ) and the resultant pricing they received.
The outsourcing job was a product (about the size of a breadbox) that had been re-designed and reduced in cost. As medical gear goes the anticipated volumes were relatively high, so it made for an attractive piece of business for any EMS or ODM seeking new medical business.
Nine companies bid. Based on my recent update to the Outsourcing Navigator I knew prices were rising but was still surprised by the quotes. The three suppliers who would talk to me (one of which was the OEM’s preferred source) had quoted almost twice as much for value-added services than I would have anticipated.
When asked about this they admitted padding their numbers by more than 5 percent (I made it more like 8 percent to 12 percent) as they felt the geography requested was the wrong solution and would result in problems. What a concept though: An EMS company actually priced a job to make some money!
Despite the fact that everyone talks about collaboration these days, none of the suppliers had offered an alternate suggestions to the OEM. When asked why they hadn’t, they all informed me it was “crystal clear” (from comments made by the OEM’s sourcing team) that the solution had already been decided and that the OEM’s main criterion was a contractor that would “keep its mouth shut and do what it was told.”
When I shared this information with the OEM manager working with me on the case study, he was furious and stopped the analysis –he didn’t even ask what was wrong with the geography they’d selected or what a better alternative might have been. Go figure.
The outsourcing landscape looks a lot different than it did last year, much less compared to three, four or five-years ago, and the rate of change accelerates. Given this reality, seeking alternative ideas and approaches is no longer a luxury – do yourself a favor and get a second opinion.
We can expect reasonable growth over the next five years in the market for aerospace, defense, and homeland security electronics, according to new research from Technology Forecasters Inc.
“Electronics in Aerospace, Defense and Homeland Security: Repositioning for the Future,” a Quarterly Forum Report released this week, also concludes that significant opportunities exist for suppliers to serve customers in these segments as they increase their reliance on outsourcing.
TFI estimates the total available market for this sector will grow from $112 billion in 2006 to $152 billion by 2011, a 6.3 percent compound annual growth rate (CAGR). EMS revenue from the sector will increase at a 9.3 percent CAGR, from $2.8 billion in 2006 to $4.4 billion in 2011. EMS penetration will remain relatively low in the 3 percent range.
The research conclusions are based on in-depth telephone interviews and an online survey directed at management and senior technical personnel. We also conducted secondary research in the appropriate markets.
In choosing OEMs, these customers focus primarily on quality, dependable delivery, a competitive price, technical capability, and adherence to regulatory standards. Flexibility, responsiveness, and customer service also are critical issues for customers.
The aerospace/defense electronics industry is attractive to suppliers because of growth potential and portfolio diversification. However, the report flags several cautions:
-Contractual requirements can prove to be challenging.
-Demonstrated experience in the government and aerospace contracting arena are critical for selection as a partner.
-Government contracting moves at a much slower pace than the commercial world. Up-front investment may take years to recover. Project cancellations can occur.
-Margin pressure in aerospace/defense business is not as critical as the commercial world, but cost management is still an issue.
How do these match your company’s experience in aerospace, defense and homeland security? We’d like to hear from you.
What’s the bigger risk for supply chains: Forecasts that overestimate demand, or forecasts that underestimate it?
Hmmm … would you rather have an impacted wisdom tooth or need a root canal?
Kinaxis, a strategic partner of Technology Forecasters, has some interesting thoughts on both problems - forecasting, not teeth - in its recent blogs.
A post on Aug. 22 looks at the problem of unexpected demand. The Aug. 9 post recognizes the flipside: Misguided forecasts that lead to excess inventory. (Unless you were asleep in 2000 and 2001 you probably remember what the latter was like.)
Both are worth reading.
A second post on Aug. 22 talks about the need for software systems and business processes that allow supply chains to manage problems that result from faulty forecasts. That post wisely concludes that the human factor is as important as the software. To wit: “In the face of constant change, companies need to empower people with the right information and tools to respond quickly and accurately.”
Empowering people is certainly one of the keys to solving the ongoing dilema of faulty forecasting. We’re reminded of a piece of research conducted earlier this year by Technology Forecasters for the Quarterly Forum in March.
“Supply Chain Software: Investments and Trends Among OEMs and EMS Providers,” concludes, in part, that even with recent improvements in supply chain software, “we find that collaboration through supply chain software systems remains fairly limited between EMS providers, their suppliers, and customers.”
The report recommends several areas that are ripe for greater collaboration along supply chains. At the top of that list: Order management and forecasting.
What are your biggest obstacles to collaborative forecasting?
Here’s a mid-year prediction from Technology Forecasters: Due to the growing desire to reduce their carbon footprints and their costs, OEMs will swing from centralized manufacturing outsourcing (e.g., in Asia for global customers, anytime, all the time) to more balanced regional strategies than we’ve seen in the past five years.
We believe the lean and green movement will be one of the drivers of a massive swing to regional manufacturing. Rising costs in Asia and improving quality elsewhere will also drive this shift, but the big push will come from green demands. As OEMs seek to reduce their carbon footprints, they’re going to want to manufacture closer to end markets. Air, ocean, and land transportation are gross contributors to exhaustion of non-renewable resources and the ill health and environmental effects of burning hydrocarbons.
We’ll go so far as to say it is not a matter of “if” this happens, but when. That is, we predict consumers and business customers will demand a reduction in the carbon footprint of the products they buy, and OEMs and their partners will respond by aligning manufacturing to serve regional customers. Some major electronics OEM executives to whom TFI has spoken expect a rapid shift in consumer sentiment regarding carbon footprints in the next 12 to 24 months and are preparing their stategies now.
The most nimble and courageous contract manufacturers will lead the way. This represents an opportunity for mid-sized and smaller regional CMs, who will find themselves on more equal footing with the largest CMs, and thus able to win new business.
In the months ahead, our OEM, CM, and component supplier members will hear more from us about what they can do to competitively and intelligently use manufacturing and logistics strategies to reduce costs and meet carbon-reduction goals.
We’d like to hear from OEMs and CMs on this: How soon will we see the swing to more regional manufacturing?
Voluntary carbon offsets are a minor but useful item in the tool kit for reducing greenhouse gas emissions. Their value is mostly symbolic, a way to raise awareness and to make a statement about one’s commitment to reducing emissions.
Families, individuals or companies can buy voluntary offset credits from any of several private companies that direct the money (minus a commission) to wind farms, solar installations and other projects that reduce carbon emissions. The idea is, if you pollute in one place, you can theoretically reduce your net climate impact by buying credits and contributing to energy efficient projects somewhere else.
I agree with those who think this is a pretty good idea, if only because it makes people aware of the carbon emissions they are creating. I don’t entirely agree with the critics who scoff at the notion as no better than the indulgences that the Catholic Church sold during the Middle Ages, but I can see their point.
Voluntary efforts should not be confused with the rigorous carbon cap and trade programs now established by the European Union and elsewhere under the Kyoto Protocol. The EU has the most rigorous program I know. Each business must meet an assigned carbon emissions cap. Companies that do better than the cap can “sell” the unused portion of their caps, for whatever the market will bear, as credits to companies that aren’t meeting their goals. There are stiff financial penalties for non-compliance.
I would prefer to see engineers everywhere act voluntarily to aggressively innovate design-for-environment features in all sites, products and services. But we’re not seeing significant movement in that direction yet, and time to reduce environmental degradation may be running out. So, mandatory cap and trade programs are likely to be among the more successful methods for lowering emissions until we develop technologies to dramatically reduce our use of carbon-emitting fuels.
In contrast, voluntary carbon offset programs are a partially effective, temporary measure toward reducing emissions, mainly because they raise the consciousness of executives, companies and individuals to the measurable costs of polluting.
For example, when we were helping one of our clients to elicit Lean and Green ideas from employees, one of the first responses was that the company should buy carbon offsets. This suggests that electronics executives need to know about voluntary carbon offset credits and develop an opinion on them.
The issue of offsets was brought to my attention by Saxton Rose, the creative director of TFI’s Web site, after he had read my blog on green wash several weeks ago. Voluntary carbon offsets do have the potential to become another form of green wash with more PR benefit to the adopting company than any real impact on the environment. I would not excessively praise companies that adopt voluntary offsets, especially if that is the sum of their green efforts.
If you want to learn more about how to reduce the environmental impact of your company and its products — and increase profits at that same time — then attend our September Quarterly Forum in Ottawa, where we will have a briefing and panel on Zero Waste in the electronics industry. To learn more about this and TFI’s other Lean and Green services follow this link. www.techforecasters.com/consulting/environment/
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