Technology Forecasters, Inc.
Global Consulting and Research for Outsourcing and the Environment
Some things are just so much common sense that we tend to overlook them. Here’s one piece of such wisdom.
Sparton Corp., a member of Technology Forecasters Quarterly Forum, has been pursuing a quality program it calls Performance Excellence — a combination of Lean, Six Sigma and common sense. For more details, listen to an interview with Spartan CEO David Hockenbrocht on our website.
Among other things, Hockenbrocht says: “When we go after excess costs and drive them down to what we believe is the lowest cost solution in almost anything, several other things happen. First, the quality of the output goes up — and that is very quickly measurable. Secondarily, the speed of delivery also goes up. We get two not so much thought about outcomes when we go after costs: Improved quality and higher speed.”
If you stop to think about it, that equation makes sense, but relatively simple concepts can get lost amid the complexities of the EMS business.
Hockenbrocht also reminds us that successful EMS companies are striving for more collaborative partnerships. Sparton, for example, is extending its Performance Excellence effort to at least one of its OEM customers. Based on a survey conducted earlier this year, Technology Forecasters concluded that adoption of Lean among partners will be the next crucial phase in driving out inefficiencies in supply chains.
Hockenbrocht also sees the sharing of goals as a key to partnerships. He tells how one customer recently invited about three dozen of its most important suppliers, including Sparton, to an event where they got to look at the OEM’s three year business plan in great detail. “I was so impressed with the openness,” Hockenbrocht says. “This is where a business partnership needs to be.”
Collaboration will be crucial to electronics manufacturing success in the years ahead. Kinaxis, a strategic partner of Technology Forecasters, always has interesting thoughts about supply chain collaboration. Its blog posting of October 4 is worth a look.
For obvious reasons, people with waterfront property might care more about global warming than people who live on mountaintops. Likewise, you’d think U.S.-based EMS companies with razor-thin margins might care more about curbing health care costs than industries with profit margins wide enough to absorb this growing expense.
Oddly, that does not seem to be the case. U.S. electronics industry thought leaders who address this problem are the exception, not the rule.
The continued health of the U.S. manufacturing base depends to a great extent on the productivity of American workers. Productivity is a function of input versus output - the cost of workers in wages and benefits versus the value they create. That ratio is heavily impacted by rising health care costs. Reining in these costs through government policy is the key to keeping the productivity of American workers high enough to justify manufacturing domestically.
In its most recent annual study of health care costs, the Kaiser Foundation reported that the average cost of employer-provided family health insurance in the U.S. increased to $12,106 per employee family in 2007. The employee pays about one fourth of the cost and the employer pays the remaining $8,825. To put that number in perspective, it’s enough to pay the fully burdened costs of a semi-skilled worker on an SMT line in China for six months.
According to Kaiser, these insurance costs have risen 78 percent since 2001. This phenomenon is widely remarked on in the automotive industry, where obligations to current and retired workers add nearly $1,500 to the cost of each American-made car.
EMS companies suffer less than automakers from the legacy of large numbers of retired, unionized workers, but in an industry with average after-tax profit margins hovering around 2 percent, an extra $8,825 per employee could make the difference between a production line staying in the U.S. or going overseas, or the difference between winning a contract and making a dime.
Several of the 2008 presidential candidates have now weighed in with health care proposals. The U.S. electronics industry has a major stake in the evolving debate over how to resolve rising health care costs. It is time to pay attention.
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?
Green is green. That’s the central message corporate environmental champions need to convey to executive decision makers to get the green light for green projects.
By that I mean, products, processes and facilities designed to conserve resources typically save money, reduce costs and in some cases generate revenue. That’s why I named my book, “Lean and Green: Profit for your Workplace and the Environment.”
As I have written in the past, and emphasized again in a recent podcast, executives are completely - and properly - motivated by shareholder value. The best way to communicate green ideas - better product design, more efficient facilities, better process in manufacturing, even natural landscaping - is to demonstrate how they’ll save money, or increase revenue. And measuring financial benefits - and the financial risks of not being proactive in this area - can now be done with standard accounting models.
For a good example, read an article written last year by Bill Roberts, who now writes regularly for TFI, about Texas Instruments’ latest wafer fab. Through sustainable (green) design, TI expects to cut yearly operating costs as much as $4 million. That’s how TI’s green champions sold the idea to the decision makers.
Once green initiatives are adopted and implemented it is also imperative to measure the improvements so executives - and everyone - can see the savings. Then they will be motivated to continue in the lean and green direction.
The central truth about lean and green: What’s good for the environment is good for profits.
Write and tell us your experience in convincing executives to go green
For my book, “Lean and Green: Profit for your Workplace and the Environment,” I asked environment champions at 17 environmentally innovative electronics companies if their companies were doing all they could to go green.
Their responses were startling.
At a large semiconductor company, the champion said they will be green enough when all they need to make semiconductors is sand and water. At an OEM, the champion said they will be green enough when the only things that leave the facility at the end of the day are finished products and employees.
At company after company - among them Apple Computer, Agilent, Celestica, Intel, NEC, Sony and Texas Instruments - the story was the same. Each is highly innovative in going lean and green, but each champion said his or her company could do more.
There’s a bottom line reason why these people set a high bar. They understand the central truth about lean and green: What’s good for the environment is good for profits. They long ago cast off myths about green costing instead of saving money.
Green enough is bound to vary from company to company. One measurable standard is zero waste. Several companies have embraced zero waste. In my book, one company explained zero waste this way: Zero contributions to landfills.
That means anything that comes in the door must be scrutinized to make sure it can either go entirely into products or be composted, reused, recyclable or returned to the vendor. This takes some discipline, but once a company establishes it, the cost savings are enormous. And the pride that employees and shareholders can have about being a zero waste company is immense.
Our web site has many resources for green and lean. And I recently did a podcast on the topic.
Next week I’ll blog on how to sell green initiatives to top executives.
Until then, we’d like to know: What would be green enough at your company?
A wise person once said, “Change is inevitable, growth is optional.” Change is bound to happen because - hey! — stuff happens. When it does, we have a choice in how we respond. Our response is everything.
That same sage might have also said, “Life is what happens when you are making other plans.” Or, planning is good, but don’t count on it, because - hey! - stuff happens.
What’s this got to do with anything? Those thoughts tumbled through my head when I was reading the blog at Kinaxis.com. The sense I got could also be summarized by paraphrasing Shakespeare: “The best laid supply chain plans, often go astray.”
Kinaxis, a strategic partner of Technology Forecasters, is all about responding to changes in the supply chain and turning them into opportunities. Because no matter how well you plan your supply chain - hey! - stuff happens.
You’d be better off to read the blog and draw your own conclusions, but let me share some items that caught my attention from the May postings.
May 21, interesting discussion that cuts to the heart of the dime-store wisdom offered above. If you need response management, does that mean you planned poorly? In a word: No.
May 15, conventional wisdom says the customer is always right. Maybe, maybe not - it is all in the metrics.
And from May 3, a discussion about the top three issues in supply chain management. No, I’m not going to tell you. Go see for yourself. Let us know if you agree or don’t by posting a comment below.
Let me end this with another piece of dime-store wisdom. Question: How many psychiatrists does it take to change a light bulb? Answer: Only one — if the light bulb wants to change.
We hope that 21st century supply chain professionals in the electronics industry want to change, because whether they do or they don’t - hey! — stuff happens.
While most EMS companies are busy gazing downstream for new sources of revenue with higher margins in design, fulfillment, maintenance, service and the like, a potential high-margin center has materialized, not in front of their noses, but behind them.
We’re talking about SiP, PiP and PoP. For those who haven’t mastered the alphabet soup: system in package; package in package and package on package, or collectively 3D packaging. At TFI, our initial research suggests it has the potential to become a sweet spot for EMS providers bold enough to look upstream. Here’s why:
In the age of nano-miniaturization, converged 3D chip packaging is a value-added activity to which both the EMS and Semiconductor Assembly and Test Service (SATS) nodes along the supply chain contribute. But which of them will ultimately capture this exploding market is still unclear.
Like many other aspects of electronics manufacturing, the cell phone is driving this, especially PoP, where multiple functions can be best accomplished in minimal space, creating more efficient connections and lower power usage. A couple of the larger EMS providers tell us they’re doing PoP work for cell phone OEMs and that demand is strong.
The cell phone may be first, but it will not be the last to benefit from 3D packaging. Laptops, PDAs, digital cameras and other consumer devices will drive new growth. So will myriad other segments, from medical to military, as engineers adopt the PoP for performance benefits of these products. PoP is expected to grow from 100 million units in 2005 to nearly 700 million in 2010.
Most EMS companies already have at least some of the capital equipment they need for this work, especially PoP, which does not require the clean room necessary for SiP and PiP. From our initial research we estimate that an EMS provider could launch PoP stacking capability for $200,000 to $400,000 investment, plus the cost of technology expertise.
For more about this opportunity, be sure to read the presentation based on my research, “New Chip Packaging Solutions: An EMS Opportunity, Competitive Threat or Both?”
Savvy companies will snatch this opportunity. EMS companies could — if they turn around and look upstream.
The electronics industry has made important strides in adopting Lean Thinking, but we still have a ways to go to realize its full benefits. I have no doubt that leading adopters are already reaping rewards, but the benefits would increase by orders of magnitude if partners along the entire supply chain adopted Lean.
If you attended our Quarterly Forum last week in Monterrey, Mexico, you saw my presentation on TFI’s research on Lean: “The State of Lean Adoption in the Electronics Industry: Who’s Leading and Lagging the Supply Chain?” Based on our survey of 250 industry executives, the answer is: EMS providers and OEMs lead, while distributors and components manufacturers, including semiconductor companies, lag.
What is less clear, because it was not the subject of the research, is why. Why are larger EMS companies and OEMs the leading adopters? Why do distributors and component makers lag? A collective understanding could be an important step towards progress. I have a few theories, but we’d also like your input.
TFI is deeply committed to Lean and wants to be an advocate for this comprehensive set of philosophies, rules, guidelines, tools and techniques to increase value and eliminate waste in our industry. Our intent is to stimulate interest and discussion, and to help the electronics industry find solutions for pushing Lean to the farthest reaches of the supply chain.
In that spirit, here are three possible theories why distributors and component manufacturers are lagging.
– With the thinnest profit margins, EMS companies are highly motivated for Lean. With some of the highest margins, many component makers have little motivation.
– Lean is typically applied initially to processes on the factory floor. Distribution does not have experience in manufacturing – possibly explaining delayed adoption.
– Perhaps the farther away supply chain partners are from the original demand signal the less likely they are to adopt Lean processes.
In the future, we’ll explore ways to bridge the gap between leaders and laggards. For now, we’re interested in your thoughts on why the leaders lead, and the laggards lag.
We are seeing some good examples of checklists and spreadsheets being created by innovative compiance managers to make products more recyclable and hazardous substance-free. Should companies share these tools? On one hand, some companies have worked hard to create these and they consider them to be competitive advantages. On the other hand, quality methodologies are shared widely and—just like quality—DfE rules benefit the whole industry. Sharing methodologies will foster alignment up and down the supply chain. Thoughts?
In our environmental consulting practice, we are finding that there is no clear role for the management of product environmental compliance — it is oftentimes blended with facilities EHS, which usually causes confusion. Our latest benchmarking report highlights this fact.
Doesn’t it make more sense to take a more holistic, strategic approach by bringing them together?
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