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 the first time since I started measuring more than five years ago, and most likely for the first time ever, the labor cost for assembling printed circuit boards (PCBs) is lower in the U.S. than in Canada.
No, you did not misread that statement. By my recent calculations, the average U.S. cost for fully burdened direct labor for PCB assembly is $39.10 per hour. The comparable figure in Canada is $45.80 - 17 percent higher.
The weakened U.S. dollar has turned upside down many assumptions we’ve been using to calculate total cost of ownership (TCO) in electronic manufacturing sourcing decisions. Everyone - OEMs and contract manufacturers - has something to lose.
Canada is not a huge outsourcing destination for OEMs, but it has been a regular North American manufacturing site because it was less expensive than the Lower Forty-Eight. The strength of the Canadian dollar changes that.
The Euro is about 50 percent stronger against the dollar than it was when many current outsourcing contracts were written for European sites. China and the rest of Asia are also seeing some, though less, impact from the falling U.S. dollar.
If your company’s CFO doesn’t have a corporate currency risk mitigation strategy, then shame on him or her. Contingencies for currency fluctuations are not typically written into outsourcing contracts.
U.S. OEMs and their CMs usually set contracts in U.S. dollars; if the dollar weakens someone takes a hit. Right now, that someone is the CM that must pay a labor force in Euros or Canadian dollars.
OEMs now negotiating contracts for future sourcing can expect U.S. dollar costs to rise accordingly, especially if they’re determined to outsource to Canada or any country using the Euro, or that has a local currency closely tied to the Euro, as many Eastern European countries do. (Most of them intend to move to the Euro but not for a couple of years yet.)
As ever, TFI’s Outsourcing Navigator can help you sort this out; in December I’ll issue a revised version that takes the weakened dollar and other changes into account.
I like to play chess. I’m not great at it, but pretty good. I don’t have the time to invest in playing with people, so I decided to get some chess software. Anyway, people can be so annoying.
While looking at different programs, I discovered some freeware I could load on my Blackberry. That’s convenient for a busy guy like me; I can squeeze in games when traveling, watching paint dry, waiting for the light to change, etc. Nice.
The program’s okay — great graphics, easy to use, small footprint, plays at multiple skill levels (the highest one is even tough for me to beat), and it never makes a mistake — something that’s really annoying when playing with people. There’s no fun in winning if the other guy loses due to a mistake.
After playing a few hundred games, I figured out a few “weaknesses.” Not bugs or errors — just weaknesses, or limitations, things that if “I got into trouble” during the game I could exploit (i.e. use to cheat) to beat the software.
Being that I lack the self-control to not cheat, and I like the portability of the chess game on my BB, I decided to find a dedicated-handheld chess unit. There are several nice ones on the market; however, the ones with features comparable to my freeware are expensive.
What the heck. I decided to spend the money and get something that would be totally up to my game, and that I wouldn’t get dissatisfied with.
So I spent a ton of money (drove my TCO through the roof) only to discover that after playing a few hundred games I figured out some “weaknesses” in the unit (not bugs or errors – just limitations) that were different from the ones in the freeware but similar.
Now I’m angry and asking myself: “What the heck does it take to get a ’solution’ that I can carry in my pocket, that’s rugged, has long battery life, has full featured graphics, and consistently plays chess at my current (and future) level without any limitation?”
Is that asking too much? Are my expectations out of line?
Having paid nothing for the freeware, I also feel like I got “ripped-off” by the expensive product. Why should I have to pay for “embedded software” in the device? Based on my estimate of COGS for the hardware it should have been much cheaper!
I think I should get my money back, and be compensated (maybe handsomely) for my trouble. Plus, I think I’m due an apology from the freeware company for all the inconvenience they’ve caused me. People can be so annoying.
There’s a blog worth reading at Kinaxis.com regarding the importance of supply network collaboration. Kinaxis, a strategic partner of Technology Forecasters, knows what it is talking about on supply chain matters - so we pay attention.
The Kinaxis blog of July 18 points out that supply chain collaboration used to mean your systems talked to each other. As important as that still is, people need to talk, too. Real collaboration is among human beings, it argues.
An OEM or contract manufacturer can throw all the collaborative technology it wants at a supply chain, but if people aren’t willing to work together, then collaboration won’t happen.
We agree with Kinaxis, and we want to advance the discussion.
Supply network collaboration is important, but many are having trouble getting there. Not so much in adopting technologies, but in making effective use of them. That’s because for a variety of reasons, corporate culture in North America historically has been collaboration unfriendly, throwing up a number of roadblocks.
David Coleman, founder and managing director of Collaborative Strategies LLC, San Francisco, has studied and evangelized collaborative technologies and collaborative culture for 15 years. His Web site is a fountain of useful information.
Take a look at his report, “Critical Factors for Adoption of Collaborative Technologies.” Especially see Page 2, where he outlines critical success factors.
Among his points: Successful corporate collaboration requires a high level champion to drive it forward; it must be connected to an important business need; there need to be measurable outcomes; business processes need to be well defined, etc. These certainly apply to supply chain collaboration.
We’re interested in hearing from TFI members about what they find to be critical success factors - and obstacles - to supply network collaboration. Let us hear from you.
A new bit of alphabet soup has crept into the electronics manufacturing lexicon. “JDM” - Joint Design Manufacturers - an alternative that more OEMs have begun to consider when reviewing their outsourcing options.
Who exactly are these JDMs and what exactly do they do?
The concept has been around for quite some time, especially in government work. You’ll find many examples of JDM - though not under that name - in the maze of military and aerospace contracting, subcontracting and sub-subcontracting. But this particular bit of alphabet soup has only recently begun to be used in the commercial electronics sector.
Briefly, as I explained in a presentation at the recent Quarterly Forum, the JDM typically does some portion of the design and then manufactures the product. This allows the OEM to focus design resources on the more consequential IP in the product, while the JDM handles the routine design elements and supports the manufacturing ramp-to-volume.
We don’t know of many “pure play” JDMs, but rather see larger tier EMS companies, design service bureaus and others - even some OEMs to other OEMs - providing these services under various names - JDM, CDM (concurrent design manufacturing), DMS (design and manufacturing services), and no doubt other monikers we’re not aware of yet.
There’s scant market data on this approach. Aside from the military and aerospace, we think most of the JDM work is being done in communications, computer and consumer segments, perhaps as a consequence of the design resources divested by OEMs in these market sectors in the past decade.
We estimate JDM services account for less than 1.5 percent of annual EMS revenues, which puts it south of the $1.5 billion mark.
There is likely much more to learn about the JDM play, and we would like to know TFI member experiences. Let us hear about what insights you have gained in this space so we can all gain a better sense of this emerging trend.
At times, OEMs and contract manufacturers appear to be obsessed with China, but Eastern Europe gets stronger by the year and should not be overlooked as a an outsource manufacturing locale.
A recent report from Electronic Business on the growing electronics industry in Romania - especially analog chip design and contract manufacturing - got some of us to thinking once again about Eastern Europe as a good place for outsourcing. Worth taking seven minutes to read it.
I asked Charlie Barnhart, the TFI consultant who designs and conducts the Outsourcing Navigator Workshop, what he thinks about Eastern Europe in 2007. “Eastern Europe is much stronger today than in the past-say five years ago,” Charlie tells me.
The last time TFI took a close look at Eastern Europe - about 18 months ago for our Munich Quarterly Forum - it was Charlie who made the presentation. He continues to pay close attention and he knows what he’s talking about.
Straight manufacturing costs in Eastern Europe run 8 to 12 percent higher than in China, but they net out at 3 to 5 percent when the total cost of ownership (TCO) is calculated, he says. The lower risk factors in Eastern Europe almost make it a wash.
Charlie especially likes Hungary, is neutral on the Czech Republic, and suggests avoiding Russia and the Ukraine. He says the best run operations are managed by Western Europe ex-patriots. And he advises that the longer the country has been in the European Union, the better bet it is for manufacturing.
Electronic Business makes a sound case for a recent new member of the EU - Romania — noting that several major EMS companies and OEMs are manufacturing there, including Solectron, Celestica and Nokia.
All in all, Eastern Europe is a place worth considering, especially if the end markets are in Europe, Middle East and Africa.
What are your thoughts? Any experience in Eastern Europe there? Tell us about them by posting below.
While we have your attention, be sure to check out the June 11 blog at Kinaxis on how to reduce supply chain costs — useful reading.
An often used analogy links air-traffic controllers’ use of radar to direct the flow of airplanes with how problems or issues in business are prioritized and tracked. Ever hear the expression, “that’s on our radar” or “that must be below the horizon as it hasn’t shown up on the radar yet”? Meaning if something is known it is on the radar and conversely if something is unknown or unexpected it’s off the radar.
So what does radar have to do with common sense, human nature, and the fundamental tenets of business?
It all started in the mid-twentieth century1 when almost simultaneously the United Kingdom, Germany, and the United States all discovered that dropping small metallic strips from an airplane generated a cloud of echoes that rendered radar information confusing and useless. In a word, this electronic-countermeasure was referred to as Widow by the British, Düppel by the Germans, and Chaff by the Americans.
Today, in Global Pricing Workshops (GPW), and soon in the Outsourcing Navigator Series (which will be released January 2007), we use the term Chaff - and a little poetic license - as an acronym for:
C ommon sense
H uman hature
a nd the
F undemntal tenants of business
It is usually under one of these three headings that the misconceptions about outsourcing can be categorized.
Let’s review by way of example.
For this item let’s use the big fish, little pond - little fish, big pond comparison as it’s the most commonly referenced analogy when discussing the scale of outsourcing requirements and potential supply solutions. Just in case the reader isn’t familiar with this parallel a brief summary follows.
Common sense tells us, that to avoid risk and maximize the potential for success when outsourcing, we need to make sure the size of the requirements aligns with the capacity of the supplier. In other words, if we need $4 million worth of outsourcing manufacturing done per year we should consider a supplier who is scale appropriate for this level of work.
In the GPW we classify scale appropriate as being somewhere between 5 to 15% of a supplier’s total annual revenue. Therefore a scale appropriate supplier for our $4 million outsourcing project would have annual revenue between $27 and $80 million dollars - or rounded off, $25 to $100 million per year.
A hard and fast rule - NO. But certainly a strong starting point from which rational judgment can begin to be applied.
So with a little common sense, and a splash of guidance from the GPW, it’s fairly easy to make sure you don’t end-up being either a big fish in a little pond (where there may be inadequate amounts of food and you won’t be able to grow) or a little fish in a big pond (where you’ll have to compete with all the big fish and may end-up getting eaten yourself).
Yet in approximately 33% of cases labeled as problematic in the Global Outsourcing Tool (GO Tool) data base2 root-cause analysis clearly indicates that inappropriate scale alignment was the key factor in outsourcing failure.
How did this happen? In most cases it was when common sense got clouded by the Chaff of misguided internal rationalizations (”If we’re a big fish in a smaller pond we’ll get more attention!”) or some form of wishful group-think (”We need multiple tier-one EMS suppliers as our new product is going to be the next big-thing!).
While human nature sounds complicated it’s actually the easiest of the three Chaff issues to explain and I usually do so by sharing the following real-world anecdote:
An EMS supplier calls their OEM customer to inform them that they’ve been unable to secure a certain part (or a commitment for delivery of a certain part) to meet the requested delivery requirements of the OEM and asks the OEM for help in finding and/or expediting the required material. To whit, the OEM makes a single phone call and immediately secures a commitment from the component supplier to ship the required part as requested.
All of which results in the author’s phone ringing and an upset OEM client “at their wits end” requesting guidance on how to get their EMS supplier to “start doing the job they’re getting paid for”, i.e. managing their supply chain and to quit bothering them.
Inevitably these telephone calls last about 15 minutes and proceed along the following script:
Such is the life of a consultant.
Lastly are the Fundamental Tenets of Business. While there are many Business Tenets, perhaps the most important relative to outsourcing is:
Margin is the difference between the cost of revenue and selling price and is applied to all underlying costs equally.
As a tenet (or something accepted as an important truth3) the above statement tells us - unequivocally - that there are more misconceptions about pricing and the true cost of outsourcing than there are accurate conceptions!
While it would take tens-of-thousands of words to construct a comprehensive list of all the misconceptions, false impressions, and erroneous beliefs floating around clouding the True Cost of Outsourcing radar, the author’s top-six “myth busting facts” are listed below:
All of which has resulted in an industry (the EMS industry) that in 2005, according to Technology Forecasters4, on average failed to make a net profit or yield a positive return on invested capital.
Why is this important? I guess it would depend on for whom you are working:
Not a pretty picture and one that’s hard enough to paint in person over the course of an entire day at a Global Pricing Workshop much less than within the constraints of a commentary of this type - nonetheless the fundamental tenet of the example is self evident.
Having great leverage in a business relationship, as OEMs have enjoyed for many years over their EMS service providers, can be a dangerous thing as pressing an advantage beyond what works to your advantage is an easy thing to do but can have far reaching negative consequences.
Fortunately, OEMs are beginning to realize as they look outside the edges of their own enterprise that:
Obviously, when navigating the complex passages of outsourcing sea it’s good to do so with a clear radar screen, which shouldn’t be a problem as long as there isn’t any Chaff floating around from misunderstandings related to Common Sense, Human Nature, and the Fundamental Tenets of Business!
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1 http://en.wikipedia.org/wiki/Chaff_(radar_countermeasure)
2 GPW V10.R2/GO Tool V2.R6bii data base, as of May 06, listing 29 of 88 cases out of 384 total
3 Definition from Encarta Dictionary: English (North American) Online
4 TFI Q2 2006 QF Report, Annual Productivity Benchmark of EMS & ODM Companies by Size
In response to electronic-system companies’ challenges in global outsourcing management and supply chain, Technology Forecasters Inc. has developed a multi-functional program deploying a team of TFI consultants to finally enable a complete audit of key performance metrics and their implications across the extended enterprise. The program is completely configurable and scalable to OEMs and their EMS suppliers, in all size categories and in all industries, whether new to the outsourcing strategy, or trying to break free of unworkable legacy relationships.
“In many respects, the historical outsourcing model is broken,” contends Bruce Rayner, TFI Vice President, Director of Research and Consulting. “With notable exceptions, the industry as a whole is failing in the most basic economic measures of business success; yet overcapacity and globalization continue their relentless two-pronged attack on electronic product designers and manufacturers. Companies must engage with their outsourcing suppliers in new ways to ensure the viability of the industry,” he concluded.
In spite of all the evidence indicating poor financial performance, companies continue to execute flawed strategies because they are unable to see the complete picture, according to TFI analysts. Each entity in the extended enterprise operates in a vacuum. The TFI Outsourcing Audit program will address these challenges by providing a complete array of consulting services, across the extended enterprise, including:
”The global extended enterprise has reached a level of complexity where there is a critical need for a comprehensive, multi-enterprise program to bring all key players and challenges together and create fresh sustainable solutions,” noted Pamela J. Gordon, TFI’s President and author of Lean and Green: Profit for Your Workplace and the Environment.. “Our clients have been telling us they need an objective third-party with deep industry experience to help them address these challenges, TFI has been serving the industry in this capacity since 1987, and recently we have supplemented our team to address all these issues at once. TFI is uniquely positioned to bring all the key elements of such a program to bear on these challenges.”
Comprising closely coordinated expertise multiple TFI consultants, this comprehensive Outsourcing Audit brings new levels of efficiencies to a wide range of functions and disciplines within the extended enterprise. This well-documented and proven methodology is configurable and scalable to OEMs of all sizes and in all industries, whether new to the outsourcing strategy, or laboring under legacy inefficiencies and models. TFI’s globally-based consultants provide the objective third-party global perspective to help clients improve not only their own balance sheet but also to understand and improve outsourcing decisions reaching into today’s complex extended enterprise. The key elements of the TFI Outsourcing Audit include:
1. Manufacturing and Outsourcing Best Practices.
2. Audit of Existing Processes and Honing of Competitive Practices.
3. Audit of Risk Mitigation Processes and Management.
4. Audit of Outsourcing Management Process.
5. Audit of Supply Chain and Supplier Relationships.
6. Audit of Total Cost of Ownership.
7. Optimizing Outsourcing Decisions while Accelerating Product Introduction.
8. Efficient and Profitable Paths to Meeting New Environmental Requirements
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