by Pamela Wiseman, TFI Senior Operations / Supply Chain Consultant, and contributing expert for TFI’s study in progress, Electronics Design and Manufacturing in Eastern Europe
Electronics manufacturing in Central and Eastern European is a hot topic these days, especially with questions at the forefront about social responsibility and rapidly rising labor rates in China, as well as volcanic disruptions to global supply chains in our recent memories. Hungary, the Czech Republic, and Poland have developed strong capabilities over the last decade with Romania, Estonia, and Turkey also active areas for some electronics companies. Someday soon, North Africa will likely become the new frontier.
The main interest in Central and Eastern European capabilities is — as you would expect — to access a ”low cost” solution to fulfill manufacturing and service requirements for European markets. Although in some of the region’s countries the transportation infrastructure is not as developed as we would like, there are some tax benefits as well as time, inventory, and logistics savings to be had. The labor cost cannot match China, but if your market is in Europe, it is definitely worth sharpening the pencil to seriously consider your manufacturing-location options. With the rapid rise in wages paid to Chinese EMS workers, the cost differential may not last forever. In the end, low cost (measured as price paid by the OEM to the EMS) is paramount in the manufacturing location selection process. Other elements such as quality and social responsibility play a role, but for some research respondents these factors continue to take a back seat because they are harder to quantify as a “cost.” In the ultimate review of an accurate business case, total costs considered must also include inventory investment, logistics expense, transportation time and risks, OEM travel time, and the value of the complexities required to manage cost, quality, and delivery from afar.
Electronics companies are continuing to expand sales, service, and distribution into the region with Poland, Romania, Hungary, Czech, Ukraine, Russia, and Turkey being of greatest interest. In Central and Eastern Europe, as well as Europe as a whole, markets are fragmented and cultures, languages, customs, and regulations can vary widely adding to the complexity. It’s important not to approach business with Europe as one “entity,” due to the distinct differences between the countries. Despite some hurdles, ease of doing business and infrastructure are thought of positively and are rated by our research respondents as “fair-to-good.” For other respondents, however, the significant positives of building and servicing product in Europe for European customers are not enough to sway the decision away from Asia, where the companies have grown accustomed to manufacturing. In especially the developing Central and Eastern European countries, the lack of logistics capabilities is so far an insurmountable barrier for some.
The ultimate question is, are we really considering and weighing all of the key elements accurately enough?
I’ve learned, from serving as VP of Operations at electronics companies for many years, that it is critical to develop a sound business case that considers all of the costs and benefits in the decision to choose a manufacturing supplier and location. Further complicating these decisions is that relative costs, benefits, and risks change rapidly within constantly evolving global economies. The right choice today may well be the wrong choice on a time scale measured in only months! Risk assessment is critical, and the risks often grow exponentially with the distance between manufacturer and customer due to all the complicating factors to consider!
For anyone contemplating doing business in the European market, it’s a must to seriously consider the relatively lower risk and the great benefits of manufacturing in Central and Eastern Europe.
Weigh in on your views about electronics design and manufacturing in Central and Eastern Europe! Our report so far features country-by-country OEMs, EMS/ODMs, and suppliers; economic insights and relative ease of doing business; skill of workforce; sales channels; service/recycling; prevalent electronics industries; and strategies up and down the supply chain. Reply to the blog, take our survey, or join in with the study’s sponsors.
Last year we posted a TFI Friday Best of Blogs about what we had been reading that we suspected would interest and benefit TFI’s clients and network. Now, in time for your summer reading, we are updating the list. I invited our team to recommend books on the topics of supply chain, outsourcing, logistics, the tech industry, economics, environment / sustainability, or a combination of them – such as the book I am recommending this time.
A Taiwanese friend whom I met in Israel had me read Prosperity Without Growth: Economics for a Finite Planet, by Tim Jackson. Jackson is Economics Commissioner on the Sustainable Development Commission, the UK Government’s independent adviser on sustainable development. He lays out rational reasons why economic growth a la the past century cannot – alone – guarantee prosperity, and how flourishing within limits is a sounder formula for prosperity to come. TFI clients experiencing rebound growth from the recent economic contraction will find insights on strategies for assuring success even when growth is not assured.
TFI Logistics Consultant Jon Gilbert dug into his bookshelf to recommend a logistics “cookbook” comprising well-written advice and “recipes” for managing outsourcing of logistics. Self published by Cliff Lynch, Logistics Outsourcing – A Management Guide, 2nd Edition is a good read and valuable tool that Jon uses frequently as he advises clients.
Kim Allen, TFI Environment Consultant, recommends Profit Beyond Measure, by H. Thomas Johnson and Anders Bröms. This gem of a book offers a simple but radical solution to operational waste that has been realized by two major manufacturers: Toyota and Scania (a Swedish truck maker). The waste reduction method elegantly eliminates the traditional structures that supposedly “manage” waste, such as complex forecasting techniques and theoretical models. Instead, intelligence is created throughout the entire system, and practical understanding by those “on the floor” is used to improve efficiency. This system mimics a natural ecosystem, and was the basis of Toyota’s market value rising above that of the “Big Three,” as well as Scania’s stability for more than 65 years.
We are lucky enough to have Ben Marshall as a summer intern; he is a mechanical engineering student at UCLA and is helping our clients with design-for-environment. The two books he recommends are Right Relationship, by Peter G. Brown and Geoffrey Garver, and Just Good Business, by Kellie McElhaney. Right Relationship is, as he describes it, about helping our economy fit into the earth’s structure, as opposed to the other way around. Just Good Business is a guide to branding a company’s corporate social responsibility efforts.
TFI Environment Consultant Nikki Pava recommends Thriving Beyond Sustainability by Andres R. Edwards (who also wrote The Sustainability Revolution). Edwards describes how we can go beyond “sustainability” and attain “thrivability.” This book features examples of people and organizations that are creating positive transformations in all areas of sustainability. The frameworks outline areas such as regenerative design, community activism, and going “glocal,” which encapsulates the “think globally, act locally” world view. Thriving Beyond Sustainability provides inspiration and optimism that we all need today.
Finally, my colleague Pam Wiseman (TFI Operations and Supply Chain Consultant) shares that she is immersed in Theory U, about transformational leadership — creating the future and pushing beyond the constraints of the past. It’s especially pertinent in a complex and fast changing world with serious problems that need new and innovative solutions. Sustainability, climate change, terrorism, and our dependence on fossil fuels are a few examples of the complex and difficult problems that we face. Leaders need new ways of thinking and impetus to drive change. This framework can help drive transformative thinking.
Many thanks to the TFI team for their recommendations — I’ll load the books I haven’t yet read on my electronic reader before vacation. What are you reading that you believe will foster the TFI community’s success in business and in the world?
By Jon Gilbert, TFI Logistics Consultant
As product lifecycles grow ever shorter, increasing velocity becomes more critical in managing the supply chain. Reducing new product development time, supplier lead-time, and speed of transport are all key in gaining competitive advantage.
Despite all the desire for speed, numerous factors are working against speeding up transportation. In the past few months, steamship lines have begun “slow steaming” programs, reducing capacity and adding as much as 50% to transit times in certain lanes. Airfreight costs are rising with demand as capacity remains constrained, and fuel costs are on their way up once again. This all adds up to higher and higher costs to go fast.
How do industry leaders cope with these issues? Many have been looking to near-sourcing alternatives, moving manufacturing, final assembly, and/or test closer to demand. This allows for fast cycles at low cost. A recent Stanford Business Journal article talks about the benefits of keeping production close and supply chains short. The result: much greater profits. Their story focuses on fashion, but the similarities to our industry are obvious.
Interestingly, we see commonalities evolving in regional supply markets. While component manufacturing has largely been driven to Asia, it has become popular to build subassemblies and finished goods in Eastern Europe and Mexico. This specialization is partly an effect of the tendency of similar businesses to locate near each other, but it also has much to do with the economics of shipping. As components are built into subassemblies, and finally combined into finished goods, density (kilograms divided by cubic meter) of the items generally decreases. Think of shipping capacitors versus assembled circuit boards, versus finished goods. Each is less dense than its precursor. Shorter shipping distances are optimal for the lower-density finished goods.
In an ideal world, perhaps the entire supply chain would be replicated close to demand in multiple places. Instead, the manufacturing economics work in favor of a split-manufacturing strategy with multiple regions participating in the supply chain (lengthening the chain). It makes great sense to create large capacity to build high volumes of uniform parts in a single location, and Asia has largely won this market. For final assembly, the scale is much smaller, and localizing production and adding opportunities for postponement make much more sense.
For these reasons, we are seeing many of our clients pursuing strategies to satisfy demand with more localized capabilities. The benefits are clear – reduced transportation costs, greater speed to market, and greater responsiveness.
What are you doing to shorten your lead-times?
How does your company plan to compete as transportation costs rise and cycle times grow ever shorter?
One of my favorite reporters from Business Week interviewed me Tuesday about the 13 (so far) suicides by employees at Foxconn / Hon Hai. I explained that moving production away from manufacturing suppliers (EMS, ODM) is tough, but that OEMs should set exit strategies in case a full or partial withdrawal becomes necessary for business or ethical reasons.
From the reporter’s questions about business repercussions from worker-rights violations, I got a sinking feeling: Will the raging sales of Apple’s iPad dip perceptibly based on the now widely known string of suicides at their manufacturing supplier, Foxconn? Or will there be no business impact at all? In other words, are name-brand (OEM) companies’ sales less impacted when egregious violations of employee rights occur at their contract manufacturers as opposed to at their own sites?
(As for the underlying reasons for the suicides, see an upcoming article by TFI Shanghai-based Analyst Fanny Lee and me in SMT magazine.)
Certainly Nike shoes were boycotted years ago after the Vietnam-based employee treatment was made public. And Kathie Lee Gifford worked to counter sweat-shop abuses after a human rights group reported in 1996 sweatshop labor conditions in Honduras where Gifford’s line of clothing was made. Today, some drivers are at least thinking about choice of gas / petrol stations in light of the BP oil spill.
But is knowledge of worker rapes (as was brought out a few years ago in Mexican contract manufacturers), suicides, illegal overtime, and age violations at contract manufacturers — which granted are seen as one step removed from the name brand company — spurring corporate and consumer customers to make different choices in name brand purchases? And if not, why not?
I’d like to hear your thoughts. Please reply at the bottom of the blog.
The title above is a statement my colleague Mike Kirschner (DCA president) made during a day-long Design-for-Environment Workshop we co-led. He’s right that when the industry long-ago migrated from vertical integration to an outsourced model, no one anticipated the breadth and depth of global environmental requirements to come, or how stringing together long supply chains with dozens of links in far-flung geographies and diverse business cultures would make cost-effective compliance nearly insurmountable.
Think about IBM’s vertical-integration model through the 1980s — designing and making semiconductors (IBM still designs), fabricating bare printed-circuit boards and component packaging (now Endicott Interconnect Technologies), assembling the components (for example in Toronto, which became (Celestica), and building personal computers (Lenovo). IBM and many other electronics companies at the time controlled product-concept design through decisions about raw materials, and product manufacturing through end of life. Today it’s hard to find vertically integrated hardware companies. Recent capital-venture-funded tech companies have outsourced manufacturing (or even much of product design!) from the beginning. Nokia has been one of the few companies hanging onto manufacturing — sometimes more and sometimes less (announcing “more,” this week).
Raw materials are sourced so far up their supply chains that supply-chain managers can’t begin to control substances’ composition, origins, and working conditions during extraction. It’s too much to ask of especially mid-sized and smaller companies to staff the number of product stewards needed to continually track global requirements for substance-restriction, energy consumption, and reuse/recycling and align their own product roadmaps accordingly.
It’s ironic, but meeting today’s environmental requirements for products would have been easier back in the vertically-integrated past than in today’s outsourced, long-supply-chain reality. Nonetheless, here are ways to meet and stay ahead of environmental requirements, cost effectively.
First, because decisions about design, manufacturing, and compliance are spread out across company departments, gain top-level executive support to make lasting and successful Design-for-Environment (DfE) processes and sustainability programs. Next, plot on a 5-year DfE roadmap the likely environmental regulations from customers, regulators, and standards committees that will affect your individual company’s product lines. Finally, proactively design to those requirements to avoid costly and iterative emergency reactions and having products blocked from an increasing number of markets.
Easy, right? Frankly, today’s changing nature and expanding scopes of global environmental-protection requirements can be overwhelming to designers and supply-chain managers.
So, after that DfE Workshop, Mike and I developed a customized service that applies TFI’s success rate at training engineers in DfE and getting buy-in from corporate executives, along with DCA’s continual tracking and influence of global regulations and standards, to individual clients’ product roadmaps. We realized that we are well positioned to customize 5-year DfE roadmaps for individual companies’ product lines, and to recommend how to systemically and cost-effectively execute the plan. Our DfE Process Integration Roadmap aligns those long supply chains with holistic product-compliance plans, avoiding costly and arduous sequential changes in reaction to new requirements.
Mike likes to use the image of a tsunami to describe the overwhelming number of environmental requirements rushing in — sometimes with little warning and from distant shores. I like to think of the challenge facing all of us to strategically prepare for environmental requirements as yet another fiercely competitive element of excellent supply-chain management. It’s not as much surfing treacherous waves as building a strong infrastructure with insights into the future and with unwavering executive support.
If you’re curious about building supply-chain processes that indeed align with current and upcoming environmental requirements, grab your surfboard and reply below.
You won’t find the world’s lowest labor rates in Eastern Europe, and one has to follow European Union environmental and other regulations in much of the region. It’s not the world’s fastest growing economy, as is China. In Eastern Europe you will find some graft and less-than-ideal manufacturing/logistics infrastructure. But for electronics company executives and strategists it’s the region to focus on now for many reasons.
The market for manufacturing services and support is moving east in Europe. Leaders are already creating and implementing sound strategies for design and manufacturing in Eastern Europe. Last week Texas Instruments’ CEO Rich Templeton said that his eyes are on markets in Eastern Europe for semiconductor sales.
Contract electronics manufacturing in Europe is expanding and changing, which affects decisions about electronics manufacturing services (EMS) companies, design in the region, component and material supply, logistics, recycling, and after-market service. The world’s largest electronics contract manufacturer Foxconn (HonHai) is building HP computers in Russia (near St. Petersburg) and is the second-largest exporter in the Czech Republic.
The European Union economy (GDP) is ranked #1 and the manufacturing center has shifted to Eastern Europe; being “absent” from this region is not an option.
Eastern Europe is not one market — it is a dozen or so markets defined by varying levels of economic vitality, socioeconomic slices, languages, business customs, quality of infrastructure, and laws. To succeed in the region, it’s essential to gain insights about each market and choose the best ones for design, manufacturing, sales, and services.
Environmental regulations in Europe are on the forefront globally and in continual progression. One must take into account how current and future regulations will affect the way the industry designs, produces, ships, reuses, and recycles products.
Recent global current events (Icelandic volcano, tainted products from China, a well-spring of corporations publicly announcing carbon footprint and reduction plans) underscore the imperative of exploring close-to-customers manufacturing strategies. So many of our tech clients generate 25% to 50% or more of their revenue from Europe. We say it’s critical to understand how best to serve customers there.
For these reasons, TFI is launching a study called Electronics Design and Manufacturing in Eastern Europe. Huge thanks go to our Founding Clients for supporting this research. Let us know if you’d like to become a Founding Client for first access to the insights, or would like to be interviewed by the TFI research team for the study to receive a complimentary executive summary.
I invite you to reply at the bottom of the blog regarding your views on Eastern Europe as a strategic venue for electronics design and manufacturing.
If you are not a newcomer to the TFI Blog, then you may have seen our posts about reducing corporate travel, choosing and aligning manufacturing and customer locations, and providing customer-focused contract-manufacturing services and in-region support. Well, last week’s volcano eruption in Iceland and the subsequent shut down of air travel in the region reinforces the strategic importance of all shades of travel reduction.
One San Francisco Area-based client found out this morning that her flight this week to Europe has been canceled. One European-based EMS company reported its inability to meet product shipments. A European conference and expo scheduled for later this month and early next is sure to be lightly attended, because the exhibitors are supposed to ship their booth and demonstration equipment this week and attendees’ travel plans are in question while wondering if the event is still on.
Regional strategies for manufacturing, sales, and customer support — as well as using travel-alternatives such as web- and video-conferencing — are about reducing risk, expense, and environmental impact. No one would have asked for a volcano to further illustrate the strategic importance of reducing movement of product and people around the planet, but now that we have this one we can connect the dots.
What else do you think it will take for industry executives to markedly reduce travel of people and product around the world?
By Pamela Wiseman, TFI Senior Operations/Supply-Chain Consultant
Until now many tech companies approached the warranty and product service parts of their business as a functional necessity –- far less glamorous than new-product development or even supply-chain management. But today’s industry leaders are finding new business reasons to strategically approach global service depots:
- profit
- competitive differentiation
- cost-effective logistics
- shorter response times
- environmental compliance
- reduction of cost of goods sold through reuse
- lower inventory levels
Better service is a path to higher revenues
I had a first-hand view of the significant business value of a top-notch service business in 1998 when, as Director of Field Service Operations for a company supporting printed-circuit-board assembly equipment, I observed that whereas customers interact closely with the sales team in the beginning of the relationship, the lasting impressions and loyal relationships are formed after the sale. Customer service is tantamount to gaining repeat sales and generating customer satisfaction. Even when faced with a significant quality issue, customers will remember how responsive the service was and how the issue was handled –- that is what makes the lasting impression.
Just how strategic was the service business? During the bubble of the late 1990s, my company’s reputation as premier provider of service had tangible value prompting customers to choose our products, often regardless of price and without sacrificing margin on spare parts. Other equipment providers made significantly less investment in 7×24 2-hour parts availability and quick-turn repairs, and their sales suffered.
Cross-functional, life-cycle strategies
Servicing equipment is yet another area where operations, manufacturing, supply chain, logistics, and environmental strategies come together into one strategic whole. Companies that are truly optimizing value across products’ life cycle incorporate design for service (DfS) in their new-product-development processes, requiring an intense cross-functional team approach and consideration of the business and marketing drivers throughout the product life cycle. Strategies deployed across the life cycle can match parts availability and even encourage customers to purchase the newest technology!
How You Can Engage
Currently, we at TFI are analyzing tech companies’ service-depot strategies and measures of success. We are documenting how companies determine and establish KPIs (key performance indicators) for service depots and the effectiveness of these measurements. We are weighing the relative merits of using numerous customer-focused depots, 3PL (third-party logistics) services, profit-and-loss or cost-center business models, service offerings (same day, 4-hour, etc.), and geographical preferences. Some metrics are related to inventory, turn-around time, customer satisfaction, and repair success.
If you are involved at a mid-sized electronics company in the areas of Customer Service, Spare Parts/Aftermarket and/or Support, then please talk to us. We will interview you by telephone (ensuring that your comments are not linked to your company) and send you a complimentary summary of aggregate positions and trends. Contact us today to schedule an interview.
It appears to me that there is a new wave of North American companies certifying to ISO 14001, the international standard for environmental management systems. To readers of TFI’s blog, “EMS” usually refers to Electronics Manufacturing Services, or contract manufacturers of electronic equipment. But now many of these same readers’ companies are engaged in the other EMS: implementing and certifying Environmental Management Systems.
ISO 14001 is certainly not new. As shown in TFI’s electronics-industry environmental timeline, as far back as 1996 North American companies were implementing environmental management systems and certifying to ISO 14001, driven largely by European corporate customers’ demands. Nearly all 17 electronics manufacturers profiled in my book Lean and Green had certified to ISO 14001 by the end of the 1990s — including Celestica, which was the first major electronics contract manufacturer to certify.
But until recently, most technology companies that do not manufacture hardware opted out of the ISO 14001 track. The position at many electronic-product companies with a 100% manufacturing-outsourcing strategy was, “Most of our contract manufacturers are certified, so we don’t need to be.” Most software companies — even many large ones — did not certify.
Why now are many non-manufacturing electronics companies and software firms opting in to creating an environmental management system and certifying to ISO 14001? It’s mainly because corporate customers not only in Europe and Japan but also in North America are starting to demand to see suppliers’ environmental programs, with a specified requirement or “bonus given” for ISO 14001 certification.
The good news is that if you have been creating and executing a strategic, profitable environmental roadmap at your company (like many of our clients do), you may be closer than you think to honing your processes and documentation resulting in an environmental management system that independent auditors will certify. And the requirements for non-manufacturers are, in some areas, lighter than for manufacturers. In fact, the process of certification will make your sustainability roadmap even more successful in terms of continually reduced environmental impact and more cost savings.
So, whether you work for an EMS or are writing an EMS, move steadily forward in certifying to ISO 14001. Life is better when you can reply to customers’ requests for proposals: “Yes, we are certified to ISO 14001.” (Hear about ISO 14001 and other voluntary and required environmental standards in the electronics industry at the April 7th Design-for-Environment Webinar.)
If your company has already been certified, what advice would you give to those companies considering or going for certification now? (Please reply below.)
If you work for an electronics product company, contract manufacturer, or component supplier, then you may ponder over which places in the world you should have your products made, or where you should establish manufacturing facilities or sales offices. Since I started tracking the electronics-manufacturing industry in 1985, I’ve witnessed mad dashes from one region to another: race from the USA to Mexico and to Scotland and Ireland. Afterward, flee from Mexico to China, grab lower-labor rates in Eastern Europe, then establish manufacturing in Vietnam. Later, it’s back to Mexico, build in India, then back to China, back to the USA, still in China. It’s quite the soap opera.
Here are some examples of electronics-manufacturing moves in recent history, by region:
Europe: Elcoteq opens a plant in Estonia, Nokia Siemens lays off 450 employees in Finland.
India: Jabil opens a plant in Chennai 2007; closes it in 2009.
North America: Celestica closes a plant in USA (Nashville); Foxconn expands in Mexico for Dell
China: CEC Telecom lays off a quarter of its China employees; Flextronics develops new facility in Suzhou (Wuzhong)
–Confused about which regions are hot and which are not? Let’s look at this strategically: in general, the hottest regions in which to manufacture are those where end customers reside. Regional manufacturing strategies can be best for bottom-line performance by allowing greater efficiencies in logistics, reducing costs and carbon emissions, decreasing supply-chain risk (through reduced lead times and improved responsiveness), and reducing total cost of ownership (when distance and risk overshadow lower labor rates).
Close-to-the-customer thinking also applies when the customers are product designers. It’s wise for electronics contract manufacturers to set up prototype facilities and for component companies to establish sales centers near electronic-product companies’ designers. (Our clients in sales and marketing have been trying to convince their management of this for years.)
In the mid-1990s when writing one of TFI’s Contract Manufacturing from a Global Perspective reports, my team and I debated whether Greenland would be the next hot region for electronics manufacturing. It was mostly in jest to underscore how far-flung manufacturing locations were becoming. Of course, with regional-manufacturing thinking, we don’t recommend setting up manufacturing in areas for only 55,000 potential customers (which is the population there).
What are your thoughts about regional manufacturing? Are you willing to eschew manufacturing where few if any customers reside?
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