Technology Forecasters, Inc.
Strategic Environmental and Manufacturing Consulting
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.
There have always been tradeoffs when devising an effective internal numbering system for electronic parts; hazardous substance restrictions make things even more difficult. Some clients have reached wits’ end over part numbering challenges created by the European Union’s Restrictions of Hazardous Substance (RoHS) Directive and similar regulations.
Some OEMs are trying to solve the problem by bringing all products to the highest level of environmental requirements as soon as possible, and keeping parts numbers the same. That’s easier said than done. Others are adding a suffix to each part number, such as 001 or 002, to indicate EU RoHS compliance level. But sales staffs often resist customer-facing part-number changes, and what about RoHS requirements from elsewhere?
RoHS is evolving with significant regional variations. From the narrow perspective of part numbering, we’d all be better off with one globally consistent standard, but no one expects that anytime soon.
The restrictions won’t end with the six substances covered by the EU RoHS Directive, which took effect July 1, 2006. Norway, for example, has proposed a regulation aimed at consumer products that would restrict 18 substances. Europe’s new Registration, Evaluation, Authorization and Restriction of Chemicals Regulation (REACH) may end up restricting a dozen or more substances per year starting as soon as 2010.
With the varied restrictions, suppliers either will need to target product designs for specific locales, or target parts that can be used globally - and identify those with an issue. Most OEMs won’t want to target product designs for specific locales so flagging issues with a part may prove to be the best approach.
This could be accomplished by flagging at the internal part number (IPN) level. The flag will need several values. OEMs will need to determine what the values are for different BOM levels (component parts vs. finished goods, for instance) then incorporate those into business processes (part selection, etc.).
It is not clear that any PDM or PLM software vendors have fully grasped the data management complexities of this or whether their tools are capable of doing what will need to be done.
Unfortunately we’re dealing with a moving target. What conventional wisdom accepts today as the best practice may not be best in the long run. How best to deal with this matter at any level, part through finished product, is still a big To Be Decided. What has worked for you?
On a tip from a Technology Forecasters member, we’ve discovered a Catch 22 for some CMs that want to do certain kinds of business in medical electronics. It stems from a well-intentioned government effort to reduce paperwork. Here’s the scoop.
Medical electronics is highly regulated by the Food & Drug Administration. There are several hurdles a medical OEM must get over - and these often apply to CMs, too. As spelled out in the Code of Federal Regulations (insert “Section 807.20″ and click “search”), OEMs and CMs are required to register with the FDA and list specific devices they are bringing to market.
In June 2005, the FDA eased the rule for domestic CMs, declaring they only need to register if they ship devices directly to end customers or into commercial distribution. Domestic CMs building PCBs, sub-assemblies or even finished devices that they send to the OEM need not register. The FDA further elaborated a month later.
Clearly, this reduces paperwork for some CMs. However, the Law of Unintended Consequences got in the way on two fronts. The first is your basic chicken-and-egg problem.
As TFI concluded from research earlier this year, many CMs want to offer medical OEMs end-to-end services, including shipping completed products directly to the OEM’s customers or into commercial distribution.
But now they can’t register with the FDA until they have secured business that includes distributing completed devices. Many medical OEMs - new to outsourcing - are not up to date on the amended rule, and still expect CMs to be registered. CMs will have to educate OEMs.
The second issue is competitive advantage. CMs already registered with the FDA, even if they were not shipping products directly to end customers, remain in the registration database. If they now compete for business that involves placing devices into commercial distribution, they have an advantage over CMs who were never listed. From the OEM’s perspective, one CM is listed and one is not.
The FDA may soon address this matter. A bill before Congress (Item 4 on Page 2), would authorize the FDA to remove all CMs listed in the database that are not shipping products directly to customers or into commercial distribution.
This issue most likely impacts medium-sized and smaller CMs that are just starting to enter or expand their medical electronics business. We’d like to hear your experiences.
Electronics OEMs doing business with the federal government are already steeped in the accessibility rules for that market. But the market for accessible products appears to be broadening, putting design for accessibility on the agenda at many other OEMs.
First some background.
In 1998, Congress amended the Rehabilitation Act to require federal agencies to make electronic and information technology accessible to people with disabilities. According to the government’s Section 508 web site, the law was enacted “to eliminate barriers in information technology, to make available new opportunities for people with disabilities, and to encourage development of technologies that will help achieve these goals.”
In addition, Section 255 of the Telecommunications Act of 1996 requires makers of telecommunications equipment and providers of telecommunications services to ensure that gear and services are accessible to persons with disabilities, if readily achievable.
Companies that sell services to the government and organizations that take federal money for research or other efforts, must also comply with these laws.
Leading organizations of disabled persons are lobbying for more accessible products, including cell phones, which are exempt under the 1996 telecommunications act.
Increasingly, the market for accessible products is broadening.
“There is growing demand,” says Danny Salinas, leader of product stewardship, who is responsible for design for accessibility and environment at Nortel Networks Corp. “It is starting to proliferate outside the federal government.”
Salinas cites several examples: Universities; the Canadian government, which is considering a U.S.-like law (Nortel is based in Canada); and states applying the federal rules and/or considering statutes. Some companies not in any way governed by federal rules are beginning to consider accessibility a trait of good corporate citizenship, he adds.
“Industry is paying more attention,” Salinas says. “In Nortel we have the disabilities business council that focuses on hiring disabled persons and so accommodating them whichever way we can to get these talented people into our population.”
There are 60 million people in the U.S. with some kind of disability, and about 600 million worldwide, Salinas says.
With no end in sight to the corporate talent war, companies can ill afford to exclude disabled workers because the work place does not offer accessible products.
Done properly, Salinas argues, design for accessibility does not - and in fact should not - add cost. With the right processes in place, engineers consider accessibility in the early stages of product design much in the same way they consider usability features.
Salinas believes - and we agree - that OEMs not already considering accessibility ought to add it to their design agenda.
What has been your company’s experience with the design for accessibility issue?
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?
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.
Every benchmark study of the EMS and ODM industries that Technology Forecasters has conducted in recent years reaches the same conclusion: The ODM sector generally outperforms the EMS sector.
This year’s study is no different — even when we reclassify all HonHai’s ODM business as an EMS play.
This raises the obvious question: Why?
The short answer: Because there are fundamental structural, operational and cultural differences between the two sectors.
Most ODMs are Taiwanese, and started in the ODM business - creating their own IP for end products - and only recently have tried to move into the EMS model.
Most EMS companies are North American or European and started in contract manufacturing, where the Golden Rule is, “Thou shalt not compete with thine customer.”
When EMS companies develop products like an ODM would, OEMs see a conflict of interest. The same OEMs do not see conflict of interest when they sign up the ODMs.
Is it possible for EMS providers to morph into ODMs? Some have tried, but it’s doubtful that this will work in the long run.
For one thing, ODMs tend to have more tightly integrated relationships with suppliers than EMS companies. ODMs often have minority or majority stakes in their suppliers. Hon Hai is an extreme example of this, but the others have tight relationships, too.
To boost their margins, EMS players may be better off focusing on offerings in services like design support, logistics and repair, and staying away from the IP business. In these areas, they have an advantage over the ODMs.
Many ODMs have not found the EMS model easy to adopt. BenQ, for example, has struggled since acquiring Siemen’s cell phone factory in Germany two years ago.
ODMs face their own challenges in becoming more like EMS companies, and vice versa.
What are your thoughts?
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.
China’s labor costs for electronics manufacturing are rising even faster than I thought they would. In my work for the Outsourcing Navigator Series, I see dozens of quotations for manufacturing projects each month, and nearly every one includes a China estimate.
Based on this information, I’ve concluded the following:
Before November 2006, China’s labor costs were rising 3% to 5% per year. Then in November that gradual slope in the cost curve took off like a rocket. The result: for all 2006, costs rose nearly 16% with the vast majority of that increase occurring in November and December. In the first three months of 2007, the rate of increase has flattened a bit but has not reversed course. My estimate for 2007: a 10% to 13% increase.
At this rate, China’s labor costs either have or soon will reach parity with Malaysia and Thailand, thus making Vietnam the lowest labor cost location in Asia.
What does all this mean for your sourcing decisions?
More than ever, OEMs need to refrain from making decisions based on fanciful whim about where they think costs are lowest and start getting the facts - and the facts need to be accurate. Plus, they need to start doing their homework on Total Cost of Ownership (TCO) whenever thinking about China, Malaysia, Thailand, Vietnam or even Singapore, because all of these geographies are becoming progressively intertwined from a regional perspective.
Here’s the bottom-line:
Rising labor costs in China will inevitably relieve the competitive pressures that have been holding down prices throughout the region so it is reasonable to say that prices throughout Southeast Asia are going to start going up. When and how much? Who knows? The best course of action may be for North American OEMs to take at look at Mexico, and Western European OEMs to look toward Eastern Europe.
If you need help with TCO or want to know more about what is going on in Asia and the rest of the world, check out my upcoming Outsourcing Navigator workshop next month in Chicago.
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