Technology Forecasters, Inc.
Global Consulting and Research for Outsourcing and the Environment
After a five-year blitz to outsource as much electronics manufacturing as possible, many OEMs have wrung out all the external costs they can from this model – they’ve harvested most of the low-hanging fruit.
This is my unavoidable conclusion based on more than a hundred research interviews and dozens of engagements with OEMs in recent years in my work to help them find the outsourcing model-location-partner-cost structure that best meets their needs.
If you need any further evidence, consider this: Since early 2006, we’ve seen contract manufacturing (CM) prices rise slightly, especially in low-cost areas like China. Many OEMs reaped a 10 to 12 percent cost savings when they went to China, but those savings are declining. Prices in China are rising 3 to 6 percent in new contracts, based on the many price quotes I’ve seen.
There are, in fact, lower cost geographies now in Asia—Vietnam, Thailand and Malaysia. And I have long believed that Singapore is the best bang for the buck, with a higher quality that offsets any labor cost differences. But for many OEMs, switching geographies could be more costly than staying in place.
What to do next? Future cost reduction will be an inside job.
Until about a year ago, most OEMs didn’t even have a handle on internal costs, mistakenly viewing as one-time costs things like tooling and training, which often become ongoing costs. They rarely factored into their models indirect staffing costs like legal, accounting and IT. They did not have accurate total cost of goods models.
The good news: I’ve seen this begin to change, with many OEMs now sizing up more accurately the internal costs of outsourced manufacturing.
The bad news: OEMs haven’t done enough to curb the internal costs.
To continue to drive their total cost of goods down, OEMs need to take a hard look at what they’re spending internally. Spending dollars internally to save nickels externally is no longer acceptable.
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As an EMS company SMC has long held the position that the best way to cut cost is by working with the OEM to design out labor and material cost were possible. OEM’s in the past 4 years had downsized their engineering groups and do not have the staff to accomplish this,so the easiest thing to do was to continue to search for lower cost manufacturing alternatives. SMC does have some OEM’s that have realized this and we have successfully kept work from moving to China or other low cost centers by working together. OEM’s need to reinvest in product designs to drive more cost out. This is on the product cost side of the equation.
Looking internally also includes looking into your internal manufacturing and operations. Are your operations seeking continuous improvement? Driving efficiencies and keeping overhead low.
The combination of the two above will make any OEM successful. The hard part is the the top management at OEM’s have to drive this message into their organizations and have to support it with the proper staff. People are not just cost, they are the creators for cost savings when given the opportunity to put focus in this area.