Technology Forecasters, Inc.
Strategic Environmental and Manufacturing Consulting
John VanNewkirk, CEO of CheckSum, which develops circuit test technology, thinks he knows why so many CMs are clutching razor thin margins.
They’ve forgotten what business they’re in.
VanNewkirk had this epiphany during a recent visit to a customer, FoxConn in China. He was stunned that the test manager’s office had two saw horses and a piece of plywood where there would normally be a desk. He’s never seen anything this low-cost.
“Cheap furniture doesn’t cost much, but they didn’t even have that,” VanNewkirk, a member of the TFI Quarterly Forum, tell us. “Cost savings is deep in their culture.”
He reasons, and we tend to agree, that a CM this conscious about saving money on office furniture is bound to apply the same rigor to cost cutting in every manufacturing process.
VanNewkirk continues: “oxConn understands they are selling a commodity, if you look at the way they operate. They’re probably paying about the same labor costs as others [in China]. But they had concrete floors and saw horses and plywood for desks.”
In their haste to rush into design and other value-added services, top tier CMs have lost sight of their main line of work, and aren’t doing enough to squeeze every penny of cost from their processes, VanNewkirk believes. Within his own area of expertise - test - he sees little effort by most large CMs to reduce waste and cost.
Consequently, he adds, they wring their hands over why they’re reaping 4 percent margins or worse. “Companies that are best at being commodity players want to eliminate waste in every step in the process,” he says.
He doesn’t advocate - nor do we - that a large CM shouldn’t offer design services. If Safeway, the grocery chain, wants to have a deli section that’s fine, but it better not forget its main business is stocking food on the shelves at the lowest possible prices, he says.
Most CM plants and offices we visit are quite Spartan, though we don’t recall seeing saw-horse-and-plywood desks. That said, we believe VanNewkirk has a point. It’s not that CMs shouldn’t add services, they just need to remember what their main business is, and do it more efficiently.
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Cost reduction is a never ending undertaking. However, It looks like it has spiraled out of control. Yes, there has to be cost reduction but where will it stop? Mr. VanNewkirk is happy to see the TE Manager using plywood instead of a desk. What is next? Just a chair? These days most of the telecom and PC suppliers are in bad shape financially because this unreasonable cost reduction has made the business unprofitable or barely profitable. The well being of the employees and the suppliers have to be considered in these unrelenting cost reduction crusades.
Majid
In agreement with Majid’s comment; I would have to ask what caliber of employees would be attracted to such a spartan work environment. You must compare the total cost (i.e. cost of any Quality issues / rework / late / missed delivery, etc.) Would such a spartan work environment compromise any of these factors due to the inability to attract and retain top notch employees? Or at the very least might it hinder an employee’s ability to produce quality work.