by Pamela Wiseman
Senior Operations / Supply Chain Consultant
It’s typical during challenging economic times for corporate executives to focus internally — especially on costs and cash. Many subscribe to a survival plan mandating full attention to internal metrics, to the extent that they are more willing to play tug-of-war with customers to cut inventory, slow payments to suppliers, and protect cash. Plus, the executives find it even more difficult than usual to predict customers’ moves, so they focus on the internal metrics they can control. This is the way to survive, right?
Wrong answer! Putting the customer at the forefront and satisfying their requirements should never take the backseat to singular attention on internal operational metrics. The latter is surely the path to decline and gives an advantage to competitors who keep a steady eye on pleasing the customer.
In the electronics manufacturing services (EMS) business especially, it’s important to reflect regularly on the fact customers are never 100% dependent on your services. Having managed outsourced manufacturing for electronics companies for 9 years, and now managing TFI Customer Retention for Business Growth programs, I have seen first hand the end result of EMS companies who were inwardly focused.
One time, at an instrumentation OEM, we were counting on the quarterly cost-reduction program that our new EMS highly advertised would deliver savings. Their “aggressive cost-down program” was one of the reasons we had chosen them. After not receiving any updates early in the relationship, we quickly learned that the EMS was really working from a Pareto of ALL customer material spend, and our parts did not make their top 10%. As a result we were quite dissappointed and needed to micromanage the situation ourselves to get attention for our account.
When dissatisfied, the customer can switch to another EMS or even bring the manufacturing back under their direct control in-house. The only reason customers use the supplier’s services is to add more value than they can produce internally. So if suppliers do not proactively view customers’ operational challenges as their own, the suppliers get off track and miss key intelligence that will benefit their own bottom line.
I advise EMS clients to take a look at how they are working with customers. Are they… (1) Proactively collecting and analyzing quality data? (2) Continually looking for purchased-part cost reductions and sharing benefit? (3) Suggesting design and process changes to reduce cost? (4) Reinventing themselves to deliver more value to customers? Or, instead, are the suppliers causing customers pain with parts shortages, average or worse-than-average costs on materials, delivery snafus, poor inventory management, and other sub-par results? Of course, the EMS needs to make a profit, but if they are truly adding value, the profits and increased market share will follow.
We would never encourage an EMS management team to accept a customer’s rules and conditions that would critically deplete the EMS company’s margins. One of my program managers showed me a Service Level Agreement that outlined the amount of forecast change that the EMS could support. We knew that the EMS would end up holding inventory and would eventually try to back out. So, we revised the agreement to be more of a win-win. It’s always best when the EMS and OEM can donate resources to a project team and build a sense of team spirit.
But I remind our EMS clients that their companies exist for one reason only: making customers more competitive and successful than they would be without them. Metrics should be aligned to eliminate debate. Strong open communication is key. Adding value, both strategically and tactically, and being proactive — soliciting feedback and suggesting where to team will — sets suppliers apart. EMS companies that strongly enable customers to reach higher levels of performance in quality, cost, and delivery for the benefit of their mutual ultimate end customer, can parry other EMS companies out of the way.
What have you done for customers lately?
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You seem to be speaking primarily from the customer’s point of view. As someone who works for an EMS company, you make some good points about always focussing on the customer. This is true in every business. However, the margins at an ECM/EMS are constantly being squeezed by the customers and profit margins for ECMs are already the lowest in practically any service business. Many ECMs have lost money due to customers’ poor forecasting and due to the ways in which the customers can take advantage of the EMS services offered. Look at all the major ECMs and how much money they have lost over the past few years. It’s obviously not a good business model. You should never run a business at a loss! ECMs are providing good services for customers, but are losing money just the same.
ECMs need to focus on the customer, but also find ways to improve their margins. You need to keep the customer happy to maintain and increase the business with the customer. But also, the ECM must find ways to make a profit. Any problem in production is usually paid for by the ECM. One of the only ways to make a profit is to maximize material PPV. There really isn’t much else. And providing cost reductions to customers is something the customers surely want, but are usually based on unrealistic expectations.
Good blog! This is an excellent topic with implications far beyond EMS.
Far too many companies lose sight of themselves when confronted with unreasonable customer expectations.
When that happens, nobody really wins.
I like your blog! Yes sharing metrics along the supply chain with your partners is essential in both directions to source and to deliver
Never take your eye off of the customer – demand that they share information about the future and treat you like one of their own. This is the only way you can respond properly to their needs. But what do you do when they don’t. New project, everyone on both sides is high on expectation, the customer says buy the long lead material and let’s get going. Then you don’t hear from them. Suddenly you find that they have put the project on hold and you’re now sitting on 1/2 million dollars of inventory that won’t get used for maybe a year. You want this customer but this is a huge hit and you will probably never recoup the carrying cost for this amount of inventory. They won’t buy it back and you can’t return it. Is this a norm cost of business?
I have worked for EMS Industry for over 10 Years now. Worked for the big ones and also also for a smaller one. In EMS world the buz word was, “Customer is King”. I remember my days in Solectron the customer focus teams(CFT’s) worked long hours to make the shipments for the customer(customer pull ins), but after the crash of 99 things changed drastically…. and the relationship changed. Inventory became the main concern EMS was left holding the bag for many a customer. Bob N states it very clearly and it is a fact the main focus in the EMS should be the relationship with the customer and the communication channel should be very strong. It is not only cancellation of projects but the forcast reduction and the NCNR parts cancellation with the suppliers. I have seen the up in the late 90’s and the fall in 2000. lots of suppliers went under and many EMS’s companies were hurt. As the saying goes, it takes two to tango. Unless both the parties learn to dance together it does not work…..