Technology Forecasters, Inc.
Global Consulting and Research for Outsourcing and the Environment
The last time you made an outsourcing decision did you consider the Blizzard of ‘08 in China? Of course you didn’t. Why would supply chain managers have a better crystal ball than the weather forecasters, who didn’t see it coming until it was too late?
Unlike weather forecasters, supply chain managers need to consider the worst case risks of their decisions even if they can’t predict when the risks might occur. If the Blizzard of ‘08 caught you off guard, it says something about your risk management assumptions.
China’s worst weather in 50 years (a series of storms in the past two weeks) has tied the infrastructure in knots, stranding millions of migrant workers who were traveling to visit their families to celebrate the lunar new year, shutting power plants due to delayed coal deliveries, and snarling a rail and highway system already on overload.
As for the impact on the electronics industry, the only evidence is anecdotal. Technology Forecasters consultants have heard stories of lost productivity, delayed shipments (weeks not days), and suppliers not returning calls or emails.
The implication for risk management is clear to Jon Gilbert, TFI logistics consultant and principal of the Gilbert Group:
“When you outsource to a foreign country you’re not just buying the capabilities of the plant, but the whole distribution network in that country, and the infrastructure that supports it. We should not be surprised when we hear about large-scale transportation interruptions in China from this snow storm because their infrastructure is challenged even under normal conditions.”
“Reduce excess inventory,” is the electronics industry mantra when planning supply chains, but the flipside is having too little inventory due to delays caused by weather, fires, earthquakes and human-caused destruction. The challenge is to find the proper balance between the risk of excess inventory and the risk of being caught with none.
At this stage in the industry’s maturity, it is easier to take inventory out of the system than to be more cautious; supply chain managers get incentives for the former, not the latter. At the very least, they need to ask the right questions. Our experts can help.
How do the decision makers in your supply chain balance inventory risks? We’re interested in hearing from you.
Even the best medical doctors consult other experts. Shouldn’t electronics OEMs that spend millions of dollars on outsourcing do likewise? The following illustrates some of the risks of the insular approach.
I recently conducted a review for a large medical electronics OEM on their request-for-quotation (RFQ) and the resultant pricing they received.
The outsourcing job was a product (about the size of a breadbox) that had been re-designed and reduced in cost. As medical gear goes the anticipated volumes were relatively high, so it made for an attractive piece of business for any EMS or ODM seeking new medical business.
Nine companies bid. Based on my recent update to the Outsourcing Navigator I knew prices were rising but was still surprised by the quotes. The three suppliers who would talk to me (one of which was the OEM’s preferred source) had quoted almost twice as much for value-added services than I would have anticipated.
When asked about this they admitted padding their numbers by more than 5 percent (I made it more like 8 percent to 12 percent) as they felt the geography requested was the wrong solution and would result in problems. What a concept though: An EMS company actually priced a job to make some money!
Despite the fact that everyone talks about collaboration these days, none of the suppliers had offered an alternate suggestions to the OEM. When asked why they hadn’t, they all informed me it was “crystal clear” (from comments made by the OEM’s sourcing team) that the solution had already been decided and that the OEM’s main criterion was a contractor that would “keep its mouth shut and do what it was told.”
When I shared this information with the OEM manager working with me on the case study, he was furious and stopped the analysis –he didn’t even ask what was wrong with the geography they’d selected or what a better alternative might have been. Go figure.
The outsourcing landscape looks a lot different than it did last year, much less compared to three, four or five-years ago, and the rate of change accelerates. Given this reality, seeking alternative ideas and approaches is no longer a luxury – do yourself a favor and get a second opinion.
Based on nearly thirty recent, on-site interviews and extensive phone research of electronics contract maufactuers, this exclusive Webcast provides an in-depth picture of the current state of outsourcing in Eastern Europe, trends for future growth, details on a set of Central and Eastern European countries, plus recommendations for OEMs and contract manufacturers.
Outsourcing Trends in Central and Eastern Europe: The Second Wave: Play Now | Play in Popup | DownloadFor a number of years, I’ve been predicting how the path to greener electronic products and facilities would unfold through the next decade. We’ve published TFI’s “Electronics Industry Environmental Timeline” on our web site to give clients context about key directives and other regulatory events since the 1970s, and to forecast environmental trends above and beyond the imposition of any single compliance standard.
For example, by 2010 I expect we will see moderate use of alternative, non- or less toxic materials throughout the electronics, and that this trend will accelerate to widespread use by 2015. Some of this will be compliance driven and some of it will be driven by the fact that electronics companies will come to see that using fewer and non-oil-dependent materials can be profitable.
I elaborated on these projections in a recent podcast with Design News.
Though the European Union’s Restriction of Hazardous Substances (RoHS) Directive loomed large for the industry in recent years, even RoHS will be nearly forgotten in time.
What will be remembered is how the electronics industry seized this moment to make bold and significant changes in the way it designs and manufactures products using drastically reduced carbon footprint, with fewer toxic chemicals, and wasting virtually nothing – using or recycling everything from the raw materials except the squeal (as the meat industry used to say about pigs).
The point is to get out in front of the timeline for business benefit. Learn how by attending the Green Manufacturing Expo next week in Southern California (which I am chairing) or by asking me about our high-return environmental and social responsibility partnerships with electronics companies. A good place to start is to take a look at the road map.
As always, we’d like your thoughts here, too.
The Joint Design Manufacturing (JDM) model could be a key for EMS companies seeking business in aerospace, defense and homeland security, according to Jeff Kaylor, director of government services for Sparton Corp., Jackson, Mich., a mid-tier EMS company with manufacturing facilities in North America and Vietnam.
In an interview with Charlie Barnhart, a Technology Forecasters Senior Consultant, Kaylor shares this and other tips on how to gain traction in aerospace, defense and homeland security. Sparton has engaged in defense contracting and subcontracting since 1914, and electronics manufacturing for nearly two decades. The 15 minute interview is available on a podcast.
In the JDM model, an EMS company or ODM typically does some portion of the design and then manufactures the product. This allows the OEM (primary contractor in defense lingo) to focus design resources on the more consequential IP in the product, while the JDM partner handles the routine design elements and supports the manufacturing ramp-to-volume.
Kaylor says the model is gaining popularity in defense contracting, which has undergone a substantial amount of consolidation in recent years, leaving what he calls “gaps” in the design chain — an opportunity for JDM services offered by companies like Sparton.
As TFI found in research conducted last year, aerospace, defense and homeland security are increasingly moving to outsourced manufacturing. While this sector’s migration to outsourcing will continue to be gradual, it represents new opportunity for EMS companies flexible enough to meet the sector’s demands.
And design is definitely something the sector is looking for, Kaylor says. For other insights from Sparton’s experience, be sure to check out the podcast, and let us know what you think by writing a post here.
With the dollar weaker than it has been in years, is there any reason to consider Central and Eastern Europe for outsourced electronics manufacturing?
There is: Although each outsourcing decision ought to be made on its own merits, the low-cost nations that once comprised the Soviet Union and its satellites should be considered, especially when the end market is Europe, the way Mexico ought to be considered when the end market is North America.
“Discussion of China versus Eastern Europe seems anachronistic to me,” Charlie Wade, a senior consultant at Technology Forecasters, told the recent TFI Quarterly Forum in San Jose. “The better point of comparison is Mexico to Eastern Europe.”
Wade, who conducted TFI’s recent research, “Outsourcing Trends in Central and Eastern Europe: The Second Wave,” presented the highlights at the Quarterly Forum.
Wade talked to 14 electronics industry executives in nine nations during a tour in October. Another 17 phone interviews with electronics executives rounded out the primary research, which builds on TFI’s earlier research in Europe.
Like any region, Eastern Europe has its issues. Among them: Cost competitiveness, supply of skilled labor, corruption and protection of intellectual property, local management skills, language differences, and the regional infrastructure.
Nonetheless, Wade concludes in the report: “After analyzing the many factors that define each European country’s competitiveness, it becomes apparent that Central and Eastern Europe together with the Baltic States are positioned to become the manufacturing center for the continent, serving the business and consumer markets for all of Europe.”
He says the region is “poised for growth” citing such features as direct labor and facility cost lower than Western Europe, locations central to the European consumer market, a growing consumer population itself, appeal to foreign investment, government support, modification of local laws, and improving infrastructure.
For his specific recommendations for EMS companies, ODMs and OEMs, be sure to read the report. (TFI’s Outsourcing Navigator can help you make sourcing decisions.)
As always, we’re interested in your reactions.
Has your company made any New Year’s resolutions yet? If you need some ideas, try one of these offered by Technology Forecasters consultants. Or share your own with us.
Think Lean: In 2008, wherever your company is in its adoption of Lean principles, extend them. If one manufacturing site is already Lean, take Lean to other sites. If all plants are Lean; bring Lean to non-manufacturing operations. If you’re 100 percent Lean, globally and every other way, start applying Lean to your supply chain—pick a key supplier or three and Lean the processes among yourselves.
Go Green: Keeping in mind that Green (the environment) is Green (profitable, competitive, etc.), take stock of your State of Green, and establish a five-year roadmap for eliminating waste and becoming more environmentally efficient, including at least three Green goals to accomplish this year. (We’ll have more to say about environmental roadmaps in the months ahead.)
TCO: This one’s especially for OEMs. Location is everything in real estate, but not in electronics manufacturing. Total cost of outsourcing (TCO) is. With the dollar weak and the price of oil high, TCO is a moving target. Resolve to consider each individual outsourcing decision on its own merit, based on TCO. (Need help with TCO? See TFI’s Outsourcing Navigator).
Rising markets: This one’s for EMS companies. Resolve to investigate at least one new market where outsourcing penetration is still relatively low — medical, defense, industrial, instrumentation, etc.
Outreach: Reach out once a week to a customer, supplier or supply chain expert. This regular effort may help with your own supply chain challenges, create an opportunity to help a partner resolve a challenge and build a diverse pipeline of inputs for a stronger supply chain.
If you’ve got your own resolutions, we’d like to hear from you.
Charlie Barnhart, TFI Senior Analyst, interviews Jeff Kaylor about the benefits and challenges of Joint Design Manufacturing (JDM) model for government electronics manufacturing.
Everyone agrees supply chain risk is a growing issue, but how to manage it, that’s the big question. Douglas Kent, principle at eKNOWtion and senior supply chain consultant for Technology Forecasters, offers a preview of new insights into supply chain risk management soon to be spelled out more completely in a white paper by the Supply-Chain Council (SCC).
Specifically, Kent writes, the SCC’s risk management Special Interest Group will offer a new definition of supply chain risk management as a starting point to understand and mitigate risk. The group has taken a further step by proposing a method for measuring risk. Kent says the SCC expects to incorporate the topic of risk in the next release of the Supply Chain Operations Reference (SCOR) Model — version 9.0 due in March 2008.
As outsourcing grows and supply chains become increasingly complicated, with more partners, leaner operations, shorter lead times, zero inventory and other efficiency traits, they also become more vulnerable to even minor disruptions. With this in mind, practically everyone is thinking about risk these days, as we noted recently.
“Supply chain has a significant impact on the company’s value,” Kent writes in eKNOWtion’s December newsletter. “The ability to measure risk is necessary for us to manage it. The SCC has taken a major step forward in terms of standardizing the definition of SCRM and provides its members for the first time, the ability to calculate Value at Risk and consider this new metric in measuring end-to-end supply chain performance.”
According to Kent, the SCC defines Value at Risk as “the sum of the probability of events times the monetary impact of the events for the specific process, supplier, product or customer.”
The full white paper will soon be available on the SCC web site, and on the eKNOWtion web site.
While we’re on this topic, Kinaxis, a strategic partner of Technology Forecasters, always has interesting things to say about managing risk and disruptions. For example: Its blog of Dec. 13 on how supply chain risk can impact shareholder value.
Compared to recent years, 2007 was quiet in regard to product environmental regulations. Aside from China’s Restrictions on Hazardous Substances taking effect, there were few new governmental requirements or actions. There were no major RoHS or WEEE enforcements, and a bill to expand California’s RoHS legislation was vetoed.
Unfortunately, 2007 was also the “quiet before the storm.” As we enter 2008, it would be prudent to expect a tumultuous year - and a tumultuous next 10 years - for many reasons.
First, we have crossed the “greening of industry” tipping point. One example: Several thousand scientists participated in a Nobel Prize-winning scientific consensus when they produced material for the Inter-Governmental Panel on Climate Change’s Fourth Report. Hundreds of corporate executives are calling for mandatory caps on greenhouse gas emissions. Virtually every leading company is launching energy-related initiatives in regard to products, facilities and logistics.
Second, it appears that we will finally see China RoHS’s Phase 2 Catalogue. An initial public meeting to discuss it was set for this week. Products in the catalogue will be required to undergo pre-market testing.
Third, we will see the first wave of implementing legislation from the European Union’s Energy-Using Products Directive. For covered products, there will likely be requirements for energy reductions and for life-cycle analysis.
Fourth, results of the E.U.’s review of the RoHS regulation will be published. It is likely that at least some medical devices and control and monitoring instruments will be included in the directive’s scope. Certain exemptions may be removed, and additional substances may be added.
Finally, the E.U.’s Registration, Evaluation and Authorization of Chemicals (REACH) will kick into high gear with a 2008 pre-registration period and subsequent registration deadlines over the next 10 years. In my estimation, REACH will be to “toxicity in products” what climate change is to “energy use in products.”
Why? Because REACH addresses tens of thousands of substances for which health and environmental testing is scarce; because it will require companies to obtain authorization to use the most detrimental 1,500 of those substances; and, most importantly, because it is an unequivocal statement: “No data. No market. No E.U. sales revenue.”
For companies that see the green handwriting on the wall, design innovation is the key. Gathering full-disclosure substance data is a must. Capturing new business from slower movers is the reward.
Happy New Year to all and rest up for the wild ride ahead.
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