Technology Forecasters, Inc.
Global Consulting and Research for Outsourcing and the Environment
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.
Statistics don’t lie, but conventional thinking might lead to the wrong conclusions about customer ratings. You tell us.
At its Quarterly Forum in San Jose, California, last week, Technology Forecasters reported the results of the 2007 edition of its “EMS, ODM and Distributor Report Card: Customer Satisfaction Survey.” On five criteria OEMs gave their EMS and ODM partners mostly boring grades – a lot of C’s and C+’s, few A’s and no F’s. The results are consistent with OEM ratings from previous TFI studies.
And, perhaps adding insult to injury, most OEMs did not consider their primary EMS or ODM partner to be “best in class,” except on one of the criteria graded —responsiveness to change.
What shall we make of this?
The results caused a rousing discussion among TFI members at the Forum. One conclusion: OEMs are loath to give their supply chain partners anything higher than average marks because they want to keep the pressure on them to deliver better, faster, and cheaper. Some OEMs represented at the Forum agreed this could be the case.
The grades also prompted an interesting reaction from the EMS folks at the Forum: If an EMS company is getting all A’s, maybe it ought to be paid more by the customer. Think about it. If the EMS is getting C’s, then maybe the effort and expense it is expending is just right. Forget about “delighting the customer” when margins are razor thin. There’s some kind of weird logic to that.
We’re interesting in your comments. Be sure to identify whether you’re from the OEM or EMS side of the equation. Are C’s and C+’s the sweet spot from everyone’s perspective?
I was meeting with executives at an electronics company to discuss their environmental roadmap. When we broke for lunch, I went to wash my hands. An employee next to me started talking about the water being wasted by the automated spout. (It did run too long.) “Doesn’t the company care about wasting water?” she asked me. To her, I was a total stranger with a visitor’s badge.
In my consulting experience, most employees are like this woman: Conscious of environmental waste. And they’re willing to point it out, when asked by sincere managers who realize that reducing environmental waste is not only everybody’s responsibility, but also good for corporate cost reductions. When I conduct workshops on environmental and corporate-social responsibility we invite employees from various departments. The executives who organize the events are always surprised at the good ideas and passion their employees have for this matter.
I’m not surprised. I’ve seen it for a decade. Years ago I began to warn executives that their employees would be a wellspring of ideas – but they’re still surprised at the quantity and rapidity of ideas from employees who are asked how the company can be more socially or environmentally responsible.
Maybe the executives are surprised because they don’t think these are issues employees notice or care about. That’s proven not to be true in every case I’ve witnessed. Maybe executives think they’re doing employees a favor if they don’t impose outside issues on them. But, employees want to be proud of what their companies are doing for environmental and social responsibility.
A May 2007 Harvard Business Review article, “Why Employees Are Afraid to Speak,” may shed some light. The researchers concluded that employees are reticent to share creative ideas because they believe — often without justification — that they’ll be reprimanded if they speak up. The short article is part of HBR’s free content and worth reading.
In my experience, employees are bursting with ideas on the environment and just waiting to be asked – or given permission. TFI Environment can help you to harvest employee’s and other stakeholders’ profitable ideas.
For the first time since I started measuring more than five years ago, and most likely for the first time ever, the labor cost for assembling printed circuit boards (PCBs) is lower in the U.S. than in Canada.
No, you did not misread that statement. By my recent calculations, the average U.S. cost for fully burdened direct labor for PCB assembly is $39.10 per hour. The comparable figure in Canada is $45.80 - 17 percent higher.
The weakened U.S. dollar has turned upside down many assumptions we’ve been using to calculate total cost of ownership (TCO) in electronic manufacturing sourcing decisions. Everyone - OEMs and contract manufacturers - has something to lose.
Canada is not a huge outsourcing destination for OEMs, but it has been a regular North American manufacturing site because it was less expensive than the Lower Forty-Eight. The strength of the Canadian dollar changes that.
The Euro is about 50 percent stronger against the dollar than it was when many current outsourcing contracts were written for European sites. China and the rest of Asia are also seeing some, though less, impact from the falling U.S. dollar.
If your company’s CFO doesn’t have a corporate currency risk mitigation strategy, then shame on him or her. Contingencies for currency fluctuations are not typically written into outsourcing contracts.
U.S. OEMs and their CMs usually set contracts in U.S. dollars; if the dollar weakens someone takes a hit. Right now, that someone is the CM that must pay a labor force in Euros or Canadian dollars.
OEMs now negotiating contracts for future sourcing can expect U.S. dollar costs to rise accordingly, especially if they’re determined to outsource to Canada or any country using the Euro, or that has a local currency closely tied to the Euro, as many Eastern European countries do. (Most of them intend to move to the Euro but not for a couple of years yet.)
As ever, TFI’s Outsourcing Navigator can help you sort this out; in December I’ll issue a revised version that takes the weakened dollar and other changes into account.
On this, the day before Thanksgiving, one thing we’re grateful for is experts who study a topic and reach similar conclusions, especially concerning the future of electronics supply chains. There’s something reassuring in this. Either great minds think alike or we’re all eating from the same bowl of stuffing. You be the judge.
Exhibit one: At a recent supply chain conference in Silicon Valley, Prof. Haul Lee, a supply chain expert at Stanford University, suggested the 21st century supply chain must be agile, adaptable and aligned among partners. Based on his research, he’s been espousing this theme for years, most prominently in a Harvard Business Review article of October 2004 entitled, “The Triple-A Supply Chain.”
(A free version can be found here.)
His analysis: Rising demand and supply uncertainties require agility; shorter product and technology cycles need adaptability, and outsourcing and multiple supply chain partners –customers and suppliers from end to end — require alignment. By “alignment” he means win-win-win arrangements among all partners. “Instead of company to company competition, we are now in an era of supply chain to supply chain competition,” Lee said.
Exhibit two: In a recent blog posting, Kinaxis, a strategic partner of Technology Forecasters, brings to our attention recent research by CAPS Research, A.T. Kearney and the Institute of Supply Management that identifies four areas supply chain managers must tackle in the years ahead: Delivering more innovation from suppliers; contributing more broadly to revenue generation; anticipating and managing supply risk to ensure business continuity, and expanding the breadth and impact of cost management efforts.
Exhibit three: At Technology Forecasters, our own research and analysis strongly suggests the need to extend Lean principles outside the single enterprise and across all supply chain partners. In our judgment this is just starting to happen, and is the direction electronic supply chains must move.
We think there’s a great deal of commonality in these three exhibits. Perhaps they track with your own thinking. While you’re finishing up that turkey and dressing sandwich, drop us a line and let us know.
Quartz Events recently asked 50 supply chain executives what concerned them most. Three topics were top of mind: Lean, green and visibility.
The informal survey, taken in September to help Quartz determine topics for the supply chain and materials handling trade shows it organizes, verifies what the organization has been hearing for sometime now.
“These are three areas I see consistently challenging supply chain executives as they focus on profitability, efficiency, and conscientiousness of our impact on the environment,” says Toby Harris, event director for Quartz.
Hardly a month passes now without something like Quartz’s survey to confirm that lean, green and visibility are increasingly important strategic thrusts for the electronics industry. Technology Forecasters has been consulting in these areas for years, and many of you know I wrote a book entitled, “Lean and Green.”
Electronics industry executives have a lot on their plates, but I hope they have room (even with Thanksgiving dinner coming) for these three main courses in their strategic thinking: Lean, green, and visibility.
Here’s an offer to our OEM and EMS clients: In March, I will speak at the Supply Chain Operations Private Exposition (SCOPE) East in Philadelphia on the topic of “‘Reduce to Grow’ is the New Imperative: For Profitability and Environmental Gain.” Other presentations will address lean and visibility.
If you already have lean, green, and visibility on your plate or if you think you should, I recommend you attend. SCOPE is by invitation only for senior executives in supply chain management, logistics and operations. As a speaker, I have 10 complimentary passes for our clients and contacts. Go to the SCOPE East site, click on Attendee Registration, and insert this invitation number: SCE1920
You can find out more about the event there, too. The pass includes access to all sessions and the exposition, and complimentary overnight accommodations at the Loews Philadelphia Hotel, plus lunches and a banquet.
How important are lean, green and visibility in your supply chains? Let us know.
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