More commentary on total cost of ownership in outsourced manufacturing

On 12.14.09, In EMS Industry News, By Tim

Eric Miscoll wrote about how the analysis of Total Cost of Ownership of outsourced electronics manufacturing has changed in recent years at EMSNow: EMSNow – Is the Migration of Electronics Manufacturing to Asia Slowing?

In a proper Total Cost of Ownership analysis, direct labor rates are one of many issues considered, and the cost improvement it can offer can be quickly eliminated when considering other important issues like transportation, support, and inventory costs.

More than 2 years ago (pre-my current job), I wrote something similar while arguing that the impact of cycle time in offshore manufacturing is undervalued:

Unless enlighted managers “dollar-ize” the effect of the integrated cycle time – and there are hard- and soft-dollar impacts associated with going from one week to four weeks, or one month to three months – manufacturing will continue to be performed where wages are lowest. It is the challenge of the regional contract manufacturer to educate and inform the customer, and develop financial models to highlight the true bottom-line impact of offshore manufacturing. Global contract manufacturers provide geographic migration plans as a standard piece of their proposals. Regional contract manufacturers must not be afraid to aggressively present these models and make the case for domestic manufacturing.

Lest anyone think I have an opinion one way or the other and that my represents the opinion of my employer (and, allow me to say right now, NOTHING I write here represents the opinion or policy of my employer! ;-) ), I will say that I am in agreement with Miscoll’s final paragraph:

CBA’s recommendation has been and continues to be that no two engagements are alike, and lemming-like behavior in search of ‘low cost labor’ can lead to expensive mistakes in outsourcing. OEMs should consider a proper ‘FIT’ – flexibility, integration, and timing – when designing a supply solution for their electronic products.

Finally, be sure to read the feedback I received from my father, a retired EMS CEO: Good piece, as far as it goes.

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Joint Design Manufacturing and the Aerospace & Defense Electronics Market

On 01.21.08, In EMS Industry News, By Tim

A friend and former colleague at Sypris Electronics participated in a podcast with Technology Forecasters, Inc. regarding Joint Design Manufacturing (JDM) and the aerospace & defense electronics manufacturing market. Jeff Kaylor, Director of Government Services at Sparton Electronics, (now with Sanmina-SCI), makes a number of excellent points with regard to suppliers in the A&D market needing to fit technically and culturally with their customer in a way that isn’t necessarily true in other markets.

Enjoy!

UPDATE: Bill Roberts followed up the podcast with a post on the TFI blog.

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Feedback on the undervaluation of cycle times in offshore outsourcing decisions

On 10.25.07, In EMS Industry News, By Tim

I received the following feedback by email (tim AT timlovelock DOT net) on my opinion-post regarding the undervaluation of cycle times in offshore outsourcing decisions:

Good piece, as far as it goes.

Uh-oh… ;-)

For instance, you might expand on the effect the long cycle time has on the ability of the manufacturer to implement “changes” or respond to a customer’s request for expedite or change that they want implemented.

and…

I don’t know how important it is to quote a 5% year over year labor reduction…perhaps a more general approximation of labor savings or even just mentioning that there are some short lived labor savings (labor being less than 10% of the cost of most products might also be mentioned). You make a good point about trading off labor savings for reduced ability to serve the customer might not be in a company’s best interests.

Also, developing a model to address the ideas in your last paragraph might be interesting…or…I imagine someone already has and, if so, it might be good to find out and possibly incorporate it into the argument.

That’s what you get when your father is a retired electronics manufacturing CEO with domestic (US) and global contract manufacturing experience. :-)

Key points from his feedback:

  1. Labor is less than 10% of product cost. If you had any production/operations management classes in college, you know this to be true. As products grow more complex and require more automated manufacturing tools, direct labor goes down even more, but indirect labor may go up as these tools require skilled engineers to set up and maintain the programs and equipment.
  2. The effects of increased cycle time on the ability to respond to customer changes: While many electronics manufacturers have an objective to reduce manufacturing batch sizes to the smallest quantity possible, intercontinental shipping of most products is more cost-efficient as batch size goes up. This means the entire is holding more inventory, especially more finished goods, so engineering changes can’t be incorporated, a direct “violation” of Lean principles.
  3. A model that incorporates the cost of cycle time in offshore outsourcing: It would be intriguing to develop this, but I have to believe one already exists. Can anyone point me in the right direction? If not, I might take a stab at this (with a little help… ahem…).

Anyone else have any thoughts?

I’m actually getting into this discussion a bit and doing some research (what can I say, I’m a geek when it comes to SCM and competitive advantage), so I’ll have a few more posts on this subject, I’m sure.

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Cycle time is undervalued in offshore manufacturing decisions

On 10.23.07, In EMS Industry News, By Tim

Raul Pupo wrote an article over at EMSNow regarding the hidden costs of offshore outsourcing. He brings up many valid points: the increasing cost of logistics, increased cycle times, cultural barriers, and increasing wages in so-called low-cost geographies.

The item that appears to be least understood by OEMs, from my perspective, are increased cycle times. Unfortunately, current financial practices require only that inventories are measured while in the legal possession of the OEM. So, each company is optimizing around their local process. If OEMs considered throughput and turns for the entire , if there was a true partnership between these companies to optimize the entire , I believe the geographical solutions would be vastly different.

Ironically, many of these same companies tout their operations as being “Lean”. The increased cycle time associated with offshore manufacturing is the exact opposite of the Lean mantra. Unfortunately, the elements affecting decision-making go much deeper than the dollars-and-cents; there are cultural and compensation issues in play as well.
As long as OEM , finance, and program managers receive incentives to provide year-over-year labor savings, they will chase wages around the globe. OEMs chase low wages from the US, where they may do prototyping, to Mexico, to China, to India, to Russia. Each year, the product moves to a cheaper country, and the OEM manager receives a 5% labor reduction for each of the five years, but his and cycle time grows. However, the manager has achieved his objective: he reduced labor costs, and earned his bonus.

Unless enlighted managers “dollar-ize” the effect of the integrated cycle time – and there are hard- and soft-dollar impacts associated with going from one week to four weeks, or one month to three months – manufacturing will continue to be performed where wages are lowest. It is the challenge of the regional contract manufacturer to educate and inform the customer, and develop financial models to highlight the true bottom-line impact of offshore manufacturing. Global contract manufacturers provide geographic migration plans as a standard piece of their proposals. Regional contract manufacturers must not be afraid to aggressively present these models and make the case for domestic manufacturing.

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