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The 10 Most Dreaded Questions For CMs
December 31, 1969 |Estimated reading time: 14 minutes
Stephanie Martin
Electronics outsourcing continues to grow at about 25 percent per year; this trend is expected to continue into the foreseeable future. Traditional manufacturers recognize the prohibitive costs of electronics technology, capital and other resources. Many have set strategies in place to allow their companies to focus on particular core competencies, such as engineering or marketing, vs. hands-on manufacturing. They have recognized that this function can be best served by an outsourcing partnership.
The contract manufacturer (CM) has come to dread certain questions OEMs ask, because they highlight internal weaknesses and the uniqueness of managing a supply chain in contract manufacturing.
OEMs often look for an outsource partner because of a corporate mandate to focus on the core competencies of research and development, marketing, or final assembly. Statistics and internal measurements are certainly important in any decision, but most outsource decisions come down to how the outsourcer feels about the relationship with the CM. It`s about building a strategic relationship with a CM - outsourcing to a partner, not just a vendor.
Assuming the CM meets all relevant technical and business requirements, there are only three issues separating one CM from another: service and flexibility, labor, and materials management. Excellent customer service is expected. Over-focusing on labor is misguided because the percent of labor to total cost is low in electronics assembly - typically 10 percent or less. Management of the material supply chain is the true differentiation because it constitutes 60 to 80 percent of the total cost of a product.
OEM concerns fall into five broad categories that lead the company to ask: Does this relationship meet my needs, and will it allow me to expand my business? These broad categories are physical control, systems control, cost control, schedule flexibility and protection.
How Does the CM Control Material Inventory?
There are four inventory factors that pose a challenge for CMs that must manage dozens of customers, each with their own part-numbering systems: excess, noncancelable/nonreturnable (NCNR), obsolescence and exposure to engineering change notice (ECN) changes. Frequent schedule changes from OEMs are common and contribute to excess inventory. The CM is often constrained by minimum reeled quantity purchases to run the automated SMT equipment. Run rates lower than minimum buy quantity mean the CM should have a strategy, such as common part usage, to minimize the cost impact. Identifying and consolidating common parts across multiple customers is an excellent way to minimize the risk, but difficult to implement. If the CM tries to create its own standardized-part numbering scheme, the varying approved manufacturer options lists (AML) can lead to a highly cumbersome environment. A better tactic is to analyze overall customer demand, seek out common part numbers, and consolidate usage and demand at the AML level. Look for a strategy where the CM also offers cost savings as an incentive for adding these manufacturers to the AML. This practice benefits the OEM by leveraging common components over multiple customer flexibility demands while reducing component costs through higher purchase volumes.
The relationships the CM has with its suppliers will determine what kind of concessions it will realize on returnable and NCNR material. Are these relationships long-term and mutually beneficial, or are they adversarial and based on spot buys? Do the relationships allow for the smooth flow of product up, down and across the supply chain? The CM with these types of strategic supplier relationships will benefit the OEM by helping to mitigate the materials risks of engineering and schedule changes in a dynamic environment. Supply-chain agreements should be firmly in place and performance metrics should compliment the strategies. The third challenge is managing component obsolescence to minimize the cost impact. A CM should have an ongoing, dedicated staff to provide proactive analysis. This function is often performed on a part-time basis by purchasing professionals. A much better choice is to have dedicated component engineers perform this function. Many OEMs have older designs with extensive life-cycle requirements. With all the short life cycles and time-to-market demands, this aspect is often overlooked. With more than 400 components becoming obsolete every day, lifetime buys, second sourcing, brokering and extensive sourcing are reactive norms that can add tremendous costs and create schedule delays. Finally, the CM`s approach to ECNs should include excellent documentation control with an approach to determine optimal introduction dates for new designs or components. A quality CM will work closely with the OEM engineering personnel on an ongoing basis.
Observe how the CM segregates customers` materials. Is it physically separate as well as system separate? Does the company use dedicated locations or random storage? Is the CM using a supplier-managed inventory program? Be wary of CMs that tout in-house stores managed by distributors. This strategy adds hidden costs - the distributor must pay the employee whether there is work or not. Look for a CM that manages inventory electronically; this is the lowest total-acquisition cost method. Additional elements to look at involve the inventory classification code: Does the CM classify the inventory by customer, plant or corporation? What are the parameters for classifying a component part?
What Are the Materials Management Information Systems?
Materials management in the CM must be controlled through fully integrated systems. The complexity of managing multiple customers` requirements and bills of material (BOM) using different part-numbering schemes simply cannot be done manually in a cost-effective manner. At a minimum, the CM must be using an advanced manufacturing resource planning (MRP) system for planning purposes. All business disciplines should be transacted through a single, fully integrated enterprise resource planning (ERP) system. Are these integrated systems used for decision making? Are these systems integrated to other elements within the supply chain, such as customers and suppliers? If so, how? How often is the system regenerated? How reliable is the data and how is integrity verified? What are the planning parameters? Does the system have the capability of doing simulations and "what if" analysis? The OEM should question whether the CM uses capacity resource planning (CRP) techniques to determine load and commitment dates. The risk is high if the CM does not use capacity as a means to determine commitment. Without it, expect orders to be over-committed and under-delivered. The OEM should request what percent of the transactions are conducted using electronic commerce because translation of component needs by conventional methods is slow, inefficient and costly. It is paramount that the OEM understands and believes that the most meaningful differentiator between CMs is supply-chain strategy and deployment. The sharing of information for decision making (not to be confused with the sharing of data) is the key to success.
Are All of the CM`s Systems Linked and Consistent in their Materials Applications?
To maximize the negotiation leverage of the entire company, the CM`s systems must be linked so the decision-makers are able to analyze inventory requirements and trends for all facilities. Otherwise, it is a manual operation to try to consolidate component demands, which adds cost to the material overhead and time delays. Look for a CM that can demonstrate that they look at the company as a whole and not as independent pieces. Does the CM use the same material management processes in all facilities? If not, be aware of the processes in the facility destined to do the work. Often, the CM will take a potential customer to its best operating facility instead of the facility where the work will be scheduled.
How Does the CM Manage the AML?
One of the most challenging aspects of electronic component materials management for any company is the AML. Keeping it updated, identifying more than one approved source, alternates, substitutes, ECN changes, and performance in different applications all make managing the AML complicated. When the CM takes the AML from its customers, it faces a new challenge. To maximize its material leverage, the CM must find a way to electronically drop a level below the customer`s part number to the AML. Consolidation of demand must occur at the AML level. The quality of the AML is usually questionable. It is not unusual for more than 80 percent of a typical list to have incorrect part numbers. Most often, these are small issues: an "O" instead of a zero, a space where none is needed, a "/" instead of a "-" or "\," and leaving a "T" or "R" off of the end of the part number. As with any electronic comparison, part numbers must be an exact match. The typical way to manage this discrepancy is for the buyer to compensate and correct the part number each time an order is placed, or for the distributor to correct the part number upon receipt. Look for a CM that has a process to correct these part numbers to industry standard. Most OEMs do not want their original AML tampered with even to update numbers to industry standards. This forces the CM to add an input field into the system to store the corrected number. How the CM manages the AML provides strong insight into the overall materials strategy. Manual processes at any point are trouble spots. Incorrect data means the wrong part gets ordered, shipped and received.
How Will the CM Ensure Material Cost Control?
The outsourcer should determine the term of the quoted price. The CM should be able to hold most pricing for the length of the contract. Exceptions should be clearly noted on the original quote and accepted by the OEM prior to placing business. Look for a quote expiration date on the proposal from the CM. Will the CM pass along cost reductions automatically? What about cost increases? Are pricing contracts in place for a minimum of one year? Were these contracts negotiated based on the total possible dollars rather then by piece-part pricing? Bundling components per manufacturer provides the greatest opportunity for lowest cost. How does the CM track pricing of volatile components? What are the ordering rules of these volatile components? Does the CM have some type of industry trend tracking and are they willing to present it to the customer and to the customer`s design team?
The CM should be held accountable to determine cost-saving opportunities. One of the best methods is to agree to a 50/50 split of any savings identified and taken. There can be radical variations in pricing between different manufacturers for components of the same form, fit and function. The CM should recognize this and present these alternate opportunities to the OEM.
How Frequently will Cost Reductions be Passed on to the Outsourcer?
At a minimum, the CM should have an annual plan for offering cost savings. This forces the contractor to update pricing. Ideally, the CM should have quarterly review meetings with each of its customers. Many CMs are willing to guarantee minimum annual savings. These savings can come not only from material, but labor, processing and redesign for manufacturability. The CM should be able to state the typical cost savings achieved over a given period of time. Look for a standard process of identifying cost-reduction opportunities.
Does the CM Use Manufacturer Direct or Distributors for Procurement?
Until recently, it was considered expensive to procure through distributors. Reorganization with most of the major manufacturers has changed this. The minimum spend amount to go directly to the manufacturer has risen steadily over the past three years. The manufacturer is redirecting its smaller customers into the distribution chain. Additionally, the manufacturer is providing fewer technical resources and is relying heavily on the distributor to provide field application support and guarantee price protection for design wins. For a high-mix, low-volume CM, having a large portion of business direct with the manufacturer is risky. The manufacturer typically does not allow schedule changes, does not provide price protection on volatile components and has few return privileges. Look for a CM with strong relationships with a limited number of distributors.
How Does the CM Maximize Material Leverage?
To maximize material leverage, the CM must have a way to consolidate demand from all of its buying facilities. It should have a process in place to identify this demand at the manufacturer and part number level. Ideally, the CM should be partnered with a group of key distributors to offer each a larger piece of the distribution total available market (DTAM). Because of the nature of contract manufacturing, the CM will always have more key suppliers than an OEM. The more distributors a CM works with on an ongoing basis, the less likely its leverage is maximized. Look for contracts in place to "lock down" pricing so that the CM is not spot buying. To maximize its buying power, a CM must form strong strategic relationships with its key suppliers. This supplier/customer relationship must be a win-win situation for both parties. Look for indications that the CM is taking advantage of contracts negotiated by the OEM for unique or specialty items where demand is consolidated across multiple CMs. Maximizing leverage is not one single point, nor is it directly related to the size of the CM. Of course, a $10 million CM does not have the material leverage of a $500 million CM, but a $200 million CM can have the same or even better leverage as a $400 million CM. This is based on the strength of the supplier relationship and the ease of doing business with the CM.
Is There a Specific Materials Strategy for Each OEM Customer?
Every customer has specific needs and expectations. The CM should be able to articulate and document the materials strategies used. Look for CMs willing to customize solutions to customer needs. How much schedule flexibility is built into the material strategy? Does the CM require a firm schedule change window of more then 30 days? A firm schedule is necessary to stabilize supply and demand. Ideally, this is a 30-day window. Is there available capacity in both material and production to allow an upside in demand within a predetermined window? Can the OEM flex the required quantity up or down some percent within 30, 60 or 90 days? The CM should be willing to sign up to a 25 percent flex up/down within 30 days, 50 percent up/down within 60 days and 100 percent up/down at 90 days. What a 25 percent flex within the firm window entails is a safety stock of inventory either on site or at the distributor. At a minimum, the manufacturing cycle time must be in a firm window.
How Will the CM Protect Me?
The questions OEMs ask should all lead to the same conclusion: Will this particular CM protect me? OEM must rely on its CM partner to make sure that it is taken care of. The CM becomes the buying arm of the OEM. As this outward-looking arm, the CM should provide a current view of market trends and conditions. Look for a CM that identifies lower cost alternate parts. The difference in pricing and availability can be substantial between different manufacturers.
Finally, look for CMs that have a real-time obsolescence program. Most CMs use a reactive method to identify lifetime-buy, end-of-life products and technology obsolescence. This problem generally shows up at the time of new order placement. By this time, the window of opportunity is lost to keep production running and to make substitution or redesign decisions. Even the CMs that use a proactive method of obsolescence identification often base these decisions on stagnant data. If one looks at the life cycle of a component, it would follow a normal distribution curve. A component begins at product introduction with limited availability and high prices. From there it moves to its growth point up the left side of the curve, with multiple manufacturers available and lower pricing. As it matures, it moves to the top of the bell curve, where pricing is stable and the market is saturated. A period of decline where manufacturers leave the market and prices start to climb follows. Finally, the component enters obsolescence with limited or nonexistent availability and extremely high prices. There are signals throughout this life cycle that can guide the OEM into making design decisions. Look for a CM that uses live industry data where notification of component decline is first indicated by the removal of a component from the manufacturer pricing catalogs, from leading manufacturers dropping a product line, or from current or pending technology changes. To be truly proactive, the CM should provide a general health assessment of the PCB assembly on an annual basis. This protection factor may prove to be the difference between one CM and another. It answers the question: "Will you protect me?"
Asking these 10 questions and assessing the answers will guide the outsourcer in determining if the CM can meet its needs. The OEM should take a long-range view of the supply strategies in place or in the process of being implemented. Are they primarily performed electronically, with minimal human intervention? Look for a CM that is taking steps to make the supply chain a virtual link from the OEM`s computer output to the supplier`s computer input while providing the lowest total acquisition cost and the lowest risk factor. SMT
This article is adapted from a presentation originally given at NEPCON East `99.
STEPHANIE MARTIN is the director of corporate material logistics for Sparton Electronics, 30167 Power Line Road, Brooksville, FL 34602; (352) 540-4195; Fax: (352) 799-6785; E-mail: smartin@sparton.com.