Recently we were asked to explain our Outsourcing Navigator Council dataset, so decided it was time for a more comprehensive description of our work and what it means to the OEM community. Bottom line, CBA’s research is designed to help OEMs gain competitive advantage by benchmarking their cross-enterprise manufacturing transformation costs. Business is an inherently risky activity. One way to be successful is to know something your competitor doesn’t know and to use that information to positively enhance the bottom line. Sounds easy, right?
We help OEMs of all sizes and in all end markets, whether they are currently outsourcing their electronics manufacturing or not. Sometimes, outsourcing is not the right decision, and we can help companies do a ‘make or buy’ call, or justify NOT outsourcing to upper management. We also help OEMs choose manufacturing geographies and suppliers.
One of the images we use during the Outsourcing Navigator workshops to illustrate how OEMs can capture their total costs of outsourcing is to visualize the outsourcing engagement as a movie, rather than a snapshot. This is useful in helping an OEM see their costs from a cross-enterprise perspective, over time.
At the risk of self-promotion, we must point out that this way of looking at electronics manufacturing is unique in the industry; our proprietary methodologies are intended to bring consistency and standardization to a quoting process that historically has been full of gamesmanship.
Costs for the OEM should be viewed as falling into three buckets: 1.) the price paid to the EMS; 2.) the sum of one-time and recurring costs accrued by the OEM internally; and the 3.) cost of geographic risk depending on where in the world the manufacturing facility is located and the destination of the end product. Unlocking the mysteries and leveraging the competitive advantage of these three buckets is the key to success.
Global Pricing Methodology
The price of EMS services can be a mystery to the OEM because of the games that are played in this arena. We believe these games arise from the often adversarial relationship between the OEM and the EMS industry. There is often a high level of mistrust between the parties – beyond the normal competing interests that arise between buyer and seller. The history of the industry, the complexity of electronics manufacturing and the disconnect between the skill sets of the two parties can explain the mistrust; however cutting through is essential to a mutually profitable engagement.
A good pricing model must include elements of scale, approach and complexity, as well as the GAAP-based metrics commonly used to estimate price. The ONS Global Pricing Methodology is a comprehensive approach to cost intended to bring consistency to this process. OEMs that use this model gain insider insights and visibility into the mystery of EMS pricing.
Benchmarking the OEM’s Internal Costs
The second area of cost that OEMs need to understand is their own internal cost to manage their outsourcing engagement. These costs are surprisingly opaque to most OEM manufacturing managers because of the silo-ed organization structure of most corporations. These include one-time costs (‘non-recurring’) and recurring costs. One-time costs include things like new product introduction (e.g. tooling, supplier selection), interventions (e.g. quality issues, component shortages, etc.) and initiatives such as RoHS, lean manufacturing, ERP implementations. Looking at this list, the savvy OEM sees that these “non-recurring’ costs do actually recur fairly often, so looking at the engagement over time is the only way to really capture total costs. Again, it’s a movie, not a snapshot.
Recurring costs include purchase price, cost of logistics, and internal support of the outsourcing program. To capture the totality of cost on a per unit basis, the OEM must add one-time costs and recurring costs, and then divide that by the total number of units produced during the life of the program. This number can be compared to industry benchmarks though the Outsourcing Navigator database to provide an objective analysis of an OEM’s internal costs.
Global Risk
CBA’s Outsourcing Navigator database comes from a case study analysis of hundreds of actual OEM quotations, from a wide range of end markets, engagement size and representing both PCBA and box-build. These quotes come from a panel of OEMs, and represent the pricing practices of dozens of reputable EMS companies. The database comprises the normalized data extracted from successful outsourcing programs. If we determine that an engagement represented by one of the case studies has ‘failed’ – defined as the abandonment of the program within a year – we do not include those figures in the dataset. However, valuable insights can be gained from failed cases. That’s where the Global Risk metric comes in. These geographic risk constants, which are included in the Outsourcing Navigator Council dataset, can help the OEM learn from the mistakes of peers and avoid the costs arising from geographic risk.
ONC membership includes Quarterly reports and webinars based on the 15 datapoints tracked in the Leading Indicators database; in-depth primary research reports on timely issues of interest to the industry; 8 hours of consulting time; and attendance at our Outsourcing Navigator Workshop training sessions.
Our Q4 2010 Outsourcing Navigator Council report will focus on the Next Horizon of global electronics manufacturing. This report will take a fresh look at current and emerging “low labor cost” geographies that are being considered now for electronics manufacturing. We will conduct an objective SWOT analysis on each of the regions based on the decades of experience the industry has accumulated at this point about what’s important to the unique practice of electronics manufacturing. We will look at which regions are ascending, which are being scaled back and why; and which areas that have been in business for years are now getting a second look.
The first phase of the research involves a practitioner’s survey: Please click here to participate; respondents will receive a free copy of the executive summary when it is published in November 2010.
