Today’s products are smaller, faster and lighter and operate on networks that are more cost-effective, offer higher levels of functionality and are far more integrated. But you already know this as you work in high-tech, where change — especially the change brought on by innovation — defines your professional life. But did you notice that the landscape from which the majority of these high-tech products are sourced is currently rumbling at about a 7.0 on the Rictor Scale?
What landscape is this?
It’s the global outsourcing landscape and it doesn’t matter whether your products go into the consumer, computing, communications, medical, industrial, aerospace or automotive industries — the ground is shaking. Nor are you exempt if you’re one of the very few high-tech companies that doesn’t outsource manufacturing, as you almost certainly outsource something; be it design, front or back office activities, channel functions, logistics, reverse logistics, or any of the other activities that are commonly serviced from outside the organizational boundaries of the typical high-tech company.
What is causing the ground to shake?
The eroded US dollar, increasing costs in low cost labor regions, inadequate and failing infrastructure, record setting energy prices, global climate change (previously known as Global Warming which I guess didn’t sit well with those folks whose local weather was getting colder!), unchecked and seemingly uncontrollable piracy of IP, failed product safety management, supply compression, escalating consumer expectations, open frustration with customer service, falling stock prices, scandalous corporate behavior, pessimistic forecasts and a general softening of the G8 economies. Did I miss anything?
What does it all mean?
Probably that the company you work for will be paying more for the services you procure. These costs can not help but rise when the dollar isn’t worth as much as it was when you wrote those original outsourcing contracts and the underlying costs in those low-cost, geographically remote, regions you migrated to are a lot higher than they used to be. Plus you will have fewer suppliers to pick from due to ongoing supply-compression. Simultaneously, your business is probably experiencing a tougher, more competitive environment where customers are increasingly discriminating and harder to retain. Consumers who are short of cash and believe they have experienced poor customer service have no problem deciding that cheap knock-offs look attractive.
What can you do about it?
Actually, you can do quite a bit about it. Starting with acknowledging the inconvenient truth (sorry Al) that while business quakes can be nerve racking they do not have to be fatal. If your external costs go up – cut your internal costs. Most OEMs spend as much managing their outsourcing initiatives as they pay their suppliers for value-added services. Are fuel costs and surcharges eating away at your margins? Then stop shipping material half-way around the world – multiple times. Embrace a rational regionalization strategy so both you and your products end-up accumulating less frequent flyer miles. If your markets go soft – get tough. Go fix those things that are keeping you from taking customers away from your competitors (or even worst, losing customers).
Why start with these items?
Cutting costs and getting tough ought to be self evident — the reasoning on geography is that too many high-tech companies are building their products in one hemisphere but selling them in the other. This is a questionable strategy that gets more dubious when you add in the environmental and corporate social responsibility impacts of the approach and the probability that costs will continue to escalate. Even in those very few cases where a cross-hemispheric strategy makes some sense from a financial perspective how long will it be before the current level of flux nullifies these justifications? Who knows?
What is known is that the systems of trailing indicators (like book to bill ratios, etc.) that the industry relies upon to monitor the business landscape have become less revealing with each passing quarter. Outsourcing managers need indicators that provide more insight into what is likely in the future, rather than looking at the past. In other words, what we need is leading not trailing indicators – the landscape is shifting too fast to merely look at the past!
What are leading indicators?
Insights into what direction (and how fast) things are moving versus numeric summaries of what happened in the past. We need approaches and formulations rooted in the principles of business theory that we all learned but summarily forgot the moment we walked away from academia. Risk mitigation, latency, hysteresis and a few other items so arcane I’m reluctant to even list them here (not sure what the proceeding terms mean? Go ask one of your engineers, they can probably give you an analogy.) Scary concepts? Perhaps a little. Incomprehensible? Absolutely not! High-tech loves complexity; complexity of speech, complexity of thought and complexity of approach.
Maybe this is why the ground is shaking? The boundaries of the simple, trouble-free, straightforward, uncomplicated, comfortable ways of doing business are long gone. High-tech has become virtual, leveraged, global and dynamic. High-tech has changed the world. You rock.
But now it is time to step-up a level. Quarterly business reviews and Supplier Scorecards aren’t going to solve your problems. The formulation, execution and management of a cost-effect outsourcing strategy has become more complicated than just dumping requirements into the newest low-cost labor region. Dash-boarding will no longer keep you safe and on the right path – you need a heads-up display with GPS mapping functions, live traffic updates and the most current weather forecast.
Got questions?
Give me a call and let’s talk!
Charlie Barnhart & Associates LLC
charlie@charliebarnhart.com
408-230-9691
Tags: EMS insider insights, Leading indicators, Risk Management by Charlie
No Comments »
Recent Posts
Navigation
RSS Feed