Posts Tagged ‘corporate social responsibility’

CBA Industry Resolution for 2013

Friday, December 14th, 2012

T’is the season for quiet reflection, taking stock of who’s been naughty and nice and so forth, so we recently began thinking about New Year’s resolutions for our family members. Some of us have young adults under our supervision; in fact, as we were sitting in the emergency room recently, where one of our young adults was being treated for a broken arm caused by an ATV accident, we realized that our advice should be short and sweet in order to be most effective.

So it is in that spirit that we submit CBA’s 2013 Electronics Industry New Year’s Resolution:

“Try not to do anything stupid next year!!!”

For the electronics industry, it’s no secret that 2013 is going to be challenging. Many global trends that have been percolating for a decade are likely to come to a boil. The sovereign debt problems of developed nations, the geopolitical unrest in emerging markets, the rising labor rates in ‘low cost regions’, as well as major market shifts around the world, will likely test the mettle of many managers of electronics companies as they guide their company’s manufacturing strategies.

Given this less than rosy outlook, the new buzz word we have been hearing – ‘re-shoring’ –gives us reason for pause, as in our opinion, this word echoes much of the nonsense that was bandied around during the recent electoral silly season. Political candidates curried favor by promising to bring manufacturing jobs back to the US. This is in contrast to what is actually happening within the global electronics manufacturing industry today, a return to ‘regionalization’ (or build in the region for the region.)

Make no mistake. Building in the region, for the demand from within that region, is a good idea and a trend we have been tracking for the past couple of years.  But the word ‘re-shoring’ implies something completely different. To us it sounds more like public relations amd plaques for corporate social responsibility than a viable means of reversing the knee-jerk reaction to the Groupthink that led to the wholesale transfer of work to China about 10 years ago.

If the decision is made to change the current manufacturing approach (always an expensive proposition), then first do a thorough buy vs. build analysis of your company’s unique situation, taking into account the entire product lifecycle and starting with a clean slate. Understand thoroughly the current costs of manufacturing, both internal and external, and then construct a global supply solution, embracing the capabilities and requirements of both your internal operations and your potential supply base. For large OEMs that probably means building in the region for the region, no matter which continent that happens to involve. But for smaller to mid-market OEMs,  that probably means in their home region, not around the world.

OEMs of all sizes that do this type of analysis can rest assured they will be keeping the CBA 2013 New Year’s Resolution for the Electronics industry in spades.

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Risk Factor #3: The Demand Cycle Has Shortened

Tuesday, October 4th, 2011

By Charlie Barnhart

(Part three of a nine part series on why risk in the global electronics industry has increased over 45% in the past four years)

In the first article of this series we wrote about OEMs demanding continual, on-going price reductions even during times when costs are clearly going up (not down) and why this practice damages everyone involved with the transaction. Then in the second article we reported on how the dramatic drop in respect for the value of the supply chain has resulted in OEMs targeting their own employees (especially those who manage outsourcing programs) for elimination. What we called the pink slip approach to a better bottom line.

On the surface all of the above seems irrational — the extreme of foot-shooting. But maybe something in the demand cycle has changed in some profound way that would justify these actions? Let’s take a deeper look.

  • Have product volumes increased so dramatically that economies-of-scale are offsetting escalating costs? Ah, sadly, no… volume and batch sizes are down across most sectors.
  • Have OEMs moved their supply solution geographically closer to their enterprise thus requiring less administrative support? Ah, again, no…  OEMs are outsourcing more tasks, more often, to locations that are more geographically remote.
  • Has the demand cycle lengthened, which would add flexibility to enable these actions? Ah, definitely no to that!

In fact the demand cycle, or the time span between when a consumer orders a product and when they expect to receive it, has shortened — dramatically. And this is true in virtually every market the industry serves. No one wants to wait, for anything. It doesn’t matter if it’s a consumer, commercial or industrial product, the buyer wants the purchase delivered immediately. Therefore most OEMs simply don’t know what they need until something is sold and then they need it right away.

Hasn’t this always been the case?

Yes but not to the extreme it is today. Back in the day when business was practiced as an art form by well-seasoned professionals, OEMs maintained finished goods inventories and operated in-house manufacturing capabilities (in addition to outsourcing) which dramatically improved their response times. Did this increase their inventory levels? Of course it did.

Yet, it worked.

It was a cost of doing business and as with any cost it needed to be carefully managed and controlled but successful companies learned to use it as a competitive advantage. Then we decided it was an outdated approach that needed to be replaced.

For a few years Lean looked like the answer but Western industry simply couldn’t bring itself to fully embrace the approach with its many operational disciplines. And a half-hearted Lean implementation is a bit like what they say about being half pregnant. It’s impossible.

So we ended up with today’s dysfunctional pathology where OEMs refuse to place firm commitments, the outsourcing industry is afraid to order anything until the last possible minute, the downstream supply chain routinely labels everything as non-cancelable/non-returnable, and the “overnight delivery” service industry reaps the rewards of everyone else being behind the demand curve.

A geographically remote, highly fragmented, sequential solution driven by a forecast based model intended to provide a strategic just-in-time-requirement via a tactical solution called Outsourcing. Does anyone believe this is working?

If not, what is the answer?

Maybe it is time to rethink where we’ve been. If we can’t bring ourselves to fully embrace Lean then maybe it is time to try something we know will work. If the demand cycle has shortened then the supply solution needs to be shortened to facilitate the requirement. We know that building in the region for the region (be it internal or external) speeds things up and is easier to administer than a cross-hemispheric solution spread over a dozen time zones and we know that a carefully managed finished-goods inventory speeds-up a company’s ability to respond. These are known quantities.

Will this transition be easy? No but who ever said business was supposed to be easy?

Will it cost more than today’s solution? Yes, especially in the short-term.

Will it work? Yes.

Bottom-line, successful long-term businesses are not built by leveraging short-term advantages out of the supply chain or padding margins via reductions in staffing levels. Nor do they ignore the realities of the market dynamic; when the demand cycle shortens, it’s time to shorten the supply-solution. The alternative is a continually escalating level of RISK!

NEXT ARTICLE: Risk Factor #4: Business are operating at higher velocities

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Risk Factor #2: Fewer resources at OEMs worldwide

Friday, September 16th, 2011

By Charlie Barnhart

(Part two of a nine part series on why risk in the global electronics industry has increased over 45% in the past four years)

In the first article of this series I wrote about the demand for continual, on-going price reductions during a time when costs are going up, not down. I explained that this demand on the part of the OEM consumer of EMS services is an irrational expectation that damages everyone even remotely involved with the transaction. Specifically, I said…

“Throughout the supply chain, each link has been stretched to the breaking point. Suppliers of everything from raw-materials to components to major sub-assemblies are pushing-back on both the EMS and ODM community with the result that entire end-market sectors are being abandoned or sold off by OEMs as they can no longer squeeze out a profit by squeezing their suppliers. The “outsourcing dividend” has long been spent. And those next even lower-cost geographies, far out over the horizon, are more pipe-dream than viable alternatives, as they lack the infrastructure, resources, capabilities and political stability to replace the current solutions.”

What I didn’t say was that I think the senior executive teams at OEMs worldwide already know all of this.

OEM top-level executives have been mining alternative sources of cost-reductions for some time. Squeezing every element of their enterprise in a futile attempt to preserve margin and thereby placate the obscenity called Wall Street. A bizarre new reality where securities analysts have become the arbiters of performance expectations, in spite of the fact that they produce nothing and at best have minimal insight into the  real-world complexities of the electronics industry.

Pink slips are now the ticket to a better bottom line.

No element of business is sacrosanct; every job at every company is subject to being outsourced, except of course the senior management team. Design, IS/IT, Payroll, Human Resources, Manufacturing, Logistics, Finance, Customer Service, etcetera, etcetera, etcetera. All can be done by someone else at a lower cost, probably not with the same level of acumen or enthusiasm as an actual company employee but at a lower cost none the less.

Old news you say? Keep reading.

As incredible as it may seem – apparently – now it’s the folks who manage outsourcing programs that have been targeted for elimination.  I say apparently because we here at CBA have noticed an expanding list of folks who have either vanished completely, or are part of a MUCH smaller organization. In some cases, an organization so truncated it would be inadequate to provide oversight and control of a program across the street much less on the other side of the planet. Yet, we still see midmarket OEMs implementing cross-hemispheric supply solutions with little more than a skeletal team of managers located many time zones away from where their products are manufactured.

An extremely risky, questionable approach that is incongruent with today’s reality.

I guess it boils down to the fact that when the executive management team decides that the number one (read: “sole”) focus of the outsourcing team is going to be price reduction (no matter which way the cost curve is trending) the only staff you really need is someone to say really loud and with great animosity, “I need it cheaper or I’ll go somewhere else!”

When you’ve laid-off or outsourced everything but the outsourcing team, what’s left?

Almost six years ago, I wrote…

“If you have never been involved with outsourcing, take it from me – outsourcing is hard work.

It doesn’t matter if you work for the buyer or seller, or are a supplier of parts or services – outsourcing is hard work. And in my humble opinion the people who make their living doing the work of outsourcing are some of the most dedicated yet least appreciated people in the electronics industry.”

Were these folks really underappreciated then (and now)? Since many of them have been laid off since I wrote that piece, it would appear so.

Perhaps it’s because the people who practice the craft of outsourcing have never shared with their bosses just how complicated and problematic the process they manage can be – probably because they were too busy trying to expedite product deliveries while simultaneously mitigating excess materials from the third product forecast change of the month. Forecasts they know will be obsolete before the issues they create can even be reconciled. Or maybe they didn’t say anything because they just knew no one would listen.

Ever hear a CEO telling securities analysts how they were going to build the next great commercial enterprise based on a fantastic new widget that would change everything, but would never actually be touched by anyone in the company?  I hear that all the time on earnings calls, and see it in press releases designed to boost stock prices.

Guess what… these CEO dreams are only possible because there are hundreds if not hundreds of thousands of very hard working people out there building the products that the CEO thinks no one will ever touch. People both inside and outside the enterprise with the chutzpa to do the heavy lifting and fight the endless battles, people whose experience is measured by scars not patina, people who make it happen – everyday – not because someone tells them how much they’re appreciated but in spite of the fact that they’re ignored.

If you are one of the few remaining, we know you will keep marching on despite the lack of respect and support. If you are no longer in the craft but are reading this let us know, we’d love to hear from you and continue to be your voice!

All of you rock, and we know it.

NEXT ARTICLE: Risk Factor #3: The demand cycle has shortened.

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Risk Factor #1: Prices are down but costs are up

Tuesday, September 6th, 2011

By Charlie Barnhart

In any commercial enterprise the difference between selling price and the total cost of what is sold needs to be a positive number in order for that enterprise to be profitable. Simply put this means you need to sell your products or services for more than you spend producing and providing them. This is a  fundamental tenet of business that everyone reading this article probably understands intuitively.

But what is the risk if the number is negative?

It depends.

If you are the seller and you continue to lose money you will go out of business. If you are the buyer you will have to find a new supplier. In either case a disruptive event occurs that impacts both parties.

Then why would either party tolerate such a circumstance?

Good question but one that is very hard to answer as the fundamentals of business, while simple, are not always in perfect balance with the realities of human nature. And as we rely on people to make business decisions there is inevitably a tension between these two forces. Think of it as the motion of a see-saw, a game of balance where the person on one side must sacrifice his or her advantage to continue the process. Historically, rationality has trumped self-interest as everyone wanted to keep the game going.  But recently in the arena of global outsourcing, something seems to have gone wrong.

During last quarter’s Outsourcing Navigator Council webinar we reported to our membership that the Composite Business Risk (CBR) index, a measure of risk in the global electronics manufacturing industry, has increased over 45 percent in the last four years and that…

“It is now believed that the CBR has been indicating a consistently increasing level of risk in the Global Electronics Industry since its inception early in CY2007. CBA believes this trend to be derivative of a decade long shift in the approach of (primarily) North American and European OEMs to supply-chain management that while economically expedient have proven incongruent with global economic and geo-political realities.”

In other words, the level of risk is currently so high it is no longer just selected outsourcing projects that are at peril but perhaps the entire outsourcing industry. Lower prices at any cost have now become the new normal. Endless, sequential cost-downs for electronic manufacturing services are virtually every OEM’s strategy for preserving next quarter’s margin if not actual profits.

Throughout the supply chain, each link has been stretched to the breaking point. Suppliers of everything from raw-materials to components to major sub-assemblies are pushing-back on both the EMS and ODM community with the result being that entire end-market sectors are being abandoned or sold off by the OEMs as they can no longer squeeze out a profit by squeezing their suppliers. The “outsourcing dividend” has long been spent. And those next even lower-cost geographies, far out over the horizon, are more pipe-dream than viable alternatives, as they lack the infrastructure, resources, capabilities and political stability to replace the current solutions.

Can the situation really be this bad?

Yes, actually it is. The underlying costs in most of the current so called low-cost regions are going up and in some including China by as much as 1 ½ percent per month. The reasons are many; inflation, monetary exchange, adoption of new environmental, regulatory and labor policies. Nor is this just a manufacturing-value-add issue as these escalating costs impact the entire supply-chain which has concentrated in these very same regions.

So what is an OEM to do?

It depends on what market the OEM serves, their business model and their scale.

Scenario I

If the OEM is in a highly regulated industry such as Military, Medical (non-consumer), Aerospace or something similar that supports reasonably stable and sustainable margins then they need to take a hard look at their current outsourcing solution and determine:

  1. Is the solution providing both the level of support and service they require?
  2. Are they (at a minimum) reasonably satisfied with the value they’re receiving?

If the answer to both of the above questions is YES, then stay the course but build into your business planning the reality that prices go down only when costs go down.

If the answer to either question is NO then start shopping, but this time think LOCAL (the closer the better!) Contrary to what many so called experts tout, CBA’s data clearly indicate that closer is not only less risky but also in the majority of cases highly competitive on a True Cost of Outsourcing basis.

Scenario II

If the OEM is in a commercial mid-scale market such as Industrial, Automotive or Instrumentation and serves a niche that is innovation versus price based then they too need to take a hard look at their current outsourcing solution and determine:

  1. Is the solution a good technological match against both today’s and tomorrow’s roadmap?
  2. Has a solution analysis been performed to determine which party (i.e. the OEM or the EMS) should be performing which functions to maximize value and minimize overall cost ?

If the answer to both of the above questions is YES then stay the course but build into your business planning adequate resources to support and grow the relationship over time.

If the answer to either question is NO then repair the disconnect or start shopping! If you are outsourcing $25-100M/year then think REGIONAL (i.e. build in the region for the region to minimize time zone separation, which is a high impact variables for risk).

Scenario  III

If the OEM is in the Computing, Communication or Consumer space or any of the other previously mentioned market segments and outsource over $100M/year they need to ask themselves:

  1. Are our products sold based on price?

If the answer is YES, either start innovating or stop outsourcing (if the answer is NO, re-read Scenarios I & II). The truth is, by definition your company is a commodity provider and a commodity provider’s only possible advantage is to MANUFACTURE their own products more cheaply and at a higher quality than their competitors.

Sorry, if that doesn’t happen to be your company’s “core-competency.” Maybe the management team should have taken their MBA in Operations Management versus Marketing. Outsourcing is not a strategy, it is a tool. And like dynamite it can be a powerful tool when properly applied to an appropriate task but misapply it and it will kill you.

In the beginning of this article we explained that based on our research we believe this trend of escalating risk and potentially failure of significant parts of the outsourcing industry is…

“derivative of a decade long shift in the approach of (primarily) North American and European OEMs to supply-chain management that while economically expedient have proven incongruent with global economic and geo-political realities.”

The bottom-line is crystal clear, the music is going to stop, and if you work for one of the OEMs we are talking about in the above quotation we suggest you find a chair! We just hope it isn’t a deck-chair on the Titanic.

Next week’s Risk Factor #2: Fewer resources at OEMs worldwide.

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Sustainable electronics manufacturing

Friday, August 5th, 2011

Recent C-level attention has spotlighted the bottom line benefits of measures to improve sustainability, typically defined in terms relating to environmental impact, including reducing carbon emissions, waste and the use of natural resources.

What apparently isn’t being discussed as much in the C-suite is the human impact of the exploitation of low labor cost regions, which should be more prominently included in any discussion of sustainability and corporate social responsibility. When the global manufacturing center of gravity first shifted to Asia and other low cost regions, executives may have been ignorant of the true human cost of these dirt cheap prices; now, however, after decades of journalists revealing human rights abuses, no executive can hide from these realities.

Furthermore, decision-makers in the electronics industry have an even greater duty to act responsibly, since manufacturing these types of products carries much higher risk to human health and safety than a few kids sewing soccer balls together in a distant village.

One specific electronics industry practice encourages – in fact mandates – companies to constantly push the envelope in this regard: draconian contractual terms that require continual price reductions. This practice defies logic, as costs clearly can’t go down indefinitely as they would eventually reach zero. The search to satisfy these contractual requirements leads manufacturers to find new ways to cut costs. At this point, the outsourcing dividend has been spent. The low hanging fruit is gone. Mid-market companies with lower volume requirements never enable the economies of scale the industry was designed to leverage.  So where do new cost reductions come from?

The answer is not pretty.  Business owners in low cost regions, where government regulations are minimal and there are still pockets of desperate poverty, are creative and resourceful when it comes to competitive bidding. You want a cheaper metal stamping? We’ll give you that price by getting the process done, not with the machines that do it safely, but by hand by older Chinese workers willing to endure flying metal fragments and horrendously unsafe working conditions . You want cheaper plastic molding? No problem, as long as you don’t mind your parts being made from grindings from old toys, plastic pens and other refuse. Will you find out about it before it’s too late? Only if you really intend to figure out how the price can be so low before the contract is awarded.

Yes, dangerous practices in unregulated geographies are still occurring, and with even greater guile and secrecy.

We realize that with globalization comes an increasing pressure to cut costs from one end of the supply chain to another. Emerging markets represent a huge opportunity for electronics companies in all market sectors and the jobs go to the lowest bidder. Period. Yet companies still must find the will to resist the temptation to win the project at any cost because that’s where the pressure starts, and cost reduction mandates then ripple down to the last metal stamping.

During the years preceding the U.S. Civil War, there were many business reasons put forth to justify why slavery in the South was an absolute economic necessity: You can’t grow cotton without slavery. People need inexpensive clothing. Most slaves are being treated better than factory workers in the North.  That all seems ridiculous and unimaginable now, but listen to some of the arguments for allowing teenagers to work 12-hour shifts without bathroom breaks.

It has to come from the top. C-level executives have to make it clear that cost reductions must come from real improvements in efficiencies arising from technology advances, not by exploiting desperate people. There is a bright line, and everyone knows the difference. It just takes leaders willing to include humans in the definition of sustainability and unwilling to turn a blind eye on the practices they now know are being used to cut costs.

For more information about CBA’s data-driven approach to decision-making, go to www.charliebarnhart.com

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The View from 2099

Monday, April 13th, 2009

Corporate social responsibility means different things to different interest groups. Since a corporation’s ultimate responsibility is to its shareholders and not to society, if those interests collide, the corporation’s management must favor profitability over any other greater good. Those who seek to persuade managers to do the “right thing” must make the convincing profit argument first. That type of conversation is fraught with speculation and risk, and is only verified through hindsight. The trouble is, few take the trouble to do the math about decisions after the fact.
 
When managers of global multinationals decide to build manufacturing facilities in what appears to be a low labor cost region, the profit argument in the electronics industry generally is twofold: low labor costs and the ability to capture emerging marketshare. The investment typically involves more than the corporation’s own facility: education, infrastructure and supply chain come along with the territory. When times are good, and the global economy is booming, it all seems to fall into place nicely.
 
But are shareholders and other local stakeholders really better off with these decisions? Was Motorola really a winner in that company’s gamble on China in the late 1980’s? What is Motorola’s market share there now? How profitable is the semiconductor and personal communications division? Not very. A Fortune magazine article written in 1996 is an interesting history lesson. Even then many had doubts about Motorola CEO Gavin’s obsession with China:
 
“Is this gamble paying off? Motorola’s sales in the PRC and Hong Kong have shattered expectations, nearly doubling over two years to reach $3.2 billion in 1995–almost 12% of the corporation’s worldwide revenues. The company declines to break down those figures by product line, but cellular phones account for a substantial chunk, and the potential market for these handy gadgets is enormous–three million new cellular phones a year until the end of the decade, according to a Chinese government estimate. P.Y. Lai, head of Motorola’s China operations, divulges his predictions of future sales growth by pointing to–and through–the ceiling. Ah, but what about profits? Lai  is vague about details, but he denounces as “totally inaccurate” a Wall Street Journal report early last year maintaining that the company loses money on every cell phone it makes and sells in China. Price competition is brutal, Lai concedes, but, he insists, “we are making good profits in China.” ‘
 
And what happens when the global economy goes south and plants are closed, e.g. Intel’s recent decision to shutter plants in the Philippines and Malaysia? There is a cost to the local economy, and to workers who train for jobs that then disappear.  What’s the long-term impact on the environment in the region, and on the stability of the government? Surely the corporate social responsibility argument includes some kind of analysis of the impact of suddenly pulling the plug on a geography.

Free-market capitalism was once thought to be the foundation of a new era of global prosperity. Now, as these forces fail, governments step in to install and enforce regulatory mechanisms to attempt to repair the damage. The question is whether they should or even can wrest control of the global economy from the multi-national corporations. Will this rightful and necessary resurgence of focus on national interests result in protectionism or a new type of capitalism? The Founding Fathers warned against getting too involved in international expansion; the Roman Republic, they argued, was done in not by Visigoths, but by the military generals who gained too much power building the Roman Empire. After the Spanish-American war, American empire-building has been built on ‘dollar diplomacy.’ CEOs of multi-national corporations are like Roman generals. Their excessive power may bring down the Republic as surely as did the Roman Emperors.

Will historians of the latter part of the 21st century look back at the last 30 years as the most dramatic transfer of wealth and intellectual property in the history of mankind? Will electronics industry executives of global multi-nationals be praised as heroes, or were they just dead wrong?
Post a comment on our blog with your opinion.
 

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