Posts Tagged ‘global trends’

It’s Time to Look Forward: Risk Factors #7-9

Friday, January 13th, 2012

By Charlie Barnhart

In the closing paragraph of article number 6 of this Risk Series I mentioned that “Risk is not always a noun (i.e. a probability) as it can also be a transitive verb (an actual exposure) and in the world of business its many underlying elements tend to pile one on top of another.” When I wrote these words, in my mind’s eye, I saw a stack of irregularly shaped blocks struggling to remain vertical. The vision of a Jenga game where no one wins as each bock is so interdependently connected that if even one was removed the entire pile would topple.

Not a pretty picture but here’s what it looked like…

At the top of the stack was the destabilizing influence of price reductions during periods of increasing cost being wobbled by the reduction of internal resources at OEMS just below it, then in the middle a shrinking demand cycle struggling to counterbalance the ever increasing velocity of change in business, and on the bottom, the process of geographic concentration slowing crushing the principle of institutional continuity out of shape.

But it wasn’t this image that worried me the most, as we spend a great deal of time at CBA thinking about how these individual pieces interact AND how their shapes evolve over time.

What worried me was the platform they were sitting on, a three legged stool of:

  • Unpredictable capital markets
  • Geopolitical unrest and instability
  • Overtaxed infrastructure in low cost regions

Why are these three elements so worrisome? Because, in spite of what you might see or hear from your favorite news source, geopolitical and geo-economics outcomes are simply beyond anyone’s ability to forecast.

Meteorological analysis is a good comparable, as even after centuries of study and the development of very sophisticated modeling software running on the world’s best supercomputers the farther you go out in time with weather forecasts the broader the range of error becomes. Same-day forecasts are usually pretty good, five to seven day projections are a crap-shoot and beyond that it literally becomes a “guess”.  The reason is simple; there are just too many variables. A butterfly flaps its wings in Singapore and three weeks later a hurricane begins to form over the Atlantic Ocean.

So given this reality how do you deal with unmanageable risks?

Our recommendation is “change the game.”  Playing Jenga in business is a bad idea to start with but then doing it on an unstable, unpredictable platform makes it even worst. A better game would be one that eliminates the “vertical stacking” of risk variables so that when the platform does begin to shake (which it inevitably will even if we can’t predict when) the blocks might move around a bit but hopefully won’t all fall off the stool.

What’s better than Jenga?

How about going back to the basics, like the fundamental tenets of business that we all learned and have practiced for many years? I know you know them…

  • Create innovative products
  • Produce them to high standards
  • Sell them at competitive prices
  • Enrich the customer experience
  • Build lasting value for your stakeholders
  • Be a good corporate citizen

Obviously each of these objectives can be fulfilled in countless ways, which is exactly as it should be. Business is all about creativity and competition; no one deserves or is given a free-pass. Success is only granted to those who are the most creative and diligent and then only until they are replaced by someone who can play the game even better.

This means that winning isn’t easy and unfortunately, perhaps because of human nature – perhaps because we’ve lost our moral compass, it has become far too easy to drift off the highroad into a swampland composed of…

  • Me too solutions
  • Marginal quality
  • Pricing gamesmanship
  • Enriching yourself at your customers’ expense
  • Short term thinking
  • Exploitation

Which I believe is the poisoned well from which excessive risk springs.

In this series we have reviewed each of the nine elements of risk that have more than doubled our Composite Business Index over the past four years.

Including:

  1. Prices are down but costs are up
  2. Fewer resources at OEMs worldwide
  3. The demand cycle has shortened
  4. Businesses are operating at higher velocities
  5. Supply chain concentration in Asia
  6. Loss of institutional continuity
  7. Unpredictable capital markets
  8. Geopolitical unrest and instability
  9. Overtaxed infrastructure in low cost regions

Wherever possible we have offered suggestions and alternatives. Where options were few we have provided insights gained from watching this situation develop.  We have tried to be direct and unambiguous in our presentation of the facts.

We have already notified our Outsourcing Navigator Council membership that we have raised our risk advice to “LIKELY” meaning that on an industry average basis it is now likely that an OEM will experience a serious disruption in their supply-solution in CY2012.

Yes, the current situation is that bad.

Bottom-line, do yourself and your stakeholders a favor and do something – TODAY – to start mitigating risk. Looking over your shoulder is a waste time you can’t afford; the risk is directly in front of you!

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Risk Factor #6: Loss of Institutional Continuity

Wednesday, December 14th, 2011

By Charlie Barnhart

The issues surrounding this risk factor are subtle and difficult because they pertain to the fabric of the outsourcing rationale, and theoretically have been resolved ages ago. What we mean by institutional continuity could be confused with the concept of ‘core competency’. As most will recall, companies were advised to outsource all but those activities that were considered ‘core.’

I want to be crystal clear about this: institutional continuity is not related to the ‘core competency’ of an organization. I have always felt that the latter was a very misleading concept. Why is it useful to consider activities in this manner? Does it mean that a company has ‘core incompetencies’? Outsourcing something you can’t do very well is obviously very risky; and the current state of many of the outsourcing relationships we observe in our consulting practice proves how risky it is. Most OEMs are not satisfied with their EMS supply solution, in spite of the ‘master-slave’ power imbalance that exists.

The loss I am talking about is deeper than the core competency discussion indicates.

Institutional continuity is what is elemental in an organization. It  relates to the way business is conducted, the company’s history and purpose; and how and why it exists. Does outsourcing in itself break institutional continuity? Not necessarily. But when you outsource everything – not just manufacturing, but design, logistics, customer service, accounting, IS/IT, and human resources – the system does break down, and I see that happening in some OEMs, especially in the past few years. So many pieces have been removed from the flow of the organization’s value stream that the value begins to leak out the holes.

To illustrate: in the US we have a Constitution, which has been the law of our land for nearly 230 years. Its power comes from the fact that it hasn’t changed much, so a body of law can be developed based on the expectation of continuity. Some people think certain parts are too flexible in fact, e.g. the Commerce Clause, originally meant to limit Federal power over the states, has been interpreted to allow most anything.

But what if we did change the Bill of Rights and other parts of actual Constitution itself every decade or so? What if, like at the state level, it was easier to amend? What if during some difficult times we threw out altogether the First Amendment guaranteeing freedom of speech, or the Fourth Amendment prohibiting unreasonable search and seizure. There would be far less stability in the courts, and among lawmakers and eventually the country would no doubt devolve into chaos.

This is the risk we are talking about related to loss of institutional continuity. It is why businesses fail — they lose their sense of purpose and some central competitive advantage slips away. This can happen at any size company, in any industry, and outsourcing too much, too often, can be a symptom, but it isn’t the disease itself.

In electronics companies, where innovative products are part of the institution’s DNA, outsourcing the manufacturing of those products can lead to a loss of the ability to find the competitive advantage in this skillset. I can’t tell you how many times we hear OEM outsourcing managers saying that all EMS companies are the same. Granted, the marketing departments in the EMS industry sometimes fail to communicate their company’s unique value. But the OEM has often lost the insights required to identify, understand, evaluate and, most importantly, leverage the unique and varied capabilities that exist in the EMS industry. CBA will be talking more about this in future blogs.

Look at Hewlett Packard. This company began when two EE’s, Bill Hewlett and David Packard, started building test equipment. The company’s history with these two men has always been part of the institutional continuity of HP. I remember visiting the company and seeing the two partners’ desks left intact since their retirement. Now, I wonder how potent that history is for HP — and if this isn’t a good example of the risks associated with loss of continuity as the company has considered abandoning hardware altogether. Certainly HP has faltered in the past 18 months.

In chasing “low cost” at any price, many electronics companies have taken their eye off the ball of their own businesses. And continue the sports analogy, it is similar to what happened to the San Francisco 49ers football team.  In the 1980’s the 49ers developed the most replicated model in professional football, the aptly named “West Coast Offense.”  This was the brainchild of legendary coach Bill Walsh, facilitated by owner Eddie DeBartolo, and executed by Hall of Fame quarterback Joe Montana.  Deploying this model, the 49ers won five Super Bowls and were named the “Team of the 80’s.”  Then in the late 1990’s things started to go wrong.  A new owner, a series of new coaches, and various quarterbacks thought they could easily continue the success of the franchise while also changing the underlying factors that had allowed the team to be successful.  The team was losing its institutional continuity. One coach, Hall of Fame linebacker Mike Singletary, even stated that the position of quarterback was not the most important position on the team.  How wrong he was!  The result was that the 49ers have been a sub-par team for over a decade and have not made the playoffs.  They are only now reclaiming some of their past glory,  by many accounts by going back to the principles and style that initially made them great.

Risk is not always a noun (i.e. a probability), it can also be a transitive verb (an actual exposure) and in the world of business its many underlying elements – including loss of institutional continuity – tend to pile one on top of another. Until ultimately, we see them show up as the 40% increase we’ve recorded over the past four year in the Composite Business Risk Index.

I think it’s time to say “enough is enough” and start thinking about how to recover what we have lost versus focusing on what else we can change.

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Risk factor #5: Supply chain concentration in Asia

Thursday, November 3rd, 2011

By Charlie Barnhart

What if these stories were in today’s news?

Widespread Destruction
The morning after China was struck by the most powerful earthquake to hit the nation in recorded history the disaster’s massive impact is only beginning to be revealed. Rescue efforts began with first light as military helicopters plucked survivors from roofs and carried them to safety. The 8.9-magnitude temblor, centered near the east coast of China, killed hundreds of thousands of people, caused the formation of 30-foot walls of water that swept across rice fields, engulfed entire towns, dragged houses onto highways, and tossed cars like toys.

“The earth shook with such ferocity,” said a US visitor “I thought things were coming to an end … it was simply terrifying.” Buildings shook, heaved and collapsed by the score, and numerous fires ignited. Chinese media reported, hundreds of thousands of people were missing and millions were displaced. Countless households are without electricity, said China’s ambassador to the United States.

Nuclear Meltdown
A nuclear reactor near Qinshan, south of Shanghai, may be starting to melt down after China’s biggest earthquake on record hit the area yesterday. Fuel rods at the No. 1 reactor at the plant run by China Electric may be melting, Nuclear and Industrial Safety Agency, spokesman said by phone today. “If the fuel rods are melting and this continues, a reactor meltdown is possible,” an inspector said. A meltdown refers to a heat buildup in the core of such intensity it melts the floor of the reactor containment housing. Luckily winds in the area of Qinshan plant are blowing at less than 18 kilometers per hour mostly in an offshore direction, according to a 4 p.m. update from the China Meteorological Association.

Supply-chain Impact
Companies both in China and around the world have already begun feeling the sting of supply chain disruptions resulting from the catastrophic earthquake and its aftermath. In addition to the damage done to factories in northeastern China by the quake itself, companies must contend with ruined roads, fuel shortages, and rolling power blackouts. Many companies are not sure when some of their facilities will be able to resume production, creating uncertainty for companies further up and down the supply chain.

“This is serious and it’s still difficult to evaluate; you have the earthquake, you have the tsunami, rolling blackouts, and fuel shortages hitting at the same time.” The sectors hardest hit are consumer goods and electronics companies, both well-represented in China. “We still don’t know the full extent of what can be done to substitute for the affected parts,” a spokeswoman said.

Electronics Companies Zapped
Many companies in China have closed their plants and generally aren’t sure when they will resume operations. Typical is XYZ, which said on Tuesday that it would partially restart operations at one facility while six other plants remain idle with no estimate of when they will come back online. Part shortages are a major issue. “If the shortage of parts and materials supplied to these plants continues, we will consider all necessary measures, including a temporary shift of production overseas,” they said on Tuesday.

Another local company managed to get one factory back into production this week, while several others remain closed. Additionally, ABC, one of the world’s largest chipmaker, has only managed to restart four of its 22 facilities. The company said the rolling power outages were disrupting production at many of its plants.

“There are a huge number of little bits of the high-tech food chain which are done nowhere but in China,” Jane Doe, senior investment manager of MMM Equity said. “Nobody else has the capacity, and in some cases the technology, to do it.”

Hopefully by this point you’ve realized that these news articles were actually from the horrible catastrophe that struck Tohoku, Japan on March the 11th, 2011. The only thing we’ve changed in the copy was the geographic location, the scale of impact (i.e. increased the numbers in these stories to reflect the differences in the populations in these two areas) and the names of the entities cited.

But what if it really had happened in China instead of Japan? What would the impact have been on the global electronic industry?

We are not going to argue the proportional concentration of electronics related resources in Japan versus China or quote endless statistics on what percentage of this type of material or that type part are controlled in which geography. Everyone has their favorite source for this data and we encourage the reader to select whichever they feel most comfortable using; we all know what the reality of the situation is.

Over the past decade the global electronics supply-chain has migrated to Asia with the majority of it concentrated in the river delta, industrial hubs of China.

Bottom-line: if a Tohoku type of event occurred in one of these regions of China today it wouldn’t be weeks or months for the industry to recover, it would be years. Global businesses would lose billions if not tens of billions of dollars in revenue, lay-offs would be in epidemic proportions, even enterprises with rock-solid balance-sheet would immediately switch to a survival mode of operation (i.e. meaning there would be widespread failure of any supplier/service provider whose business was related to either discretionary or B to B spend) and some significant percentage of OEMs reliant on a commodity-based business model would simply go out of business.

It’s harder to think of things that wouldn’t be impacted, than to think of those that would.

We have a model for what happens when a critical resource is concentrated in just a few areas, like oil. Supply and demand is artificially managed (to control prices), geopolitics vs. the market dynamic becomes the basis of distribution and strategic interests are protected (read: wars are fought). Not a pretty picture.

Are we overstating the probable outcome? Perhaps, but to be honest we don’t think so. What we do know for certain is that a gentleman named Edward Aloysius Murphy, Jr. once said “Anything that can go wrong will go wrong.” I just hope the term “China Syndrome” doesn’t end-up taking on a whole new meaning.

Closing note: We apologize to anyone we may have offended by using the consequences of the Tohoku tragedy in this article to make a literary point. Our hearts go out to the people of Japan and those around the world who were impacted by this cataclysmic event. We recognize that it was not only a natural disaster but a human one as well.

NEXT ARTICLE: Risk Factor #6: Loss of institutional continuity

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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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Executive Summary: China vs. Mexico research

Wednesday, August 31st, 2011

Download a free Executive Summary of Eric’s ONC Special Report Mexico vs. China: An Objective Comparison for North American OEMs. The summary includes the study’s rationale, Table of Contents outlining survey findings related to OEM perceptions of the strengths and weaknesses of the two regions, and a discussion of EMS trends, including regionalization and total cost of ownership analysis.

Download Executive Summary here>>

Contact Eric@CharlieBarnhart.com to find out how to get a copy of complete report.


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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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