A Movie, Not A Snapshot

2015-01-13 06:00:00


By: Charlie Barnhart

Recently we were asked to explain how CBA's service offerings helps OEM companies formulate, execute and better manage their external manufacturing solutions.  In the simplest of terms, CBA's research, insights and tool-set provides OEMs competitive advantage by benchmarking both their approach and practices on a best in class and/or like-kind, scale-equivalent basis.

Why is this important?

Because business is an inherently risky activity, the best way to succeed is to know something your competitor doesn’t and then use that information to enhance your bottom-line versus theirs! Sounds easy, right?

As is typical, the devil is in the details.

One of the images we use to illustrate how OEMs can capture their total costs to achieve this advantage is to visualize the outsourcing engagement as a movie, rather than a snapshot.  This technique is particularly 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 and that our proprietary approach is one of the very few way to assure consistency and standardization to a process that historically has been full of gamesmanship!

In our opinion the costs to the OEM should be viewed as falling into three buckets:

  1. Price paid to the EMS,

  2. Sum of one-time and recurring costs accrued by the OEM internally, and the

  3. Monetized 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 literally the key to success when outsourcing.

The first of these elements ‘Price paid to the EMS’ is supported by CBA’s Global Pricing Methodology (GPM).  Not surprisingly, without an accurate modelling algorithm, the price that ‘should be’ paid to an EMS can be a mystery, primarily because of the games played in both the quoting and ongoing pricing of the service offering by the EMS.  Therefore 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 GPM is a comprehensive approach intended to bring consistency to this process.  OEMs that use this model gain significant ‘insider insight’ and visibility into the mystery of EMS pricing.

Benchmarking an OEM’s internal spend, is the second area of cost that OEMs need to understand and is addressed by CBA’s OEM Internal Spend (OIS) module.  Yes, OEMs experience significant internal costs in both the initial execution and ongoing management of their external manufacturing solutions (based to a very large extent on the approach used.) Unfortunately, these costs can be very difficult for OEMs to track over time and therefore it is imperative for OEM’s to have access to and consistently apply a reliable modeling tool.

Compounding this situation is the fact that these costs include both one-time (‘non-recurring’) and recurring expenses.

One-time costs include things like NPI (e.g. tooling, supplier selection, etc.) whereas Recurring costs include purchase price, cost of logistics, and internal support of the outsourcing program. Therefore to estimate the totality of cost on a per unit basis, the OEM must add the estimated one-time and recurring costs, and then divide that by the total number of units produced during the life of the program (there’s that “It’s a Movie, Not a Snapshot” thing again!)

Lastly, valuable insights can also be gained from failed cases-studies, especially over time, and that’s where CBA’s Global Risk Module (GRM) comes in. This simple to use algorithm, along with its associated geographic risk constants, is used to both estimate and monetize risk on a geographic basis. A tool now broadly used throughout industry and academia to monetize geographic risk.

Bottom-line, here at CBA we call all of the above, the ‘True Cost of Outsourcing’ model and teach all three methodologies to OEMs in our two-day class called the EMS Pro Workshop!

 

For more information, please contact:

Eric Miscoll
Managing Principal
Charlie Barnhart & Associates, LLC
eric@charliebarnhart.com
www.charliebarnhart.com
(817) 251.4929  Office
(817) 235.8698  Cell
 
 

(Originally Published on 8-22 -2011)


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