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Electronics Production | November 09, 2009

Just in Case (Study)

By Charlie Barnhart: Earlier this year we worked with an OEM client on a case-study involving serial supply failures in China. The OEM is a well known, publicly traded, industrial equipment provider with over twenty years of outsourcing experience.

The EMS companies are both reputable industry sources; one headquartered in Asia the other in North America. The project was a forecast based, batch build of a relatively simple controller-type box (less than a dozen configurations) in single container-sized weekly quantities. In this case, supply failure was defined by the OEM deciding to pull the business from one EMS Company and move it to another; which has now occurred twice. In other words, the OEM is now working with their third EMS supplier on this project (in less than two years). Hopefully, I’ve got your attention. Before we continue, please respond to the following: What was the root cause of the failure in the above example? 1. Intrinsic problems with manufacturing in China 2. Issues related to the OEM’s approach 3. Issues related to the EMS value proposition and/or execution 4. All of the above 5. None of the above 6. If you don’t get to the point PDQ I’m going to stop reading this article! The correct answer is 6, which is the one you probably chose as more than a few of us working in Outsourcing (either OEM or EMS) suffer from a chronic and debilitating psychological syndrome we call “Recognizing Realities Deficit Disorder” or R2D2. This is actually a weaponized version of the more familiar Attention Deficit Disorder (ADD). No worries, it’s not your fault. We don’t blame you. You didn’t catch this disease because you were a bad girl/boy and refused to eat your spinach. You contracted it by working in a crazy industry that has made you (well…) a little crazy. And for senior management, this disorder is even more serious as it can actually cause blindness. The folks who are really to blame are (in no particular order): 1. Every business school who stopped talking about Joe (if you don’t know what that means then it doesn’t apply to you). 2. Everyone who stopped thinking about manufacturing the day the term "core-competency" was coined. 3. Every C-Level Executive who thinks more about EPS than product innovation (not to be confused with market or business innovation, as those are the dung heaps where the R2D2 germs thrive!) 4. Anyone who works on Wall Street or any other Street where people discuss credit-default swaps or any other imaginary financial instrument. 5. And of course George W. who is by default the recipient of all not otherwise assigned blame. With that said, let’s (finally!) take a look at what happened, why it happened, and what we can learn so it doesn’t happen to any of us in the future. THE GOOD There’s nothing intrinsically wrong (then or now) with manufacturing in China; obviously, FIT (Flexibility, Integration and Timing) is critical when working with any outsourcing solution and especially so when working with geographically remote solutions. Nevertheless, many of the best equipped, operated and technologically capable electronic manufacturing facilities in the world are now located in China. In our case-study China FIT was not the problem, and even though the demand and supply solution were not 100% congruent from a needs/value-proposition perspective they were reasonably within the boundaries of many successful comparables. Nor were there any substantive technical or organizational deficiencies at either of the EMS companies; the OEM’s requirements and the EMS companies’ capabilities were reasonably aligned. Further, the OEM, while probably not 100% appreciative of the complexity of doing business in China (more on this later), accurately articulated the requirements of their program to the EMS companies and the EMS companies clearly understood and agreed to these requirements. In fact, the EMS applied (I suspect much to their chagrin) considerably more technical and operational resource to the program (before they were eliminated) than they had originally committed in their quotations. THE BAD The OEM, who had received training on the risk-module of the Outsourcing Navigator Series, apparently forgot… or perhaps more accurately their executive management elected to forget… that to implement a cost effective and risk appropriate Outsourcing solution there needs to be an alignment between the Expectations & Internal Resources of the OEM and the Capabilities of the Supply Solution. Success (or failure) isn’t just about the Expectations of the OEM and Capabilities of the EMS; the OEM also needs to bring sufficient Internal Resources to the union to support their Expectations! If you’re an OEM, you know that your True Cost of Outsourcing isn’t just what you pay your EMS suppliers but also includes your internal investment for staffing, travel, experience leveling (where gaps exist… like, doing business in China), IS/IT and Design Engineering support, technology sharing & training (again for where gaps exist… like, proprietary software and testing), forecasting management, etcetera. Make no mistake, when these expenditures are withheld and/or simply eliminated, the probability of failure increases. This is not speculation, it is demonstrable by this and dozens of similar case-studies. THE UGLY Yes, you guessed it, after much chagrin and teeth gnashing the root-cause failure was determined to be a COST CUTTING program. But not some run of the mill cost cutting program – a new punitive R2D2 form of cost cutting where everyone is “punished” by cutting costs whenever there is a problem – intentional or not, that’s what actually happened. All of which reminds me of a tee-shirt that says, “The beatings will continue until morale improves.” While this was going on those who worked at the OEM (especially on the outsourcing team) were not able to overcome this most severe outcome imposed by the R2D2 thinking, and so maintained a very low profile and ultimately millions of dollars were squandered to save a few thousands. Fortunately today, some progress has been made, the product has been moved back on-shore (to Mexico) which has reduced the level of spend required to support a geographically remote solution and there has been some (if limited) acknowledgement by management that the CEO’s dictate to go to China and their simultaneous budget cuts were “a bit asynchronous” (wouldn’t it be cool if buzz-words caused the speaker’s head to explode?) What’s the bottom-line? Even smart people can make bad decisions – especially when they’re in the R2D2 zone. We need to slow down and get control. We’ve all been doing this for a long time and know that short-cuts and half-measures end up costing, not saving money. You want to go manufacture in China – great – remember Copy Exact? It worked 20 years ago and it will still work today. “Seamless integration” of a manufacturing solution is all about substance not some passing R2D2 fad! ----- Author: Charlie Barnhart, Barnhart & Associates
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