Electronics Production | October 25, 2011

Risk factor #4: Businesses are operating at higher velocities

(Part four 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 three article of this series we talked about…

1.) OEMs demanding continual, on-going price reductions even during times when costs are clearly going up, not down.

2) How this disintegration of respect for the supply-chain has resulted in some OEMs now targeting employees managing outsourcing programs for elimination.

3.) When the demand-cycle shortens the supply-solution needs to be shortened.

These are three issues deeply rooted in cost-cutting. Pay less for what you buy, buy it with fewer people and (heaven forbid) never hold any inventory. Sounds like Wal-Mart. I suspect you never thought you would be working for ‘Wal-Mart’ when you spent all that time preparing for a career in high-tech, huh? Bummer; get over it.

Anyway, now we are going to shift (in this and the next two articles) away from cost cutting and look at how a company’s business processes can result in added risk. In other words, what I call systemic migration to core-incompetency.

Let’s start by agreeing that Business is an inherently risky proposition and today’s maximum velocity business models based on complex, highly leveraged solutions make the situation even worse. Nevertheless, the trend is clear, electronic branding companies (or OEMs) continue to outsource more functions, more often, to more geographically remote locations than ever before.

Why do they do this?

Some might say they do it to coldheartedly bolster corporate profits by chasing low-cost labor around the world, and given the often negative human impact resulting from laissez-faire globalization the argument seems… well, compelling. But to gain competitive advantage in today’s highly commoditized marketplace, where every competitor exploits every other competitor’s slightest weakness (perceived or actual), velocity (versus innovation) seems to be the name of the game.

So what is a conscientious manager to do?

Acknowledge that high velocity means higher risk.

Accept accountability for any issues resulting from this risk and (at least try to) do something about it. While this may seem an unreasonable burden to place on the already hard-working folks who manage outsourcing solutions, consider who loses the most when your company’s customers’ orders go unfulfilled, or when your company fails to meet its financial commitments, or when your CEO can’t report an ever increasing level of profitability to Wall Street. Like it or not, the bottom-line is that the bottom line dictates whether your job will ultimately be at risk. Hey, someone has to be held responsible and you can bet your severance pay it won’t be anyone on Mahogany Row!

A good example of what we are talking about would be when an OEM decides to use an Original Design Manufacturer (or ODM) for a new product, as this decision is typically made to provide both a lower design cost and increased velocity in product introduction.

So what are the risks?

Starting with lower design costs the most applicable pitfall is unintentional creation of enterprise momentum as performing product design outside the company can result in the elimination of a capability or resource core to a business’ success (i.e. thus making it a core-incompetency!)

So how does a manager mitigate the risk of this happening?

The first step is to understand and estimate the impact related to the potential risks. In our ODM example a typical risk element could be:

That a key engineer decides to ‘jump ship’ as a result of seeing his or her co-workers being laid-off or passed over for additional training as a result of designs being outsourced.

And should this key engineer leave the organization, what would it cost to replace him or her? Or even worse, what are the potential costs of losing a key person to a competitor?

One way to estimate this would be to ask, does the probability of this happening, multiplied times the cost of replacing him or her and the lost revenue resulting from the exit of this key person produce a number larger than the potential saving from outsourcing the design?

If the answer is yes, then using an ODM is simply too risky.

Relative to the advantage of reduced time-to-market, the question is will the advantage gained by using an ODM really produce a benefit that exceeds the inherent risk associated with a higher velocity solution? A more difficult but not impossible question to answer as one of the potential pitfalls with the ODM model is what CBA has labeled “The theoretical kinetic energy risk to business (i.e., the v2 factor).”

Let me explain. Physics tells us that kinetic energy, or the energy of motion, is calculated as one-half the mass of an object, times the objects velocity squared.

Kinetic energy = ½ mass X velocity2

In other words, the larger something is or the faster it moves the more kinetic energy it possesses. But there is an interesting consequence in the final element of the equation: velocity squared. As whenever you multiply a number by itself, the product increases geometrically not linearly.

Let’s take a look at an example to see what this means.

If you square the number 2, the answer is 4. But if you square the number 3, the answer is 9, an increase of 225% for only a 50% increase in the original number. Throw a stone just a little faster and it impacts its target with considerably more force. Or reduce the time-to-market by increasing the velocity of the process and risk grows dramatically. Even as a theory, it is a very scary thought.

If you attended a business school you probably remember learning about the “potential energy” effect, which is the force accumulated within an enterprise as it grows larger. You were probably taught that if left unmanaged this force will eventually bring an organization tumbling down. The analogy in nature from which this effect is derived is that whenever you lift an object the process instills into it potential energy and this energy remains within the object until it falls back to its original height. In the case of nature this energy is derivative of gravity, in the case of business it is a function of chaos theory.

So the kinetic energy risk has a well-documented parallel in business and a strong basis in common sense. There is little doubt; using an ODM solution to reduce time-to-market will increase risk and it will increase it exponentially as the time element is reduced.

Bottom-line, perhaps a little paranoia about increasing the velocity of business processes would be wise. Remember, paranoia is only a disease when they aren’t out to get you! Given what’s going on today in the electronics industry, the economy, the US, and the world – a little paranoia seems more than justified.

Note: More information can be found in CBA's website. Follow this link.
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