© General | March 29, 2012

Mafia like methods put market forces out of play

I think increased competition - with joint mobilization between contract manufacturers and customers – provides enormous potential for improvement. Unfortunately this isn't always how it works in my field - a closed industry where market forces are neutralized and speculation encouraged. How it works in the electronics industry in some way resembles a governmental policy from a totalitarian economic state.
(Note: This article is translated from Swedish)

During the recession a few years ago, several component manufacturers in the industry closed down their production facilities. When demand rose again, component suppliers could not deliver according to contract manufacturer needs, that is, demand exceeded supply and we had a supplier-driven reality.

In an ideal world, we could find other suppliers, but this is often not possible in an electronics industry which requires unique components.

About the Author: Olle Hultberg is a civil engineer and entrepreneur with several successful start-ups under his belt. His professional career has focused on change management, which include a wide range of roles and industries. Olle Hultberg is also the author of "Managing complex change projects." In 2007 he acquired, along with Fredrik Berghel, EDC in Munkfors. Today the company is part of Inission group with production facilities in Stockholm, Gothenburg, Munkfors and Tallinn, and a turnover of 260 million Swedish Kronor. Olle Hultberg is the owner and president of Inission.
© Inission

Allocation is an important concept in this industry. As demand exceeds supply, suppliers benefit and prioritize components for our customers – but suppliers find it difficult to describe how this allocation works and it's natural to think they simply don't want to describe it.

As a contract manufacturer, we live in an industry with thin margins. Our core business is production and we compete through our efficiencies. A large portion of our costs are components and as these costs vary, this obviously influences our margins. As you might guess, it's not useful to have such an imbalanced relationship with our suppliers. The industry should therefore make a joint effort to balance the scale.

Our largest counter parties are distributors who import electronic components from manufacturers. They are part of the processing chain and often make good margins. They add little value since their function in many cases is only to be the messenger of the assignment statement.

One might think that contract manufacturers should skip the distributor level and buy directly from manufacturers, unfortunately manufacturers only interact with distributors so that possibility is eliminated.

With this background it's easy to understand the emergence of an extortion-like phenomena called spot-suppliers - they buy up components through pure speculation and sell at prices that can be 10-20 times higher. Unprofessional suppliers also send fake components without content or with the wrong content, worldwide.

We should change the business model so that it promotes the performance of distributors. I propose that our customers join us in changing structures so that we can source components from the best suppliers.

The savings we achieve by manufacturing in Asia is small compared to the what can be gained from promoting competition in the material supply chain.

In cases where we have managed to rebuild structures with a focus on lowering material costs, we have saved 15% of a product's total cost, while increasing flexibility and delivery reliability. Our company has a turnover of almost SEK 300 million and our customers would thus be able to save 45 million. The EMS industry in Sweden, with a turnaround of about 20 billion, would achieve a savings potential of staggering 3 billion. Many manufacturers move production to Asia in order to save corresponding value.
>>I want with this opinion piece to challenge the industry in general and purchasing managers in particular<<

So, where do we start?

I want with this opinion piece to challenge the industry in general and purchasing managers in particular: Dare to resist the promise of price reductions through contract manufacturing in low cost countries and focus instead on the structure of the supply chain.

Set targets for price reductions and work actively with your contract manufacturer. If you go this way, the savings will be big and also provide significant improvement in delivery performance. Together we have the chance to drop the word allocation from our industry vocabulary once and for all. So, where do we start?

Olle Hulteberg at Inission
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