Posted on 27 Nov, 2014 by Neil Sharp
When you first partnered with your Electronics Manufacturing Service (EMS) provider I’m guessing that unit pricing was an important issue to you?
Whilst cost is only one of several factors you should consider when selecting an EMS company, it remains an area that is closely scrutinised in any outsourcing decision. And once you have selected a partner that you trust, and agreed the service level parameters you need from them, cost - and specifically cost reduction - is likely to remain an on-going agenda item during your discussions.
If your product has been manufactured using the same materials and process since inception, how and where then do you squeeze out additional savings without compromising aspects of service delivery, i.e. product quality and delivery? This blog post looks at some of the steps your Contract Electronics Manufacturing (CEM) partner should take when embarking on a cost down exercise, and which areas to focus on in order to help deliver tangible results for you.
Defining the project team
For the best results your CEM partner should create a cross-functional team, so that a variety of ideas and experience can freely exchange during the brainstorming stage of the exercise. Typically, this team would include production operatives, engineers and purchasing staff. It’s likely that your own internal contact will also become the project ‘sponsor’, so they can discuss the progress and initial findings with you. If you originally nominated suppliers on the key cost drivers that make up a significant proportion of the overall cost, then your CEM provider is likely to want them to join the project team also.
Agreeing the baseline cost
In order to really focus the team in the right areas, your CEM provider will need to establish the current raw cost figures. Over time, it’s likely that costs have fluctuated both ways, so before any cost reduction exercise begins it’s important to break out the current material costs, labour content and any handling margin or charges applied to each of your products. Experience suggests that 80% of the overall cost for any electronic or electro-mechanical product resides in the materials so it makes sense for this to be the first area your CEM provider pursues.
Analysing the material costs
The next step is for your CEM partner to break out these material costs further. It is recommended that the materials are grouped together, for example, machined parts, sheet metal, bearings, cables, electro-mechanical parts and electronic components, etc. Once separated out, a value and percentage of the overall material cost can be allocated to each subset; this enables the team to focus on the right areas. There’s clearly little benefit in looking at, for instance, cables if these make up less than 1% of the overall cost, when there are bespoke machined parts that make up 30%.
Using a fresh pair of eyes
Your CEM provider should physically lay out all of the constituent parts that make up your product. Each of these should be clearly labelled and then grouped together in material sets. This simple exercise can immediately start to produce powerful results. For some members of the project team this could be the first time they have physically seen all of the materials used in your product. As an example, it may become obvious to the purchasing members that there are very similar parts within the product that are currently sourced from multiple vendors. Or else, it may be clear there are subtle differences in material specifications which, if standardised, could realise potential cost savings.
The team should be encouraged to review the parts in front of them and make suggestions (no matter how bizarre they may sound) as to ways the cost of the bought in parts might be reduced. All thoughts and suggestions should be written down - flip charts and post-it notes work well here. The point of the exercise is to simply capture all of the thoughts of the team, not to debate or dismiss them at this stage.
A similar exercise should then be carried out for the labour content of the product; this time, the team should examine the production process, and talk to the operators about their views on achieving process efficiencies. This should also extend to functions outside of the actual build, such as test and logistics, where there are often opportunities for ‘time stealing’ activities to accumulate over time.
Taking time out to reflect
Once both the material and labour exercises have been completed, the notes compiled by the project team can be worked on. A number of trends are likely to start to emerge so your CEM partner should look to group these into categories. Example categories may include:
- Materials - are there any potential savings associated with how and where the materials used within your products are sourced?
- Design - are there any potential savings relating to product design or material specification?
- Process - are there any potential labour efficiencies to be gained through changes to the manufacturing process?
Looking at each category in turn, the team can then decide if the ideas have merit and can be taken forward. Any suggestions that the team feel should not be taken forward, for example a request to change material specification which has previously been rejected, should be discarded so that those remaining can form the beginnings of a SMART action plan.
Turning notes into SMART actions
One of the most important stages of any cost down initiative is to turn the ideas and suggestions into actions. Your EMS provider may find that they are able to make some changes immediately, such as those relating to their internal production line process. Others however, like design changes, will of course need your input and approval first. It would be the role of the team sponsor to assign specific actions to the relevant team member, progress them internally, and then keep you, the customer, abreast of the outputs along the way.
So, there you have it, six steps that your CEM provider should take when approaching cost down exercises on your behalf. Whilst some Original Equipment Manufacturers (OEMs) feel it necessary to set year-on-year cost reduction targets for their EMS providers, it’s important to make sure that this doesn’t drive the wrong type of behaviour and start to impact on the integrity of your product. But, is this really a good thing? There will always be another company that can manufacture your product cheaper. John Glenn, the first American to orbit the Earth, wasn’t convinced when he was quoted as saying: ‘As I hurtled through space, one thought kept crossing my mind - every part of this rocket was supplied by the lowest bidder’.
In my opinion, it’s vital that product quality and service delivery remain just as high up on the agenda when conducting your regular business review meetings with your EMS partner.
Image by Howard Lake