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A TALE OF TWO STRATEGIES Electronics manufacturing services (EMS) supplier Solectron ran the following cost analysis for an OEM customer that wanted to move more of its manufacturing to Asia. Scenario 1 Estimated annual cost savings: $37.8 million Actual cost savings: $7.6 million The OEM would • • • • Retain existing printed circuit board assembly (PCBA) manufacturing in Penang, Malaysia, and transfer more of its stable PCBA product-product not subject to wild upside/downside demand-to Penang Maintain its less stable PCBA manufacturing in Austin, Texas Leverage additional Asian sites as necessary Integrate systems in Penang and Columbia, S.C. Scenario 2 Estimated annual cost savings: $20.5 million Actual cost savings: $11.7 million The OEM would • • • • • Retain existing PCBA manufacturing in Penang, Malaysia (focus on stable, high-yield demand) Transfer the majority of its Austin PCBA manufacturing to Guadalajara, Mexico (focus on stable, high-yield demand) Maintain a small portion of its PCBA manufacturing in Austin (less-stable demand) Leverage additional capacity in Guadalajara or Austin as needed Integrate systems in Penang, Columbia, Austin and Guadalajara. In the above case study, Solectron found that moving manufacturing to Mexico would reap higher cost savings than moving it to Asia. The model showed a significant difference in missed sales (demand that could not be fulfilled within a specified time period), ECO/RMA costs (materials-related issues causing supply chain delays) and manpower (troubleshooting and travel expenses). PCBA carrying costs were also higher in the Asia scenario, because more buffer inventory—product on hand to meet possible upside demand—had to be maintained in the Americas. Lead times from Asia were too long to meet sudden spikes in demand. BEWARE THE COST OF OWNERSHIP Technology Forecasters' Global Pricing Workshop analyzes the costs associated with manufacturing onshore and offshore. The three actual case studies below compared the costs of manufacturing in the United States, China and Mexico. Case study 1 A low-volume/high-mix medical product for a U.S.-based customer was quoted in the U.S., China and Mexico. The product was ultimately manufactured in the U.S., because higher freight and cost-of-ownership expenses negated the savings from lower-cost China and Mexico. (annual volume measured in U.S. 1,000s) China Mexico Low-volume/high-mix PCBA and box build (large cabinet for medical industry) FOB factory/selling price $1,984 $1,938 $1,945 Freight cost $0 $26 $17 Cost of ownership $30 $110 $73 Actual cost to OEM $2,014 $2,074 $2,035 Lesson learned: Big, heavy, complex products utilizing lots of high-tech parts, sourced from regions such as the U.S., Europe or Japan, are often found to be more cost-effectively manufactured onshore when freight and cost-ofownership issues are fully considered. Case study 2 A medium-volume/high-mix printed circuit board assembly (PCBA) used by a U.S.-based telecommunications company was quoted in the U.S., China and Mexico. Ultimately, the product was built in Mexico, because it provided the lowest-cost solution and was geographically close to the end customer. (annual volume measured in 10,000s) U.S. China Mexico Medium-volume/high-mix PCBA (telecommunications product) FOB factory/selling price $1,307 $1,272 $1,284 Freight cost $1 $5 $3 Cost of ownership $9 $39 $23 Lesson learned: High-mix manufacturing (of moderately complex, medium- size products) no longer has to be done onshore—in this case, the United States. Cost-effective solutions are available "near-shore" in Mexico. Case study 3 A high-volume/low-mix portable consumer product for a U.S.-based customer was quoted in the U.S., China and Mexico. China provided the best solution, largely because of lower materials costs. (annual volume measured in 100,000s) U.S. China Mexico High-volume/low-mix PCBA and box build (consumer product) FOB factory/selling price $120.77 $92.40 $100.40 Freight cost $0.45 $1.10 $0.88 Cost of ownership $0.56 $2.36 $1.57 Actual cost to OEM $121.78 $95.86 $102.85 Lesson learned: For manufacturing high-volume, lightweight items such as consumer products, offshore locations such as China can be extremely attractive. In this case, the highest cost savings came from direct access to low-cost components from Asia. Low-cost labor was less of a factor. KEY OF TERMS: FOB/FACTORY SELLING PRICE —the per-unit price for each product assembled by a contract manufacturer for an OEM. This includes materials, labor and other overhead. (FOB, free on board, is the point at which the product's ownership and liability are passed from the contract manufacturer to its customer.) FREIGHT —the per-unit cost of shipping the product from the factory site to the customer. It does not include duties, taxes or other governmental fees. COST OF OWNERSHIP —costs above the product's selling price. This is what the customer spent, per unit, to support and maintain its relationship with its contract manufacturer. Cost of ownership can include employee time (purchasing and other functions), indirect expenses (such as travel) and administrative costs. It can also include costs associated with new-product introduction (NPI), production, end-of-life management and warranties. LOW VOLUME/HIGH MIX —the product requires a high number of different components, but is manufactured in units of 1,000s. MEDIUM VOLUME/HIGH MIX —the product requires a high number of different components, but is manufactured in units of 10,000s. HIGH VOLUME/LOW MIX —the product requires a low number of different components, but is manufactured in units of 100,000s. SOURCE: TECHNOLOGY FORECASTERS INC.