Download a tale of two strategies

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
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•
•
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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
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•
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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.