Successfully competing in the market still means having the high-quality products your market wants, when and where they want them. However, the new twist is competing globally for available material, while maintaining enough operational efficiency to price competitively and still make a profit.
This calculus is further complicated by increased competition, changes in cost structure in traditionally low-cost labor markets such as China, and greater technological complexity.
Lean manufacturing principles continue to be a leading tool in addressing those challenges. This month we look at some of these trends and ways Lean philosophy can help companies lower total cost and increase their flexibility in addressing market requirements.
Challenge #1 – Variable demand. While some markets consistently have variable demand, a gradual recovery increases the number of companies with hard-to-forecast production requirements. Longer component lead-times and increasing component cost mean that poorly forecasted demand will drive higher costs. Yet echoes of the economic downturn makeincreased inventory unacceptable.
Lean manufacturing principles apply to both sourcing strategy and the actual manufacturing execution. From a sourcing standpoint, the focus should be on minimizing transport, overproduction and transactions. In high-mix, low-volume production, a supplier within the same region as the end market that responds on pull signals is likely to be more cost-effective than a supplier in a low-cost labor market that consolidates shipments.
At the EMS provider, there are several ways Lean philosophy can support this strategy:
Challenge #2 – Changes in traditional cost paradigms. Recovery has created several cost-changing dynamics. First, most Asian countries have had a much stronger recovery than the US and Europe. This has driven wage inflation and increased turnover. Demand that exceeds capacity in the semiconductor industry is inflating materials costs. Additionally, recovery has fueled increased demand in higher volume consumer products. This makes low volume, high mix or variable demand production much less attractive to large-scale EMS operations in traditional low-cost centers. Most OEM sourcing teams are recognizing that sourcing strictly by labor cost alone is not the best way to achieve lowest total cost.
As mentioned in Challenge #1, supplier selection should consider whether or not project complexity dictates a supplier specializing in high-volume production in a low-cost labor region or a high-service supplier capable of supporting variable demand. While the two aren’t mutually exclusive, analysis of variables such as labor content, likely lot sizes and annual volumes may show a clear best choice.
While materials typically represent the largest portion of product cost, the ability to significantly reduce materials cost in the current market is limited. That said, the ability for EMS providers to reduce cost through more proactive involvement with design for manufacturability and testability recommendations remains. A strong focus on DfM/DfT contributes to improved quality, minimizing very measurable costs of poor quality such as scrap, rework, missed shipments and product recalls.
This frontend focus may also identify potential procurement issues such as sole-sourced components or components with extended lead-times, enabling proactive substitution recommendations or broadening of the approved vendor list (AVL) before these issues drive added cost in the production process. A focus on minimizing transaction costs and raw, work-in-process and finished goods inventory can also help reduce overall cost.
Improvements in factory throughput driven by Lean philosophy can be another area contributing to potential cost reduction. Short production cycle times add schedule flexibility and help minimize inventory requirements.
Challenge #3 – Miniaturization. The world is getting smaller and so are most products. This drives complex products with small footprints that in turn drive greater need for quality in the production process.
From a Lean perspective, new product introduction processes, process control, inspection and test strategy should be carefully evaluated. Key points to consider include:
Challenge #4 – Increased customization. Many OEMs compete based on the ability to deliver outstanding customer service. In industrial products, customer service may translate to uniquely configured products or specialized end market support. Given today’s patterns of variable demand and reluctance to carry large inventories, supporting a high service customization requirement is not an insignificant challenge.
Lean philosophy can be applied to support customization requirements in a number of ways:
Challenge #5 – Sustainability. Component lifecycles are typically driven by consumer products. Yet, many medical, industrial and defense-related products have much longer lifecycles. Early identification of potential obsolescence challenges and contingency plans are important. Several Lean practices support a proactive approach to sustainability, including:
Strong supply-chain teaming efforts, including regular review of component lifecycle trends and technology roadmaps.
Robust analysis of potential issues during NPI, with clear recommendations for alternative sourcing strategies.
Strong program and materials management disciplines relative to understanding historical demand trends and setting appropriately-sized material buffers.
The EMS industry exists because of its ability to develop solutions to customer challenges. A holistic approach to implementing Lean philosophy throughout the organization provides tools for improving efficiency and reducing cost at every step of the process, regardless of challenges from evolving
Steve Fraser is vice president of operations at Epic Technologies (epictech.com); firstname.lastname@example.org.