Mini Case Study:
How does a company manage a huge project like outsourcing without distracting critical resources from their operational responsibilities for six months? What rates, fees, and mark-ups are reasonable for a company to pay for contract manufacturing (CM) services? How can a company minimize its exposure and maximize the benefits by incorporating the right terms and conditions in the supply agreement? Where can an organization find the extra bandwidth needed to address, in a proactive manner, all of the process, system linkage, and communication issues that put product availability at risk during the transition between CM partners?
Problem:
A medium sized OEM that makes broadband modems and complex head-end products was unhappy with the performance of its contract manufacturer (CM). The company also wanted to lower the cost of the product and improve the value of the contract terms but they were uncertain about the opportunities that existed. Additionally, the company kept a very lean management structure in order to control costs and had no spare resources to lead a project of this size and importance.
Solution:
Symphony was able to help this company with the expertise and bandwidth they needed. We were able to work with the internal team to create a successful project from supplier selection to contract negotiations and managed the project through to production ramp. Our work was broken down into seven major elements.
Evaluation of the current situation: Symphony facilitated internal conversations to get to the root of what was working within the existing CM relationship and what was not. We also spent time with the management team to clarify their expectations. From there we were able to establish objectives, evaluate various strategic options, and develop timelines and metrics to measure the success of the project.
Partner selection criteria: Symphony worked with the team to articulate the needs and the wants with respect to a new partner. Based on the initial input, the team established a set of desired business and technical criteria for selecting the new CM. A few critical items were the CM’s financial position, geographic presence, relative size, NPI resources, manufacturing technology, and materials management capabilities.
Information gathering: The team began gathering information on potential CMs and began filtering out those that did not meet minimum expectations in some of the critical areas. In parallel to this effort, we sent the CMs a descriptive memorandum that described the business opportunity more fully and a detailed request for information (RFI). Over the ensuing weeks, we had numerous meetings, presentations, and conference calls with the various CMs and their management team. We also involved the executive management at the company in some of these meetings. This gave a strategic air to the discussions and allowed the executives to begin building high-level relationships. After all of the discussions and meetings, we ranked the CMs in order to narrow the list to a handful of players with whom we would invest more time.
Site audits: The next step was visiting the CMs factories that would actually be involved in building the product. Symphony provided the team with a detailed framework for a successful audit. The team, with Symphony’s guidance, then tailored the audit sections to meet the particular needs of this business. The audits were an important step in the process for several reasons:
To maximize the benefit of the on-site audit, we made certain that they were well planned and orchestrated. Symphony took the lead on coordinating all aspects of the audits. Each team member had critical areas he/she needed to cover. The audits focused on finding real examples of the processes that were working and those that were not. The auditors were encouraged to follow threads through the organization. One question that started with Supplier Management might lead to a past quality problem that might lead to a documented corrective action. At the mid-point of each on-site audit, we would check the progress in each of the sections and shift resources as necessary to ensure complete coverage of critical topics.
Selection of final candidates: After the on-site audits, it was time to select the CMs with whom we wanted to start detailed negotiations. In addition to performance and service criteria, we needed to consider pricing and economic factors. In this situation, our task was straight forward because the project only involved a half-dozen products. We asked for, and received, detailed quotes in specific formats. This allowed us to compare pricing easily from the CMs. In other projects we have managed, where there were hundreds of products, we had to take a more complex approach looking at a market basket of components and value-added elements.
Part of the decision-making process involved objective data like pricing comparisons. We also had to manage the more subjective data like audit scores and people’s perceptions of the different CMs. Symphony played the challenging role of facilitating the group discussions to get consensus amongst the team members. Our goal was to select two suitable CMs to take to the contract negotiation phase. It was critical to the project that all of the stakeholders had a voice in the selection at this time because as we entered the negotiations phase we would need to involve a more limited set of personnel from the company.
Supply Agreement: Negotiations can be a complex form of art. In the case of outsourcing projects, there are so many variables to consider that success is contingent on a well thought-out negotiation strategy and up-front research on options and boundaries. On this project, Symphony managed all of the negotiations on contract terms, pricing, and sub-agreements dealing with inventory sales, asset transfer, and business valuation. We coordinated with people at the OEM including key management, the legal counsel, and the executive management team to forge agreements that were comprehensive and provided recognizable business value. It is easy for companies to underestimate the importance and the time required for this phase of the project. A company has its maximum leverage before it gets legally or mentally locked into a specific CM. This is the time to explore all creative means of securing value. Sometimes this comes in the form of a direct benefit like price or business valuation. Other times this is in the form of contract terms that lead to lower financial exposure or more services. The swing in value between a “good” contract and an “excellent” contract can easily be 5-10% of the total contract value. In this case, Symphony had the time and the expertise to get the results.
Business Transition: The project reached a significant milestone when the agreements were finished and signed. While it was satisfying to have that phase completed, we knew from experience that the business transition phase was the most work and represented the greatest risk to the company. Once again, organization and leadership were the cornerstones to success during this phase. Since we had no investment in legacy processes or decisions, Symphony could be objective about facilitating the decisions that were best for the company and the project. Also, since we had no operational role in the company, our work on the project was not subject to daily distractions. We had the bandwidth to deal with all of the emerging issues and to be proactive about addressing potential roadblocks before they became serious issues. More specifically, Symphony’s role was to manage all of the project meetings, to establish an “action list” and track progress with task owners, to coordinate business process reviews, to facilitate problem-solving sessions on complex issues, and to prepare various forms of communication to keep people and the management informed on the project.
By definition, the project involved a significant change in the supply chain for the OEM. That meant that the lifeblood of the company, revenue, was also affected. Symphony provided a type of insurance policy for the OEM. We provided skilled resources to focus on the project. This allowed key managers to focus on their areas of expertise rather than on project administration.
Results:
We had three goals as we started this project: 1) better performance by the chosen CM; 2) a smooth production ramp for the new product; 3) significant improvement in the financial arrangements. The OEM was very happy with the results from this project in all three areas. Since this initial project, this company has used Symphony on two similar projects for different parts of their business.
Here are some specifics. Based on feedback from the OEM, the new CM has been performing better in all areas, as compared to the previous CM. They are more responsive, more accessible when problems arise, deliver better quality, provide more accurate and timely data, and deliver products on-time. While a lot of credit goes to the CM, we think the positive feelings also have a lot to do with a good match between the OEM and the CM.
The production ramp went smoothly in general. We had two unforeseeable technical issues that presented some challenges. Not only did we have to work with the engineers to find a solution but we also had to scramble to make up some lost time. In both cases, we were able to rally the teams together to solve the problem and recover as much time as possible. The schedule did slip a couple weeks but the CM was able to recover the quantities within the quarter.
Pricing, for the products involved, came in 6.2% lower than the previously optimistic estimates. More important was the advantage we were able to bring the company in non-price areas. The supply agreement was very thorough and included key terms that were favorable to the company. When we took the new contact terms and applied them to known business situations that had occurred in the previous 18 months – we could show $3.1 million in benefits (~9%). These non-price negotiating points are often missed in this type of project. Overall, the negotiations were very successful and the contract became the model for future agreements.