Symphony Consulting Newsletter – Q1 2003
"Remaining Competitive in a Tough Economic Climate"
Although economists differ on whether or not we should prepare for a recovery or a double-dip recession, there seems to be agreement that when a recovery does come, the growth curve will have a modest slope. This means that companies will continue to compete for a limited market in most high-technology sectors. In this tough competitive environment, price erosion has become a fact of life for all.
What should your company do to remain or become competitive?
- Rethink your contracts and business arrangements with suppliers. Chances are that your agreements have not been updated to reflect the current economic conditions. A contract is not just a reference tool; it forces dialogue on business terms and conditions that are critical for the success of both parties. Unfortunately, most companies limit themselves with a singular focus on price. This “quote and go” mentality misses significant sources of value. According to one study, as much as 17% of the contract value can be found in non-price areas, such as:
- Reduced lead-times through postponement manufacturing
- Design collaboration on new technologies with suppliers
- Supply assurance and flexibility programs
- Competitive terms regarding warranty coverage and epidemic failures
- Protection against currency fluctuations
- Look outside your walls. It is important for you to understand the cost drivers in your supply chain other than component cost. Areas such as freight and duty, off-site warehousing, distribution and material mark-ups add costs but are less visible. Some of these sectors have gone through massive changes in the last two years and you should know whether or not your current solution is the most competitive in industry.
- Take advantage of manufacturing capabilities in lower cost geographies: Many large OEMs have been enjoying the benefits of working with their EMS partners in low-cost geographic locations for years. Still, a significant number of companies, especially small and medium size firms, have yet to realize the full potential of this option. Labor-intensive processes are still being performed in high-cost areas due to the perception that their product complexity is beyond the skill set of lower cost manufacturing areas. Capabilities in these regions continue to increase so it may be time to revisit your strategy. A move like this works the best when you have good documentation for your product and you are willing to invest in some training and start-up costs. The payback for your company could be impressive.
- Make smart supply chain decisions during the design phase: Approximately 80-90% of the factors that affect long-term cost and availability are set during design. Your company should be taking a few approaches during the design phase to capitalize on the unique opportunities available at this stage. 1) Put a firm, well thought-out cost target in place at the start of the project. 2) Determine the few parts or suppliers that will have the most impact on costs. Keep your options open and negotiate a solution BEFORE this part of the design is solidified. 3) Determine what resources to call on to help develop a solution that meets both technical and business needs.
- Seek your customers’ involvement: You might have made various assumptions about your relationship with your customers that may no longer be valid. Ask for their help in exploring ideas that would reduce the cost of doing business with each other, and make them a stakeholder in the benefits that result from your collaboration.
The clock is ticking:
It is as true now as ever: time is money. The economic climate has created an opportunity to restructure costs for your company. For most companies, this is not just an opportunity but a necessary step for survival. The key is to execute quickly so your company can begin to realize the benefits. Whether you are an OEM, an EMS company, or a component supplier, all of the five points raised above can help you reduce your total cost.
Helping clients achieve cost reductions in the supply chain is one of Symphony’s core competencies. We can develop and execute a plan for you that achieve bottom line results.
