Symphony Consulting: Newsletters

Symphony Consulting Newsletter – Q2 2007

"Busywork is killing your manufacturer's ability to execute!"

In our practice, we spend a lot of time in electronics manufacturing facilities, especially those owned by contract manufacturers (CMs). These organizations are running with a very lean staff out of necessity. Resources are scarce, margin pressures are relentless, and the rate of change is ever-increasing. And yet, in one glaring example, CMs are burying themselves in unproductive transactions.

It all stems from the basic policy that drives how demand for individual components are grouped together into a purchase order line item – in other words, the approach to order policy. Most companies use a components A-B-C code to establish this policy. For example, on “A” parts, a company might bring in a weeks worth of supply, “B” parts four weeks of supply, etc. Based on studies we have done, this approach is causing companies to process 2 to 3 times more transactions than are necessary or prudent. If you are an OEM and outsource all of your manufacturing to a CM, you might be tempted to say that this is the CM’s problem. But if you think about the number of times you have had these issues you might feel differently:

Have you received quarterly E&O (excess and obsolete) reports with inventory numbers beyond what you expected and wondered why more was not done by the CM to mitigate your liability?
Have you missed a shipment or delayed a product launch due to late components?
Have you had an engineering change that did not get implemented as you had hoped because some detail or deadline was missed?
Have you had a quality problem where you wished a more robust corrective action was implemented with the supplier?

In each case, think about what would be possible if the CM eliminated more than 50% of its purchasing transactions and freed those resources to address issues that are important to you. Also think about what those excess transactions are doing to the cost structure at your CM, thereby impacting your product cost.Although we have focused on the CMs, if you have internal manufacturing and use the same basic ABC order policy, you will have the same problems with cost structure and resource allocation.

Here are some questions you can ask to see how this issue might be affecting you:

1. Do you or your CM use ABC code to set order policy?	Yes	No
2. Do you or your CM have less than 10 levels of differentiation in your order policy?	Yes	No
3. Has the basic policy (e.g. A = 1 week of supply) been the same for the last 6-months?	Yes	No

If you answered “yes” to any of these questions then you have a significant opportunity for improvement. We have found that companies can get a 50-75% drop in transactions by moving to a more modern approach to order policy. In these cases, inventory also drops because overall execution improves as resources are better utilized. The bottom line is that there is no good reason to keep using the traditional ABC based approach which is ineffective and costly.

Symphony has analytical tools where we can map out the potential improvements you would see in transactions and inventory as you take a more modern approach to order policy. We can use your data or your CM's data to do the analysis and give you an expected "before" and "after" picture. If you have any questions or feel that we can be of service, please contact us at info@symphonyconsult.com or call (650) 948-3909.