CMs beef up SCM services
By James Carbone, Executive Editor, TechPlus Edition -- Purchasing, 1/25/2001 2:00:00 AM
Life used to be easier for purchasers at contract manufacturers. Fifteen years ago, most contract manufacturing business was consignment. CMs would build printed circuit boards for OEMs using parts that were purchased by the OEM and then delivered to the CM.
These days CMs aren't just building boards, but entire systems for OEMs. CM buyers are handling most of the day-to-day purchasing for the systems their companies are building for the OEMs. Most OEMs handle the strategic sourcing for the systems they outsource
The OEM negotiates contracts with component suppliers and the contract manufacturers will buy off the contracts. Typically the OEM lets the CM handle strategic sourcing of standard lower value parts. However, an emerging trend is for the CM to take on strategic sourcing and supply chain management for the OEM as well as the day-to-day buying. As OEMs rely on CMs more, they will entrust the CM with more responsibility to manage their supply chain.
"Every year, we get more customers who want to use our strategic sourcing groups," says Dave Otterness, director of supplier management, strategic materials at Flextronics. Those groups include a global commodity management group, global procurement organization. In those groups are commodity managers for semiconductors, connectors, plastics and passives.
Many of those customers are start-ups, says Otterness. Those start-ups are using CMs for strategic sourcing for several reasons. One is that the small start-up can take advantage of the buying clout of the CM. For instance, Flextronics spends about $8.5 billion a year on components and materials. "That's as big as some of our major customers," says Otterness.
"Some major customers believe they are the best negotiators in the world. But if you stack up the parts from our major customers, they are all over the map on prices," he says. "That's because one guy may be negotiating for 10 million parts and the other guy may be negotiating for two million. He will be convinced he has the best price in the world. The reality is he doesn't," says Otterness. In fact, some OEMs using CMs have elaborate price-masking systems to prevent the CM from knowing what the OEM is paying for the parts used in the systems that the CM builds for the OEM.
To determine if the OEM customer in fact is getting the best price Flextronics will do a "best BOM" (bill of materials) with a customer.
"We will take their best prices and our best prices and cost the BOM out so they can take advantage of both our strengths," he says.
Besides leverage, some OEMs are turning to CMs for strategic sourcing to be guaranteed supply of scarce parts. In times of shortages, major CMs get larger allocations of parts than small and medium size OEMs. "Customers can get only so much allocation," says Otterness. "We can go in and negotiate our own allocation and we can use some of our allocation for those key customers.
Who's important?
As contract manufacturing industry grows and CMs handle both day-to-day purchasing and strategic sourcing for OEMs, the role of supplier management and procurement groups at CMs will become more important.
Major contract manufacturers have dedicated customer teams for major customers. For instance, Flextronics will have a program manager and a corporate and operational program manager, and supply managers for key OEM customers.
"We have strategic supply chain managers. They work for global procurement," says Otterness. "They are responsible for interfacing with the customer in helping develop the customer's supply strategy and implementing our supply strategy with the customer."
As OEMs outsource more manufacturing and supply chain management to CMs, OEM purchasing managers have to take a close look at the supply chain and procurement operations at contract manufacturers. Not all are created equal and their strategies and practices vary. Some buy virtually all parts directly from component manufacturers while others use electronics distributors for value-added supply chain management programs. Some CMs have highly centralized purchasing operations, buying for customers around the world from a single location.. Others are more decentralized. Some have a combination.
"Sanmina has centralized supply base management while leaving the fulfillment functions decentralized at the plant level," says Latchman Venkatesh, vice president global supplier management for the San Jose, Calif-based contract manufacturer. "Sanmina's overall supply chain strategy is to concentrate as much business as possible among fewer suppliers," he says. "We want to buy direct where we have higher volumes, lower mix and steady run rates and use our distribution partners for higher mix, lower volume business where we need quick turns, short leadtimes and high flexibility. Sanmina definitely has a place for both the channels," he says.
Whether buying direct or using distributors, Sanmina uses commodity teams to manage semiconductors, passives, connectors and electro-mechanical devices.
Sanmina's overall commodity strategy is to consolidate its supply base. It has 2000 suppliers and expects to cut that by 50% in the next several years. It also wants to place all distribution business with our preferred partners, implement programs such as vendor managed inventory (VMI), consigned and bonded inventory, JIT and in-plant stores, says Venkatesh.
"The main priorities that we look for in our suppliers are availability of products and their performance," he says. "Time to market with the latest technology as well as quality is equally important. At Sanmina, our focus is on competitive pricing. To ensure that suppliers provide competitive pricing, the Sanmina team uses various industry publications as benchmarks. We also conduct market surveys from time to time," he says.
Focus on design
OEM supply managers can expect contract manufacturers to beef up their design expertise and logistics as CMs play a larger role in the supply chain.
"All CMs are developing strong design strength," says John Boucher vice president of global supply management at Manufactuers' Services in Concord, Mass. "The OEMs may want to go to the next version of a product that has been out for awhile. Or the customer may ask if there is enough time to go to a DFM (design for manufacturability) on a product to save cost and make it worth the change. Some DFM work requires layout engineers and design folks and things like that. And other DFMs just mean changing a supplier or a component. Because we bring the manufacturing expertise to play, the customers are saying to us, can you re-layout this board and redesign the board?"
Boucher says design expertise is growing in importance because lowering total cost is growing in importance. "If the customer asks me how can they reduce cost, I'll tell them to release more of the design work to us," he says. "We can start to design it to preferred parts and leverage our capabilities better. If they're doing the design work, they're asking us to help them, but we've got one arm behind our back," he says.
Demand for design expertise is coming from startups and well as more established OEMs. "A lot of the new companies coming along now are not putting the infrastructure in place. The older companies have to tear it down, and the last thing to be torn out of the old companies is design," he says.
At the other end, CMs are improving their logistics capabilities.
Increasingly OEMs want CMs to not only build a product, but ship it to the end customer.
While CMs are starting to do some strategic supply chain functions, they still must work on tactical issues for OEMs.
"The tactical challenges are day to day and they rotate around our ability to transact purchase orders or transact any type of business with the supply base fast enough and keep up with the challenges in the growth of the customer base," says Otterness. "We do whatever we can to create demand/pull programs, EDI programs and hubbing programs. We have to implement those programs quickly just to keep up the growth. If you have a fairly small organization, you still need four or five buyers and planners to manage all the material in the plan on time to customer demand," he says.
Otterness says a large contract manufacturing facility may have 10-15 customers with 100 different product lines. "You can't multiple your buyers because the part numbers you're managing are going up. You can just say for every 150 parts I need a buyer. If you did that then you'd have 500 buyers in every plant. So you have to implement these programs (EDI, demand pull, hubbing) very quickly," he says.
CMs beef up SCM services
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