SPECIAL REPORT: Eaton turns to electronics distributors for value add services
Printed circuit boards, semiconductors, batteries and other electronics costs drop 10-15 percent through distributor consolidation.
By Jim Carbone -- Purchasing, 9/10/2007 11:40:00 AM
Supplier base reduction and consolidation of electronics purchases have been key initiatives by electronics commodity managers at Eaton Corp.
Eaton buys about $850 million of electronic and electrical products, including semiconductors, passives, connectors, bare printed circuit boards, circuit breakers batteries, and transformers. Eaton also purchases electronics manufacturing services (EMS) for printed circuit board assembly and box builds.
The parts and EMS services are used for the various systems Eaton builds, including crash avoidance system, automated truck transmissions and airplane wing flaps among others.
Eaton buys 90% of its electronic components from just five distributors. “Because the bulk of our products are high-mix, low-volume, the distribution model works very well for us,” says Doug Marsico, electronics commodity manager for Eaton’s electrical group. “The percentage is high, but we get the advantage of the value-add programs like in-plant stores and on-site personnel,” he says. Eaton also uses its distributors for kitting and to help manage component obsolescence.
“They do some kitting for us with our external manufacturers,” says Marsico. “They would supply all of the material to the contract manufacturer as required. We also use distributors’ proprietary software packages that identify end of life components,” he says.
Fabulous five
Eaton has used distributors for a long time, but it only recently decided to use just five. Prior to 2005, it has been using 100 suppliers, many of which were distributors.
“In the past, we have been very fragmented in our use of distributors. We decided to consolidate to a couple of distributors,” says Marsico.
Jeff Thompson, director of commodity management and supplier performance for Eaton, says Eaton company-wide decided to reduce its number of suppliers and to form strategic relationships with its electronics distributors.
“We wanted to increase the level of business with them and get the level of attention and the value add out of them that we couldn’t get in the past just because we were dealing with too many distributors on too small of a scale,” he says.
“Value added services were a big factor in determining which distributors to use,” says Marsico. “A lot of line cards are shared. Very few are unique to a particular distributor so some of the differentiating factors were value-added programs.
By consolidating purchases with fewer distributors Eaton reduced its material costs. From 2005 to 2006, Eaton cut its electronics materials costs by about 10-15%, says Marsico. “And we just repeated it again for 2006 to 2007,” he says.
Big wheel keeps turning
To manage distributors and commodities, Eaton uses a “hub-and-spoke” team approach.
“We get participation from every business that uses a particular commodity,” says Thompson. The team leader for a commodity is a buyer who works in an Eaton business unit that has the largest portion of the spend for that particular commodity. The team leader and other members of the team will develop the strategy for that particular commodity and sub commodities “so we are acting and behaving as one company versus a variety of different businesses within a company,” says Thompson.
Dave Montanino, electronics commodity manager for the aerospace division, says the hub-and-spoke team identifies key suppliers and evaluates their capabilities. The teams also evaluate technology trends, identify what Eaton’s needs are with the commodity and handle spend analysis.
“Spend analysis is one of the first steps that the team goes through,” says Montanino. “We use a site needs assessment tool which identifies by site where the volume of a commodity is and the suppliers of the commodity at the site.”
The hub-and-spoke approach to commodity management is different from how Eaton previously managed its supplier base.
“If we go back where Eaton was versus where we are today with these strategies, we had individual Eaton businesses buying similar components with a fragmented supply base,” says Montanino. “One business didn’t even know what the other business was doing,” he says.
While hub-and-spoke commodity management and supplier base reduction have been successful, Eaton buyers are not done yet trying to be innovative with supplier management.
For instance in its aerospace group, buyers are trying to get more value out of suppliers. “A goal is to move towards the concept of a supplier becoming more of a systems supplier than just a component supplier,” says Montanino. For example, a connector supplier may become an interconnect systems supplier.
“Our challenge is to identify those areas where it makes sense to do that and find the right supplier that is capable and matches to what our needs are,” he says.
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