Background
The book Supply Chain Brutalization, by Walt Grishcuk is really quite educational as to many aspects of contract manufacturing, but one aspect of interest is how badly they are often treated by OEMs. First is that CMs are paid very little by OEMs. First its important to consider how little CMs are paid. For instance, while Foxconn employs around 1/2 as many people as Wal-Mart, they have only 15% of the revenue of Wal-Mart (although as the Chinese currency is undervalued by roughly 1/2, on the basis of purchasing power parity, we might adjust this value up to 30%). Although Foxconn has roughly a 3.7% profit margin, which is quite common in the CM industry. There are many reasons the profit margins are so low for CMs, but some of the profit is simply stripped out by OEMs. This done both through the contract negotiations, but also on how the CMs are forced to hold inventory when things are slow, but are not compensated for this. As pointed out by Walt Grishuck, poor planning by the OEM can be pushed to the CM. In fact, many OEMs use “lean” terminology
There are several ways to achieve cost reductions. Earlier we mentioned the brutal ways in which SCI was tormented each quarter by Racal. Is it safe to say that they would not have achieved the price points if they weren’t so tenacious? Yes. But, look at the total costs, including the loss of revenues, which also occurred due to poor execution of the team and the resultant lack of desire of the CM to service them (business at a loss). Then add the costs associated with moving their manufacturing to a new supplier.
We now operate in a brutal environment where the OEMs look for the company that can produce the products that will pass inspection for the lowest cost. This results in the sourcing of manufacturing in places that have the lowest labor rates, sometimes less than humane treatment to its work force, and the least amount of regulations on how the enterprise operates in its community or affects its environment.
It’s very difficult to see how “collaboration” can occur in such an environment. However, the concept of mistreating suppliers and then asking them to enter information in a collaboration system is all too common. Poor treatment of suppliers not only reduces collaboration, but also reduces the incentive for sophisticated supply chain planning. It’s interesting that so few books discuss this topic, but Walt’s is one that does, and does so in a very honest fashion. No doubt it won’t sell as well as books that describe “21st century based collaboration,” because most readers prefer fantasy over reality, and a simple story-line that only discusses the upside. This is the approach of many consulting companies as well. Sell the dream.
References
“Supply Chain Brutalization: The Handbook for Contract Manufacturing,” Walt Grischuk, BookSurge, 2009
{ 0 comments }
