Contract Manufacturers Manage Risk
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Contract Manufacturers Manage Risk
By Ed Sperling -- 4/18/2003
Electronic News
Risk management is rapidly becoming a central theme throughout the boardrooms of contract manufacturers, which are still reeling from the write-downs of the last boom.
In the past six months, virtually every contract manufacturer has come face to face with this issue. Prior to that, many of them had never even heard of it. And until the bubble burst two years ago, it's unlikely that any of them would ever have given it a second thought.
But times have changed. Contracts are now being written to assign liability to electronics components in the supply chain.
"Contract manufacturing is not about the location of your factories," says Mark Zetter, president of San Jose-based Venture Outsource Group. "It's about how well you can execute. You can be as profitable running a small new-products introduction center as you can a large contract manufacturer."
Zetter says that with all the inventory write-downs, contract manufacturers have suddenly seen the light. He adds that during the boom, most were running their operations at 70 percent capacity, which is close to ideal, because it allows headroom for increases in customer demand. But when the demand started falling off, their utilization was only 45 percent to 50 percent.
At that point, the contract manufacturers realized they had too much in the parts pipeline and tried to put on the brakes. Unfortunately, many of the contracts that had been written for parts didn't spell out who was liable for parts that were never used.
That's where risk management comes in. Zetter says that new contracts are clearly specifying precisely how much exposure different companies in the supply chain have, when the liability shifts from one company to the next and exactly how much each is liable for.
Greg Frazier, executive vice president for supply chain services at Phoenix-based Avnet Inc., says that at least some of the problems contract manufacturers now face have been handled by distributors for years. But, he explains, the goal among those companies is to control the supply chain themselves -- something that others say can drop several percentage points off the cost of producing a PC, for example -- opening the door to all sorts of questions about how big their risk is and how to manage it most effectively.
One facet of risk management is part number cleansing, the process of determining where parts are within their life cycle, whether they're about to go on allocation, or whether they're going to be obsolete in six months. It also determines how many companies manufacture a part, which has a direct bearing on pricing and availability.
"The trend among larger EMS players is to handle the supply chain themselves with a preferred parts list we provide," Frazier says. "What we do for them is aggregate usage and trend data. When you look at what Wall Street values, it's return on capital and capital employed. Although that has always been important, what became apparent was that agreements with suppliers and OEMs were not totally clear."
Moreover, it remains to be seen if all the kinks are worked out. John Caltabiano, materials director for procurement at Solectron Corp., says that although contracts are being written much better today than 12 to 18 months ago, no one is certain how well all the changes will work once demand picks up again.
He says, however, that contracts are now being written far more clearly and aggressively than before, assigning liability as clearly as possible. "There are still refits, but those refits are a lot less than before," he concludes.
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