Calibrating the value of execution speed: three case studies show how U.S. firms can maintain mid-volume projects.

In outsourcing, production realization cost is typically driven by two factors: landed unit price and the opportunity cost associated with execution speed. Identifying and eliminating hidden cost drivers in the outsourcing relationship is critical in supporting complex, medium-volume production projects.

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Reptron Electronics is a mid-tier EMS provider with two primary divisions: Reptron Manufacturing Services (RMS), which operates facilities in Florida, Minnesota and Michigan, and Reptron Outsource Manufacturing and Design (ROMD), which operates a system integration facility in Silicon Valley. Here, we look at three complex unit build projects and examine customer outsourcing goals, hidden cost drivers and jointly developed OEM-EMS strategies for minimizing these costs.

Offshore sourcing options are used for commodities most cost effectively procured in lower-cost markets. However, U.S. manufacturing remains a viable option for unit assembly because the total combination of project requirements add up to competitive total cost when balanced against lead-time issues, business model preferences and support flexibility options typically found offshore.

Hidden cost drivers. High-volume, low-mix projects are relatively easy to outsource in any labor market with an established EMS community. Higher mix projects, particularly those with system or sub-system assembly, present greater challenges. These projects often contain hidden challenges that may not be apparent to either the sourcing team or the EMS providers involved in bidding. Hidden cost drivers can include:

* Documentation integrity issues.

* Varying requirements for industry-specific quality certifications.

* Full lifecycle support.

* Varying volume mixes over the life of the product.

* Periodic specialized engineering support needs.

* Extensive test support capabilities.

* Flexible logistics support.

* Fast response time in some segments of the product lifecycle.

* Requirements for variations in the outsourcing business model by product line.

Example 1: Manufacturing not the customer's desired core competency. In this example, the OEM was an audio/video product developer that did not desire to develop internal manufacturing infrastructure. They see their core competencies as product developers and marketers. Their goal was to supplement their internal product development capabilities with an outsourcing partner capable of filling the gaps. Their products were "prosumer" grade, which increased product complexity and minimized potential volume. The project was comprised of four different models of an A/V management system. Annual volumes range from 3,000 to 5,000/year for each model. These annual volumes were not attractive to many Tier One providers. The customer also required full product lifecycle support, which included the ability to support product development cycles, stock finished goods and third-party accessories, and provide in-warranty repair depot support to the end-market. This made the product difficult to source within the range of smaller EMS providers whose business models were optimized to support these volumes, but did not necessarily have the required engineering resources, warehouse space or procurement support infrastructure required by this project.

Several cost drivers needed to be addressed. During product development, there was a need for a range of engineering disciplines. The customer chose to maintain software development and top-level system design capabilities in-house, while accessing the RMS engineering team for design services such as circuit performance research and schematic capture based on the customer-provided product specification. RMS also handled PCB layout, design for assembly/testability, quickturn prototyping for design verification and complete unit build prototyping for product qualification through its NPI process. Following the qualification, RMS provided complete beta unit assembly for product launch, followed by transition into full production at the company's Tampa facility.

There was also high engineering change notice (ECN) activity early in each product's life. Speed of ECN implementation represents both an opportunity cost in terms of market support and a measurable cost in terms of inventory change and non-recurring engineering cost. On average, software-driven ECNs are implemented within two weeks of initial request and more complex ECNs with changes to the circuit board are implemented within four weeks.

Logistics was another area of cost focus. The product was integrated with third-party accessories that were most cost-effectively purchased in bulk and stocked at the build site. In addition, some of the components required Asian sourcing for best pricing. RMS' Hong Kong-based international purchasing office was used to support component purchases and a bonded warehouse set up to store third-party accessories and customer-determined levels of finished goods inventory. The customer provided monthly production orders. Stocking of accessories and finished goods minimized the customer's requirement for internal warehouse space and optimized their financial inventory turns. The bonded warehouse strategy also limited RMS' liability for the carrying costs associated with finished goods inventory. Closely coordinated forecasting efforts supported optimized procurement strategy for custom components that required bulk buys. Supporting this customer's fulfillment and in-warranty repair depot needs increased the value-add support component of the project, which balanced the lower production volumes. Finally, placing the full lifecycle support activity at RMS eliminated the cost of duplicate functional test equipment at the customer's facility.

Fulfillment response speed was also a key area of focus. The customer manages a large network of installers that provide both sales and service. The customer collects orders through a centralized system and transmits them to the bonded warehouse electronically for fulfillment by RMS. Orders are fulfilled on one-day turns. In-warranty repair uses a swapping strategy where previously repaired units are immediately shipped as damaged units are received. Once repaired, the received units go back into in-warranty repair inventory.

The program has been in place for over six years and RMS is sole-sourced.

Example 2: Extended product lifecycle. This customer is a manufacturer of medical imaging equipment; the products are image resonator units used with CAT scan equipment. The project has been in place at the Tampa facility for over a decade. The customer operation has been acquired by larger medical manufacturers twice during that period and the cost justification for continued outsourcing has remained viable during post-acquisition cost analysis.

Project complexity drives a range of cost challenges. Each product type has a top-level bill of materials averaging 200 line items and contains four complex printed circuit assemblies whose BoMs each average 400 to 500 line items. The project currently supports six different product types, which have a varying range of volumes at different stages in the lifecycle. Initially, each model runs five to 10 units/month during NPI, which may last over a year. Once the market accepts the new product, typical volume rises to 30 to 50 units/month. Long unit life spans also drive a requirement for extended end-of-life production support in lower volumes.

RMS supports new product development, assembles and tests the assemblies, and then builds the image resonator unit. Elevated temperature burn-in is provided on certain products. This is integrated with the final product at the customer's Midwest manufacturing facility. During the first year of production, it is not unusual to see as many as 100 ECNs.

Installed units must be supported over the entire life of the product. When replacement part stock is no longer manufactured or available in end-of-life inventory supplies, RMS acts as the emergency repair depot, accepting returns directly from the hospital and troubleshooting the failed part until repaired.

The RMS facility building the project is both FDA registered and ISO 13485 certified. This level of quality system focus is not required for this project from a regulatory standpoint, since the product is integrated into a larger unit elsewhere. However, having a highly compatible quality environment has made it easy for this customer to add additional product to the project and has also supported growth of repair depot support activities. The large component count, typical production volumes and long lifecycle makes clustering common projects extremely cost effective from both a total cost and an inventory management standpoint. The high service/high quality/fast response environment of the medical imaging equipment market makes co-locating NPI, production and end-of-life support advantageous because it supports improved response speed and communications efficiency.

Example 3: Proximity to end build site and access to specific technology expertise. The final customer is a medical imaging equipment manufacturer who wanted assembly support close to its Silicon Valley location to augment its Lean manufacturing philosophy in final assembly. The end-product is an intravenous ultrasound system for which ROMD performs assembly of intelligent data acquisition and display subsystems.

ROMD's facility is located in the same general area as the customer's manufacturing complex, its assembly services are focused on mid-volume complex builds, it has developed LCD display technology expertise for medical and industrial markets, and it provides dedicated engineering support.

ROMD's initial role in the end-product lifecycle was to support the customer in redesign of the display subsystem, which included conversion of the original off-the-shelf CRT monitor to a 17" SXGA LCD display. Industrial design (aesthetic blending with the end product), electrical and mechanical compatibility with the original monitor and best-in-class image quality were the key project requirements.

All goals were accomplished, resulting in a highly compatible LCD monitor in a cast aluminum housing with a unique tilt/swivel mechanism. This solution also provided the customer with extended lifecycle for the end-product, and design control of the display subsystem. As a result, the customer subsequently outsourced projects to manufacture additional computer-based data acquisition subsystems in the same end-product.

A few years later when an electronic video board in the display became unavailable, ROMD provided sustaining engineering services by identifying the OEM offshore manufacturer and securing the limited number of the boards remaining directly from their factory to keep customer production deliveries on schedule. While the offshore boards were being depleted, ROMD designed and qualified an electrically and mechanically comparable replacement with image quality improvement and domestic hardware/firmware control, to minimize overall display assembly redesign.

ROMD also assumed responsibility for agency recertifications, minimizing the involvement of the customer's engineering staff, who was engaged in next-generation product development. Migrating to a custom, domestic board design minimized costs and provided a reliable, long-term component supply line for the life of the customer's end-product.

ROMD continues to supply the customer's final assembly operation with three-piece subassembly kits on demand. Although the associated computer assemblies were originally build-to-print, ROMD now assumes the sustaining engineering role to address proactively periodic component end-of-life situations with critical supply line management and engineering support. This includes identifying possible replacement components, qualifying supplier sources, qualifying component performance and compatibility via engineering tests and reports, securing inventory and managing engineering change processes both internally and with the customer as needed.

Benefits to this customer include a smaller manufacturing footprint and minimal raw inventory storage space requirements in their facilities. Additional benefits include high-quality assemblies, on-time deliveries, quick reaction time to customer special needs and minimization of customer engineering time related to component lifecycle management.

In each of these cases, developing a successful project cost model involved careful analysis of hidden cost drivers and close coordination of engineering activities, forecasting, inventory management strategy and end-market support needs.

The cost savings were not the result of a particularly low-cost service, but the cost effective combination of a broad range of services and the elimination of redundant capabilities at the customer. Customer willingness to increase the overall value-add in each project by clustering projects in long-term relationships and outsourcing full lifecycle support activities balanced lower volumes. Customer desires for minimized inventory storage costs and maximum schedule flexibility were balanced by bonded warehousing arrangements and mutually-agreed upon forecasting and stocking methodologies. Additional savings were achieved through close coordination of product development engineering and materials sourcing strategy from both a DfA/DfT and inventory management perspective.

Complex, higher mix unit build projects can be effectively outsourced provided customer and contractor teams are willing to jointly evaluate cost issues and develop mutually-acceptable strategies to either share or eliminate these costs. While the outsourcing relationship is typically focused on manufacturing capabilities, in complex unit builds the key capabilities which generate the lowest total cost are the contractor's depth of engineering resources, willingness to rapidly respond to unique customer needs, ability to structure innovative supply chain management and stocking strategies, and the willingness to provide cost effective end-of-life and end-market repair depot activities for extended product lifecycles.

Bruce Kolek is director of engineering, Reptron Manufacturing (reptronmfg.com); [e-mail]. Bill Fraker is technical director, new business development, Reptron Outsource Manufacturing and Design.