Stop losing money with bad materials management. Learn what’s important to contract electronics manufacturing (EMS) providers in OEM-EMS relationships and manage manufacturing supply chain operations more effectively.
Are you a technology OEM project or program manager managing a contract EMS partner? Perhaps you’re an EMS program manager managing OEM product accounts?
If you answered yes to either question, give yourself a raise for the challenging work you do. Then, give a shout out to your OEM and EMS project and program management peers because this article is dedicated to each of you.
Its of little surprise to decision makers responsible for outsource manufacturing strategy and supply chain performance that sound management of materials purchasing and materials cost of good sold (MCOGs) are important areas technology companies allocate a great deal of focus.
In fact, electronics materials management and optimizing the management of functional groups supporting technology manufacturing are both so important that numerous companies (and entire industries) have emerged eager to help improve your company’s tracking and management effectiveness in these areas. Think: software vendors specializing in ERP; PLM, SRM, CRM and sales and operations planning (S&OP), financial planning and analysis (FP&A) …
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By carefully reading through this article and closely examining the link content located throughout, you will understand 90 percent of what being a program or project manager in the electronics industry is all about.
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The following examples are from recent, actual working engagements with program management teams inside EMS providers. Engagements focused on improving program management sense of urgency while paying closer attention to managing the profit center in OEM customer programs.
This article salutes program managers everywhere. As decision makers in the electronics industry you already hold some of the cards directly related to your company’s success. We want to reward you with another type of card, here.
This article reflects the perspective of a senior EMS program manager helping other EMS program management staff within an EMS provider set strategy for effective EMS programs and materials management of OEM customer accounts.
Manage OEM quotation packages
EMS program management obtains the most relevant (and current) BOMs for all assemblies which are then used for:
- Calculating monthly [$] material demand
- PPV analysis
- Creating and managing leadtime charts based on findings
- Determine critical or allocated parts
OEM orders and forecasts
EMS program management collects details for current OEM orders and current forecasts which is used for:
1. Check against ERP and work or purchase orders
2. Verify material lined up to support orders and forecasts
3. Calculate monthly [$] materials demand
4. When ordering against forecasts advise program management of material liability
- Ensure material is underwritten by customer
- Do not order materials against forecasts if it is not underwritten by the OEM. Requests must be seen in writing / email. Verbal requests are not sufficient, either from program management or from the customer
New OEM orders from existing programs
EMS program management supplies EMS purchasing copies of all new orders which are then used to:
- Check raw materials pricing (costs) and requested vendor delivery dates
- Compare with forecasts, advise materials of implications of any mismatches
- Confirm orders are consuming the forecast
- Status critical parts and long leadtime items
- Within two (2) days receiving orders, advise program management of anticipated start date for the order
- Ensure order is entered into system in-line with start date before actioning ERP
- Measure performance against agreed on completion dates from program management, planning, and manufacturing
Treat OEM reschedule requests similar to new orders, taking the following actions:
- Compare existing date with new request date
- Schedule pull-ins: status material and advise a start date
- Schedule push-outs: calculate the value of inventory being held
- Get appropriate EMS functional groups in decisions whether to charge inventory carrying costs
- Respond to reschedule requests within two (2) working days
Engineering changes can typically involve replacement of one component / part with another. In such instances take the following actions:
- Status the price and availability of the replacement (new) part
- Status the stock-on-hand and the stock-on-order of the deleted part(s)
- Advise program management of new part cut-in date, any obsolescence costs
Then submit new BOMs to program management, who then submits new quotation(s) to the OEM along with an effectivity date. Again, make sure you receive revised customer orders for assembly work plus any obsolescence costs.
Nothing decreases an EMS provider’s profit more than negative PPV.
Managing materials stock and inventory turn ratios
Inventory turns are calculated for each OEM program taking the next three months material demand and dividing that number by stock-on-hand for that program, then multiplying by four. (months)
Actual example #1 for industrial OEM NPI-to-production program (not ramp-to-volume)
RAW MATERIALS STOCK: $608,751
WIP STOCK: $682,773
Materials total = $1,291,524
Looking at the value of materials demand forecast
MONTH 1: $914,430
MONTH 2: $1,235,432
MONTH 3: $1,485,465
Forecast total = $2,720,897
WHERE: $2,720,897 / $1,291,524 = 2.1067 x 4 = 8.42 TURNS
For the above, you are currently turning stock for this OEM program 8.42 times in one year. Yet, you have 9.22 weeks of inventory stock.
You should target a maximum of 4.3 weeks inventory, or roughly 12 turns per year as a start. Once you achieve 12 turns, you then set up systems in place to target a higher turns number. Some providers can manage materials for some OEM programs at 18 turns per year. Getting to this number depends on a number of different influencing factors.
Increasing inventory stock turns
- Elimination of all excess on order by a target date 3 months out
- Elimination of all excess on hand inventory by a target date 4 months out
- Reduce WIP to 1 week by a target date 4 months out
Manage all parts against an ABC category system with deliveries of:
- A class parts weekly
- B class parts monthly
- C class parts quarterly
The above will likely increase stock turns to at least 15, provided OEM schedule stability matures. (If schedule stability does not exist, push the OEM for discussions)
Purchase price variance (PPV)
This is the difference between the price you sell material to your customer measured against the price (cost) for you to pipeline the material from your supplier.
It is not uncommon for BOMs to exist for each product, one is the customer quoted BOM [selling price] and the second shows your actual costs. PPV is the difference between the two. The following needs doing…
1. Measure your existing PPV and determine the PPV value for each product
2. Eliminate negative PPV items by:
- Obtaining price reductions from existing sources
- Increase selling price
3. Increase positive PPV by:
- Cost down programs
- Competitive tenders
- Vendor engineering
In tandem with the above, the following achievable PPV targets can be considered:
- Eliminate of all negative PPV by a target date three months out
- 3% positive PPV on all products by a target date six months out
- 6% positive PPV on all products by a target date nine months out
Most of a provider’s profits are derived from material purchases. Nothing increases profit more than PPV.
6 percent PPV on $1,000,000 materials spend is $60,000 straight to profit. Even in this market normal net profit for a quality contract electronics manufacturer can be 5 percent. (Every $1M in sales generates a net profit of $50,000 so, a 6 percent PPV more than doubles that profit)
Just as nothing increases profit more than PPV, nothing decreases a provider’s profit more than negative PPV. Providers carry negative PPV whenever selling price for OEM materials stock-on-hand is less than the price paid for materials.
Actual example #2 from a aerospace / military prime NPI beta build.
In a given month, let’s say you have a 5.76% negative PPV on a small OEM program. Your selling price of that material is $304,810 but you paid $322,385 for that material. Meanwhile, revenue from that OEM program for the month is $394,557.
Net profit generated by that revenue would be about $19,728 for the month. You have negative PPV of $17,575 reducing your profit to $2,153. (This does not take into account materials that were in MRB or production floor test failures at re-work or 2nd Ops)
Generate monthly reports per OEM program measuring at least:
- Inventory and Material Demand for next quarter
- Material stock turns
- Excess material on hand / material on order
- Material quantity and value in MRB
- Material constraints [potential shortages]
- Open program / material issues
- Program projects pending
Whether you are reading this as program manager with your employer or your primary responsibility in your company is purchasing, planning or scheduling, or you’re a project engineer or quality manager, or you assemble quote packages and review or develop contractual service level agreements…I hope you find this information useful.
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