Circuits Assembly - November 2007 - (Page 20)

Focus on Business Excess Inventory Management Key issues that drive excess inventory and unanticipated parts obsolescence. or years, excess inventory management has been a challenge in consumer product projects because of short lifecycles and frequent engineering changes. Longer lifecycle products have faced the very different challenge of maintaining design with little or no change. However, the combination of RoHS legislation and focus on cost reduction throughout the industry is changing that. Suppliers are choosing to eliminate some leaded part options, while cost reduction is driving redesign cycles previously not considered. OEMs with longer lifecycle products are finding their product strategies can be arbitrarily shortened by these trends. Complicating this is the fact that low- and medium-volume higher-mix products may carry significant hidden inventory liability. This is because these products often require material below minimum-buy quantities. Many EMS providers carry this liability with the assumption it will eventually be consumed. If a significant product redesign occurs, some or all this material must be liquidated or written off. Assessing excess inventory risks. Typically reeled components, custom fabricated components with minimum-run quantities and any material classified non-cancelable, nonreturnable (NCNR) are the categories with the most potential for excess material. Some EMS providers charge for minimum-buy quantities upfront. However, this practice isn’t widespread because far more are willing to carry excess inventory, provided the customer signs up to liability for the minimum-buy-driven excess in whatever manufacturing agreement is signed. Some companies amortize the cost in the piece price, but this can complicate cost-reduction initiatives. In other companies, minimum-buy material is resolved whenever the part goes inactive for more than a quarter. In upfront discussions, many customers see this as a relatively small cost; however, in a high-mix program that has been in place for several years, what starts as a small liability can grow to a significant number if excess issues are simply postponed until project end or redesign. Most EMS providers have clauses in manufacturing agreements that address material liability for minimum-buy driven excess inventory. Additionally, some EMS companies identify minimum-buy liability, NCNR and tape-and-reel inventory in the initial quote. While this can be a competitive disadvantage if compared to quotes that simply quote F Susan Mucha is president of Powell-Mucha Consulting Inc. (powell-muchaconsulting. com), a consulting firm focused on optimizing EMS account acquisition processes, and developer of the EMS Integrated Marketing™ and EMS Concentric Selling™ training programs; smucha@powellmuchaconsulting.com. a unit price, it ensures that customers are aware of the issues from project start, rather than surprised when excess parts materialize. Some EMS providers have internal tracking methodologies specifically focused on excess material. Customers may or may not have real-time visibility into a system depending on the tracking tools and the contractor’s information-sharing system. For example, Fawn Electronics (fawn-ind. com/electronics) uses a material authorization procedure to keep a running tab of on-hand and onorder excess for each customer. The firm notes that with current lead-times, often two-thirds of material in its pipeline is not covered by purchase order, although it should be authorized under a customer forecast. By capturing this liability, the company does two things: First, it has a vehicle for keeping customers in the loop on real-time inventory of any product. Second, it has an internal accounting tool that tracks a key cost. Tracking costs internally is critical because material cost is often 70-80% of an EMS provider’s revenue. In mid-tier companies, accounted for excess inventory can be a significant portion of that. Fuzzy accounting of accounted for excess material makes cost resolution at the end of a project difficult. For instance, if an EMS provider amortizes the excess in the piece price, but doesn’t accrue the amortization internally, it creates an out-of-sync charge at the end of the program. It can be transparent to the customer from a payment standpoint, but it needs to be properly accounted for internally in ways clearly visible to program management, purchasing and accounting. Setting ground rules. Ultimately, the better job an EMS provider does of communicating liability upfront and continuing to update status, the less likely a customer is to be surprised later. Reduction of the surprise factor is often key to achieving a win-win resolution in material liquidation because often a portion of the excess cannot be returned or resold, and ultimately has to be written off. To reduce surprises, it is important to: • Identify liability in the quote. • Address liability issues in the manufacturing agreement. • Validate POs against quote volumes and pricing. • Get commitments that may trigger increases in excess in writing. • Reinforce potential liability any time minimumbuy exposure is increased. 20 Circuits Assembly NOVEMBER 2007 circuitsassembly.com http://circuitsassembly.com

Table of Contents Feed for the Digital Edition of Circuits Assembly - November 2007

Circuits Assembly - November 2007 Contents Caveat Lector Industry News Market Watch Talking Heads Focus on Business Global Sourcing On the Forefront Screen Printing Better Manufacturing Pb-Free Manufacturing from a Tier III EMS Perspective ‘Living Documents, Subject to Change’ Creating Ideal Solder Joints An Alternative Drying Process for MSDs ‘Customer Satisfaction is More than a Score’ Optoelectronic Substrates: Will They Happen? Tech Tips Wave Soldering Process Doctor Test and Inspection Getting Lean Materials World Equipment Advances Product Spotlight Assembly Insider Technical Abstracts Ad Index

Circuits Assembly - November 2007

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