Circuits Assembly - July 2008 - (Page 22)

Global Sourcing Forecasting’s Bitter ‘Secret Sauce’ Leading indicators have been the bane of prediction models. A more rational model is proposed. ver its 75 years as an industry, electronics manufacturing has primarily been driven by innovation in product development. While that remains important, business issues of global supply chain management are trumping innovation in building successful (i.e., profitable) products. With the increasing interdependence of global economies and the accompanying unprecedented rapid rate of change, those in charge of global manufacturing operations are burning out. North American-based management team’s enthusiasm for the twice-weekly 4 a.m. emergency conference call with Asian counterparts is wearing thin. Added to these complex global supply chains are the uncertainty of currency fluctuations and escalating energy costs. OEM outsourcing managers must regularly recalibrate their total cost calculations to stay competitive. That means the ability to track and interpret macro trends and global economic indices is an essential part of business planning in every industry. Yet forecasting remains more art than science, in spite of the introduction of complex automated algorithms and sophisticated financial models. It still remains the responsibility of the business planning team to determine what it all means for their business. And that takes experience – yet, how many have relevant experience when the world changes so rapidly? Basically, the three types of metrics in electronics are leading, coincident (ones that change about the same time as the industry) and lagging (sometimes called trailing). Overall the industry does a great job on lagging indicators (e.g., last quarter’s revenue) and a reasonable job on coincident indicators (e.g., this quarter’s payroll), but a marginal job on leading indicators. Charlie Barnhart & Associates has compiled a list of 12 leading indicators to aid decisionmaking for outsourcing managers and EMS suppliers. While some forecast analysts take a “secret sauce” approach to their analytics, which tend to rely more on trailing indicators like book/bill ratios and so forth, Charlie Barnhart’s Leading Indicators are more rational. They are broken into three categories, all specifically related to the data-driven realities of manufacturing electronic products in more than 20 geographies. These factors are based on hundreds of actual case studies Circuits Assembly JULY 2008 O Jennifer Read and Charlie Barnhart are principals and co-founders of Charlie Barnhart and Associates (charliebarnhart.com); jennifer@charliebarn hart.com. tracked over the past seven years. The data points are developed from the metrics that matter most to this industry. We have arranged these critical metrics into a total analytical framework, providing a robust toolset for precise and profitable decision-making. Latency factors. The first group of factors includes cost of labor and overhead; margin expectations; corporate costs by EMS type; and regulatory and compliance issues. Consider, for example, the changing labor laws in China and their impact. Or corporate costs for EMS providers operating under the contract manufacturing model, as compared to ODM or Chinese nationals. What makes these factors “latent”? Here’s an example: Our analysis clearly shows the average cost of labor for PCB assembly in China increased 38% from the beginning of 2003 to the end of 2007 (stated in today’s US dollars). This is a trailing data-point because we are talking about the past. But when you look at this same data with a different set of lenses, you see these costs have yet to be fully passed onto the consuming OEMs – an effect called latency. Latency is defined as a time delay between the moment something is initiated and the moment one of its effects becomes detectable. The word derives from the fact that during the latency period, the effects of an action are latent, meaning potential or not yet observed. So the leading indicator we call “latency”” is predictive of future price increases in China because the underlying increases in cost have yet to be fully actualized in price. If you haven’t seen these increases yet, you will. Hysteretic factors, or consequences based on historical trends. The second group of leading indicators is based on critical ratios and relationships. We have learned many of the factors driving this industry are interdependent. Looking at one metric in a vacuum is misleading. Geographic Pacing compares today’s capacity to the level of interest within the geography. In other words, is the level of capacity keeping pace with the potential requirement? With unity (or the value of 1.0) indicating a relative balance, this indicator gives managers critical information about current and emerging geographies. Similarly, Sector Pacing compares the current circuitsassembly.com 22 http://charliebarnhart.com http://circuitsassembly.com

Table of Contents Feed for the Digital Edition of Circuits Assembly - July 2008

Circuits Assembly - July 2008 Contents Caveat Lector Industry News Market Watch Talking Heads Focus on Business Global Sourcing On the Forefront Screen Printing Tech Tips Will Electronics Follow the Sun? ‘Warm’ Manufacturing Heats Up Reputation Trumps Recession, China ‘Web Circuits’ A Novel Non-VOC Conformal Coating Krypton: Benchmarking Customer Satisfaction 2008-09 CIRCUITS ASSEMBLY Buyers Guide Wave Soldering Pb-Free Lessons Learned Process Doctor Materials World SMTA Int'l Product Preview Ad Index Assembly Insider Technical Abstracts

Circuits Assembly - July 2008

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