High Tech Electronics Company Drives Significant Cost Reductions with Contract Manufacturers

The company profiled in this case study is in the High Tech Electronics (HTE) industry vertical and focuses on the design and manufacture of networking equipment, servers, and switches. They outsource 100% of their product manufacturing to some of the world’s largest contract manufacturers, such as Celestica, Flextronics, and Foxconn, and a supporting tier of the world’s leading commodity manufacturers for sheet metal, plastics, die casting, and heat/surface treatments. This company operates in a highly competitive market, requiring constant innovation and efficient supply chain management to maintain profitability and market position.

HTE is one of the most competitive markets today. Whether you are a major global OEM headquartered in North America or a small injection molded plastics supplier in Malaysia, the pressure to adapt and evolve with constantly changing market dynamics is intense. The three primary challenges companies in this marketplace include: Fierce Global Competition, Hyper Innovation Curve/Short Product Lifecycles, and Complex Global Supply Chain. In a world where innovation is constant and unrelenting, manufacturing volumes are extremely high, supply chains stretch around the globe, and getting your products to market quickly is mission critical, product development teams face a number of challenges in securing acceptable product margins, including: No visibility to cost during product design, Time to manually generate a cost estimate is unacceptable, Credibility of spreadsheet based solutions is suspect, No details available in should-cost estimates for fact-based negotiation. This customer is under significant pressure to closely manage product profitability, given the considerable pressures they face every day in their operating environment.

Dedicated Costing Resources: Major product lines are organized into individual business units. Some of the larger business units created positions within their product operations teams that were dedicated to cost modeling and estimating services. However, the company also recognized that a centralized 'technology & quality' team was needed to provide expert support to the business units during times of peak demand, and also provide cost modeling and estimating services for the smaller business units that did not have the resources to fund their own dedicated cost team. The new technology & quality team was located at corporate headquarters, and was responsible for selecting, configuring, and maintaining the cost management platform leveraged by all members of the product design, costing, and sourcing teams. The team was also responsible for developing an integration strategy and tools that facilitate the process of managing cost estimate requests from the product design teams, tracking cost savings and working with the buyers to help ensure they were maximizing their should-cost data. In addition to the central costing team at corporate headquarters, a dedicated engineering service team was set up in India to help support day-to-day cost modeling tasks and cost estimation requests. The mechanical design and engineering teams are constantly working on new product initiatives. Target cost for these new products are set by the product marketing team. The target cost for a product is in most cases broken down to the functional level. When the product design team has achieved a sufficient percentage of design definition, a request is sent to the cost engineering team. The request is analyzed by the senior manager of engineering operations, and routed to the proper resource in the cost engineering service team for detailed analysis. The cost engineering service team handles 3-5 projects per week, with most projects consisting of assemblies that have 20 or more individual components to be analyzed. Using aPriori, a detailed cost estimate including all of the primary manufacturing operations and any secondary operations that may be required, such as plating, heat treatments, etc., is generated very quickly for each part. The cost of all components is rolled up into a fully cost bill of materials (cBOM) for the product assembly that includes any mechanical assembly operations.

• Visibility to detailed cost estimates earlier in the product design process.
• Better comparison of the individual part cost against the Contract Manufacturer’s quote.
• Improves efficiency of negotiating process by enabling quick identification and concentrated focus on high opportunity parts.
• More productive supplier negotiations by providing a detailed framework for discussion.
• Mandatory inclusion of aPriori cost estimates in all tooling funding requests.

• $125,000 savings due to supplier using wrong minimum order quantity on a purchased component.
• $33,750 savings from supplier quoting soft tool pricing on one part of an assembly expected to be fully hard tooled.
• 65% cost savings on renegotiated part: Supplier Quote: $84.27, aPriori Cost: $22.89, Re-Negotiated Price: $28.86, Cost Avoidance: $55.41 per unit.