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Best-Practices for Managing Material Costs, Part 3

The high-tech electronics manufacturing market is one of the most dynamic industries around the world. Price fluctuations, component obsolescence, and component revisions occur on a daily basis. OEMs and their EMS providers must actively monitor and adapt to these changes throughout the quarter. As new prices and changes to components occur, OEMs and EMS providers need to synchronize the changes. This can be a significant challenge when dealing with dozens or hundreds of assemblies that contain thousands of parts.

An outsourcing system management (OSM) solution enables OEMs and EMS providers to adapt more easily to market changes. Since notification and reconciliation can be done more rapidly, OEMs are able to capture price erosion on commodities to increase profit margins during the quarter. The goal of the OEM is to keep the lowest possible component price in the hands of its EMS provider.

Any purchase part variances (PPVs) need to be resolved quickly to maximize profitability and keep accounting records accurate between the two organizations. Taking weeks or months to implement reduced pricing across outsourcing partners can cost an OEM millions of dollars in unnecessary material costs.

The enterprise OSM system provides a real-time method of alerting a business partner of a pricing or component change. The OEM can “push” pricing changes to its EMS provider as commodity management teams secure better pricing or engineering teams identify component changes. The OSM can keep track of all the changes and provide evidence of the date and time that the notification was made. EMS providers can also use the system to alert the OEM of PPV that is occurring downstream.

A common occurrence is EMS providers being unable to purchase OEM contracted components from suppliers at the price set by the OEM. These deltas need to be communicated back to the OEM so its commodity management teams can investigate and resolve the discrepancy. Once the resolution has been identified, the changes can be entered in the OSM system to ensure that all parties have the most accurate and up-to-date information.

Without an enterprise OSM system, OEMs and EMS providers typically try to share this data via spreadsheets. The complexity is overwhelming, and data inaccuracies are commonplace. The OSM system provides a centralized way to capture, modify, and communicate the changes to all relevant parties. Once changes are validated, they can be easily transmitted to financial, ERP, and accounting systems to assure that the execution of material purchases is accurate.

OEMs and EMS providers are reliant on each other for the success of their business. Real-time communication, negotiation, and collaboration on complex assemblies are required to ensure that these companies are able to thrive in a rapidly changing business environment. The risk of managing these critical functions using email and spreadsheets has become too great.

Today, software technology has matured to a point where it handles these complex interactions in a streamlined, accurate, and systematic way. An enterprise outsourcing management system brings with it a new wave of process improvement to reduce cycle time and improve productivity. More importantly, enterprise OSM systems have consistently demonstrated the ability to provide sophisticated business intelligence that drives additional cost out of direct material.

1 comment on “Best-Practices for Managing Material Costs, Part 3

  1. mfbertozzi
    July 13, 2011

    It is a very interesting editorial Linda, sometimes major focus is spent on managing materials in the sense of “inventory”, but it's true: rethinking processes could help much better industries which play within a dynamic market. Platforms you have mentioned, are also triggered on rules coming from different policy each Govs is applying for example to treat obsolescence (in terms of financial worth of goods and operational activities) and similar processes?

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