February 21,
2007
Keeping
Your Component Costs Down
As
manufacturers in the electronics industry prepare for production, their biggest
concern in component selection – after simple functionality – is cost. Yet the
cost of a component is more than its individual price. Other considerations
have to be taken into account such as product lifecycle, the widespread use of
the part, and terms with the part manufacturer or distributor. Supply chain and
product executives at Phoenix-based Avnet Inc. and Chicago-based Newark InOne gave
us some pointers manufacturers can use to reduce the overall cost of parts.
“The
best way to save on component costs is to move your supply chain to Asia,”
jokes Greg Frazier, executive vice president, supply chain services worldwide
at Avnet. Components in Asia are indeed cheap, but Frazier notes that it’s not
easy taking savings on components by simply moving everything to China. While
Avent supports North American and European manufacturers that shift their
manufacturing to Asia, the customer usually uses the same components it used at
home. “For the most part they’re buying the same franchise parts in Asia that
they were buying in Europe or North America,” says Frazier. “Usually the OEMs
require their contract manufacturers to use the same bill of materials (BOMs).”
Frazier
notes that there is a high cost involved in revamping a BOM. That cost usually
exceeds any savings the OEM might get from cheaper Asian parts. “There is a
cost to changing the BOM, so the savings on parts has to be enough of a magnitude
and the product has to have a long enough lifecycle to justify the change,”
says Frazier. He also notes that the cost reduction people saw in Asia two or
three years ago has dwindled. That said, he notes that the savings in Asia
tends to be in the area of plastics, sheet metal and overhead.
Frazier
says the real savings companies can take on parts doesn’t always come from
individual component pricing. “The savings come from designing products with
parts that are readily available and not in the sunset of their technology,”
says Frazier. “You need to use products that are not going to go obsolete.” He
also suggests that manufacturers choose parts that are widely used. “We look at
usage. Are the parts designed often into products that are widely used? If so,
you get a cost advantage from the large-volume manufacturing and you get
liability reduction.”
Another
way to keep the total cost of parts down is to slow the payment on inventory.
“Companies save money by postponing delivery until right before they need the
part,” says Frazier. “You can work out payment terms with your distributor to
reduce the outlay of working capital. That saves you money because capital
costs money.” He points to Avnet customers that use kanban and in-house stores
to avoid paying for parts until those parts actually go into production.
Another
way to save on parts is to use distributors you know and trust. According to
Jeff Shafer, senior vice president of product at Newark InOne, manufacturers
can reduce the risk of getting counterfeit parts by using known distribution
channels. He also notes that manufacturers are moving more to distributors
because component manufacturers are making it more difficult to buy direct.
“Parts suppliers are raising their minimum orders even to the distributor,”
says Shafer. “They’re trying to restrict customers to keep down the number of
people they have to deal with.”
Shafer
says that manufacturers can also reduce their component costs by working with
distributors to study their buying patterns and plan lead times. “We can give
customers a break down by the quantities they buy,” explains Shafer. “They can
see what they buy from us and get a notion of the cost and lead time for
products in the future.” Another service Newark InOne offers its customers
helps to avoid costly interruptions in parts flow. “We try to cross-reference
our customers’ parts with something this is more prevalent,” says Shafer. “We
try to direct them into an arena that makes sense from a cost standpoint and
helps them take savings by buying larger quantities.”
There
is one potential cost increase for parts that hasn’t happened yet. The price of
non-compliant parts has not skyrocketed as industry experts expected.
Distributors expected the industry to shift dramatically to RoHS-compliant
parts last year. That shift would have caused parts suppliers to shift the bulk
of their production to lead-free components, thus relegating non-compliant
parts to short – and expensive – manufacturing runs. But so far, only about 50
percent of the parts ordered in North America are required to be lead-free.
That is likely to change in coming years, but in the meantime, the
non-compliant parts have not generally become rare and pricey.
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