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The Low-Cost Supply Chain
It is clear that NikoTech would not have experienced 23% sales growth in Y2 had it not been getting product out the door. While an admirable accomplishment, NikoTech must also reinforce the elements of a low-cost/high-quality profile in its business model. Beginning with cost of goods sold (COGS) and going through each line item on the income statement, the company needs to constantly seek ways to reduce costs and improve the quality of the customer experience. With many products that are now viewed as quasi-commodities, the company must combine the element of supply chain velocity with low cost structures to profitably grow the business. This point is particularly relevant in the electronics manufacturing services (EMS) industry, where contracts are awarded on the winning combination of quality, lead time reliability and a concept known as "target pricing."Until fairly recently, most companies arrived at a product's selling price by adding the desired profit margin on top of all costs associated with the manufacture and distribution of that product. The practice of target pricing predetermines what a product can be sold for and works backward to determine if, after accounting for all costs, there is sufficient margin to justify production. In the EMS industry, it is common for potential clients to present contract manufactures with a Request for Proposal that states the price they are willing to pay for specific volumes. In this model, understanding what constitutes COGS, as well as the drivers of this complex line item, speaks to the very survival of a company like NikoTech.In organizations that emphasize strict COGS practices, it is understood that decisions on issues like product design, bills of material, common parts, geographic sourcing strategies and materials requirements planning will have an effect on net income. For NikoTech, once the target price is agreed upon, any change in the cost structure will create a snowball effect that careens down the income statement, turning profitable contracts into a grandiose waste of time and resources.When studying COGS figures in a global model, it is important to realize that a large percentage is composed of the landed costs for all raw materials, components and subassemblies used in manufacturing the mix of products detailed in the production plan. These figures make the roll up of the COGS number a complicated exercise, particularly when one considers the number of combinations that exist for the hundreds of suppliers that feed NikoTech's production facilities.Because of the complexities inherent to international materials management, it is incumbent upon a global organization to make the distinction between unit and landed costs. Unit costs are just that - the cost per unit of the product made available to the buyer at the supplier's door. Landed costs, on the other hand, include not only unit costs but also all transportation- and customs-related expenses incurred in bringing the raw material to the production floor.In the case of NikoTech, recall that the organization has 350 suppliers feeding four campuses, each of which has a different customs tariff and logistics cost structure. Driven by the quantity of parts, the countries sourced from and the cost of transporting goods into each facility, the possible number of landed cost matrices per product is difficult to envision. This is a particularly salient point in low-wage countries, where landed costs are the dominant variable in the cost equation. With this in mind, any change in a company's sourcing strategy, be it quality, capacity, price or logistics related, must be carefully considered prior to execution.The dynamics of landed costs are a very important consideration should NikoTech management truly rationalize its supplier network. Upstream product quality, common parts and tiering all bring benefits, but the strategic decision as to which suppliers to work with should also include a landed cost component. Specifically, the supplier rationalization plan should include matrices that identify inbound transportation costs to each plant from every origin, lead time into the facilities and the customs duties levied on each component. The customs duty aspect of this analysis is perhaps the hardest to ascertain as countries have a variety of duty rates on products, depending on the country of origin. While the information is difficult to compile, NikoTech should be seeking suppliers in countries that have trade agreements with Mexico, Brazil, China and Hungary, so as to enjoy reduced or eliminated duties in every instance possible. Taken in kind with the lean supplier philosophy, good old-fashioned legwork on the cost side of the equation will augment the supplier rationalization initiative.
