Do you know how to REALLY measure TCO?
Written by Hans Dittmar
How to Measure and Reduce an OEM’s Total Cost of Ownership
Presented by GMI Solutions, a Contract Manufacturing Partner offering ISO 13485-based manufacturing and DFM services to OEMs globally.
Hans Dittmar, Director of Marketing, GMI Solutions
Manufacturers need to record and analyze a myriad of details in order to truly measure and reduce their total cost of ownership (TCO). This overview describes how best to lower TCO by accurately analyzing costs involved in product design, management and support. It also discusses how to leverage a strategic partner for outsourcing of manufacturing in order to achieve the full benefits of simplified logistics, improved product quality and product lifecycle management. It provides a checklist approach to ensure that no critical cost element is overlooked.
Within this global marketplace, Original Equipment Manufacturers (OEMs) all over the world face increasing challenges to remain competitive on a global basis. Customers demand more with greater value, increased competition from globally based companies forces lowered profit margins, ever-changing technology creates shorter product life cycles, costs of all types are escalating, and resources are stretched thin.
This difficult business environment forces companies to re-think their business models and adopt new strategies that will allow them to improve their competitive position while reducing risks.
Elements of Total Cost of Ownership (TCO)
It can be quite challenging to accurately measure the costs associated with manufacturing capital equipment. It is very different than production of a consumable where a 2% decrease in scrap rates is significant. The critical aspects of manufacturing high-mix, low-volume complex assemblies is different, and in fact may not include direct costs. Difficulties related to a true evaluation arise because associated costs may cross functional boundaries, and often these costs are not accurately measured. It is also difficult for many of these OEMs to capitalize on the efficiencies and cost savings of the global economy for both component supply and direct manufacturing costs.
Three basic elements need to be addressed:
- Direct costs
- Indirect costs
- Risk factors
Direct costs include elements that are obvious. Invoices directly related to these items make them easy to track, and experience from past product design cycles enables you to estimate their costs prior to new product development. In general one can say that the direct costs track the logical flow of product introduction, starting with the program and engineering management, proceeding through manufacturing and concluding with quality assurance and scrap.
In the area of direct costs, significant savings can be achieved by economies of scale resulting from product outsourcing—the higher volumes handled by the vendor result in improved efficiencies and greater bargaining power when dealing with component suppliers.
|Program management||· Coordination, timelines and logistics
· Action item maintenance
|Manufacturing Engineering||· Systems engineering
· Component and system level test engineering
· Build instruction development / maintenance
· Regulatory compliance
· Sustaining engineering
· Service requirements (FRU, regression testing, etc.)
|DFM Engineering||· Process efficiencies
· Component-level design enhancements
· Testing efficiencies
· Common component use assessment
· Continuous improvement initiatives
|Operational resources||· Global procurement resources
· Order processing
· Receiving and inspection
· Consistency program development and implementation
|Manufacturing resources||· Labor
· Materials: Raw, WIP, Finished goods
· Inventory turns management
· Manufacturing test development
· Shipping logistics
· ISO and CGMP requirements
|Quality resources||· Process improvements
· Data collection and analysis
|Scrap and Rework||· IM fallout
· Design errors, reworks and updates
· Manufacturing errors
|Service||· Warranty repair
· Field replacements and upgrades
· Technical support
· Testing and diagnostics
|Capital expense||· Manufacturing equipment
· Design engineering equipment
· Manufacturing test equipment
Costs that are not immediately evident tend to be excluded from the initial decision making process. Additionally, when these costs do get included they may not be calculated correctly. A good example would be the loss of market share caused by being later to market with new technologies.
In the effort to reduce indirect costs, a strategic vendor such as GMI Solutions can add specialized expertise to the mix and can be tasked to ensure these costs are measured, controlled, and reduced. By bringing additional resources to bear on the initial design cycle, they can shorten the all-important time to market. Sometimes they can also serve as a consolidated measurement point, collapsing all these costs into a single figure.
|Managing technology||· Researching current technology building blocks to capture constant change in available technologies
· Assessments regarding product-specific feasibility of new technology
· Maintain relationship with technology providers
· Continued education consuming resources
|Lost opportunities||· Extended time to implement product improvements
· Lost traction to competitors
· Lost opportunity costs
|Development cost||· Can be reduced by vendor’s experience and expertise through leveraging of in-depth application understanding
· Consumed resources focused on non-core activities
|Supply Chain Management||· Vendor relationship and logistics management
· Utilization of global procurement for best possible pricing
|Serial tracking and device history records||· Revision control and tracking
· Material change control
· Root cause analysis
· FDA compliant record keeping and retention
|Training||· Training personnel in new areas:
· In process and final inspection
|Sustaining Engineering||· Expertise specific to platform and components
· Value engineering services to ensure competitive advantage
· Legacy support and service for units in the field
· Field support ongoing process/rework management
|Operational focus and flexibility||· Increase in size is accompanied by a loss in agility
· Bureaucracy limits quick and decisive responses
· Need to preserve focus on core competencies
|Real estate||· Warehousing and fulfillment facility
· Vendor can handle logistics of inventory and burden costs
Risk is an additional cost that is often overlooked or calculated incorrectly. The reasons are that OEMs often face the possibility of changes in areas with which they are not familiar. For example, it would be difficult and costly for a manufacturer of highly specialized equipment to acquire and retain staff with expertise in regulatory compliance for embedded computer electronics and associated technologies. This does not excuse them from the need to comply with these regulations, which are in a constant state of change. Further they are not likely to have personnel with the time to devote to planning a long-term roadmap for the existing off-the-shelf component of their product—an area where the technology can transition at a steady and exaggerated pace. This is disruptive because design stability is a prerequisite for sustained profitability.
Having a strategic partner to manage your mechanical assemblies and related tier 2 (and even tier 3) suppliers can enable you to contain much of this risk by offloading it to a single source. The result can often be drastic reductions in material handling costs.
|Interruption of supply||· Natural disaster events
· Catastrophic supplier facility failure
· Global logistics
|Tool ownership||· Risk of lost tooling costs
· Non-transferable tooling risks
|Fluctuations in demand||· Inventory logistics (over / under stocking)
· Lead time oversight
· Supplier management; requires management of fluctuations at the source
|Labor||· Managing labor force size
· Employment entitlements
· Interruptions in labor availability
|Material obsolescence||· Offload material management issues
· Roadmap management
· Replacement component diligence and validation
|Legal issues||· Liability: Product, personal, regional and regulatory|
Of course, like any business- and product-specific assessment, your list may differ from this, but it is likely quite similar. OEMs across all industries are looking at very similar lists, and most will miss a few things. The make-versus-buy decision can be a very difficult one, and it is also often emotional. It's your product, your invention, your business, and it SHOULD be hard to conclude you should no longer manufacture it. The real question you need to ask yourself: is maintaining manufacturing operations in the best long-term interest of the company?
GMI Solutions - A Virtual Division to OEMs
GMI Solutions' goal is to operate as a virtual manufacturing division of an OEM and provide a “perfect fit” solution that meets the OEM’s specific manufacturing, quality and logistical needs. GMI Solutions value proposition is not to be a supplier and sell a product, but rather a partner that delivers a total system solution that is both efficient and cost effective.
To accomplish this mission our business model focuses on lowering the OEM’s Total Cost of Ownership and positions GMI Solutions as a direct extension of the OEM’s engineering, manufacturing, quality, procurement and service program – all at a global level. The result is a business model where GMI Solutions provides complete end-to-end services over the entire product life cycle. This approach allows an OEM to focus on its core competencies and achieve higher ROI for more rapid growth.
How GMI Solutions Reduces an OEM’s Total Cost of Ownership
Reduce and control overhead costs
Using GMI Solutions as a virtual division allows the OEM to contain overhead costs by more effectively utilizing direct resources on core functions. From an operational point of view we essentially become a shock absorber that provides the OEM with a lower and consistent fixed cost of operations that is independent of market cycles. We manage the business challenges on your behalf.
Redirect resources to higher value activities
GMI Solutions business model allows OEMs to redirect company resources toward strategic activities that offer a greater return on investment - activities such as developing application enabling technologies and customer development initiatives. By focusing resources on higher value activities the OEM is more focused on building a competitive advantage and increasing market share.
Avoid capital expenditures
The production of ever-changing technology means capital investments in equipment and facilities. GMI Solutions can eliminate capital equipment costs and provide the OEM with a more cost effective solution by simply spreading these costs over many more builds. These may be in the handling of radioactive materials, gluing operations, heat staking or many other capabilities. These are all examples of technologies that GMI has brought in house for manufacturing of specific OEM products; and we can leverage those capabilities across all of our customers. This results in significant per-program savings.
Save on manpower and training costs
Utilizing our business model the OEM can better control labor force size and expertise. With GMI Solutions operating as a virtual division the OEM no longer needs to be concerned with training and managing these resources and can enjoy a fixed operational cost regardless of changing economic conditions. The added capabilities listed in the previous point are great examples - when you add a new piece of machinery, you need to hire someone to run (and maintain) it. That person also needs training.
GMI Solutions allows OEMs to be more agile and quickly address changes in market demand and direction. GMI Solutions core competency in building application-specific solutions provides the market knowledge, relationships, strategic partnerships and resources to make rapid and right decisions. The ability and flexibility to make quick changes and scale appropriately can be a distinct competitive advantage.
Focus on Core Business
Every organization has resource limitations. Partnering with GMI Solutions allows our OEM customers the flexibility to redirect their resources, most often human resources, from non-core activities toward activities that serve the customer and offer greater value. People whose energies are currently focused internally can now be focused externally—on the customer.
Leverage the Global Advantages
It can be a real, time intensive struggle to find the best source for components at a global level. GMI Solutions offers the OEM this advantage inherently in our processes. We have a globally directed procurement activity and offer our OEMs the advantages that brings – seamlessly. The same is true for product manufacturing, as GMI Solutions has fully capable ISO 13485 based, wholly owned manufacturing facilities in both North America and Asia.
Summary: GMI Solutions Reduces the OEM’s TCO
A partnership with GMI Solutions allows the OEM to concentrate on core competencies, drive down their overall product costs, improve their ability to respond to changing market conditions and make their cost structure more predictable. The end result is a solution that provides the OEM with a lower total cost of ownership.
There are several reasons GMI Solutions is able to lower an OEM’s total cost of ownership. One of the most basic is GMI Solutions' focus to contract manufacture OEM solutions exclusively - our technical expertise and operational efficiencies assure the OEM of best-in-class performance. And since GMI Solutions builds only perfect-fit solutions, the choices our OEM partners make to meet the requirements of the most demanding customer will never compromise their business goals. Our partners simply call on GMI Solutions to complement their business model and manage the manufacturing of their electro-mechanical assembly – all with the convenience of a single SKU.
In addition, GMI Solutions also provides OEMs with high quality manufacturing and the opportunity to have a complete turnkey solution that is immediately ready to integrate upon delivery. Globally. This allows the GMI Solutions OEM partner to reduce the number of costly “touches” they make in the manufacturing process regardless of where the final assembly is shipped. It also provides our partners with a significant competitive advantage – acting as a shock absorber GMI Solutions is able to buffer the OEM against the ups and downs of the market. The OEM benefit is a fixed cost of operations that is independent of these business cycles.
Finally, GMI Solutions eliminates cost surprises and has the means to provide OEMs with end-to-end services across the complete product sourcing and manufacturing cycles. A single invoice source that reduces and controls hidden overhead costs often ignored in calculating TCO. With GMI Solutions the OEM simply redirects internal resources to higher value activities, eliminates supply-chain and material logistics, avoids capital expenditures, saves on manpower and reduces training costs.
GMI Solutions. Manufacturing What Matters.
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Business Development Manager
Business Development Manager