Does Your Cost Reduction Focus Adequately Measure Accountability Cost?

10 May 2007

The electronics industry’s unofficial motto has always been better, cheaper, faster. To that end, engineering and procurement are always challenged to find lower cost sources of supply. But at what cost is the lower price? Susan Mucha examines the subject further.

A conversation with an old friend in senior management at a large Asian-based EMS provider started this train of thought. In assessing trends in his medical industry customers, he mentioned that they tended to focus cost reduction efforts more on elimination of wasted transaction or logistics costs rather than on continual rounds of component redesign. While part of this tied to regulatory issues and the potential costs of product re-qualification, another factor was OEM concern about cost of accountability. Over the years he’d seen examples in more margin sensitive consumer product industries where continual redesign for cost reduction eventually led to degradation of product quality and in some cases, large recalls.

That got me thinking about the bigger picture. If a risky sourcing decision is made, either in terms of contract manufacturer choice or in the bill of material approved vendor list, what would the total cost of recall be? Why many companies do failure modes and effects analysis (FEMA) on new designs, how much of that is routinely done in subsequent cost reduction efforts? A very current, non-electronic example of a worst case scenario is occurring in the U.S. pet food market right now. A pet food contract manufacturer made a choice to procure wheat gluten from China and include it in a range of pet foods. The ingredient was contaminated and pets are dying. The real damage hasn’t yet fully been assessed. The recalled brands of food range from some of the most discounted on the market to some of the most expensive. Consumers who are paying for premium brands, which supposedly reflect higher standards than the discount food, are finding that their food is manufactured in the same manufacturing facility as the cheaper brands and may contain some of the same ingredients. In this case, the same unsafe ingredient. In the short term those brands face the issue of dealing with pet owners directly impacted by the recall, but in the longer term they may also face a brand credibility crisis because their representation of higher quality and better ingredients appears to be not entirely true. Additionally, consumers are learning that the company whose brand they are buying may not be the company manufacturing the product, which is a new and discomforting concept to some of them. While the adage, “you get what you pay for,” held true for the manufacturer, it hasn’t proven true for some premium brand consumers. The accountability cost of this cost reduction decision will be felt for years.

From a sourcing and engineering standpoint, it is important to look at both organizational goals for cost reduction and the product’s brand identity. The cost of accountability can range from unanticipated costs associated with use of an inefficient supply base to the cost of recall and loss of brand image associated with a large-scale product defect.

This doesn’t mean cease the pursuit of lower cost suppliers, either at the contract manufacturing or purchased component level. It does mean that common sense should be applied to sourcing decisions at both the contractor and component sourcing level. The practice of analyzing wasted transaction and logistics costs may be the best next step in cost reduction when it appears that component sourcing is at lowest cost. Products with variable demand may have more cost reduction opportunities related to logistics strategy than at the component level. Product margins should also be analyzed, because they may justify smaller cost reduction efforts and sourcing at a contractor with higher levels of process control.

Consumers are awakening to the concept that the only difference in some product categories is the label and the price. Long-term that may pose an issue to premium brands who forget the cost of accountability in their cost reduction efforts.

Susan Mucha is president of Powell-Mucha Consulting, Inc., a consulting firm providing strategic planning, training and market positioning support to companies in the EMS industry.

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