Making China Work for LVHM
Earlier this year, I visited Shenzhen and other cities in southern China as part of an Asian sourcing program that OCM Manufacturing established in 2003. At that time, we set out to understand whether the cost benefits that very large manufacturers enjoy through their offshore outsourcing can also benefit the small- to mid-size companies that OCM serves.
Our research led us to conclude two things. First, that China lacks strong component distribution and low/mid volume, high-mix (LVHM) manufacturing infrastructure. Second, that there is no arguing with labour at $5 a day. So what’s a LVHM manufacturer to do? For OCM, the answer lies in incorporating China into our supply chain. This allows us to realize the cost benefits of Chinese labour for certain components while maintaining control over the quality process.
LVHM manufacturing generally involves more labour than high-volume, low-mix manufacturing (HVLM). LVHM manufacturers must be optimized to multi-task and to handle great product variety, frequent customer cycles, a high degree of customer interface and cross training among staff. In this environment, labour comprises as much as 40 per cent of a product’s cost. Coupled with the low cost of labour in developing countries like China, this makes selective outsourcing a necessary and important part of OCM Manufacturing’s business plan.
Yet, when we began to research how we would build out that business model, we found that China’s electronics manufacturing infrastructure was built around HVLM. China has attracted the very large tier 1 EMS companies as well as the large component distributors. In contrast to the LVHM model, this high-volume infrastructure is geared toward turning out tens of thousands of pieces of one type of product at a time.
Tier 1 manufacturers in China do subcontract out lower volume work to smaller manufacturers. However, as we discovered, this subcontracting model is a consigned model: the LVHM manufacturers assemble products from components purchased, kitted and supplied by the tier 1 company. Thus, China has not developed the infrastructure to buy and handle components at low volumes.
That said, there is a nascent LVHM component industry in China, as I discovered. The lower-volume players can get around the lack of procurement infrastructure through electronics bazaars. These components ‘supermarkets’ enable manufacturers in China to obtain low volumes of components, but the uncontrolled environment illustrates the great risk for outsiders like OCM.
At the Saige market in downtown Shenzhen, I saw everything being sold from brand name to no-name components and a range of options in between. It is entirely possible to purchase obsolete or repurposed components. I saw, for example, young girls at one kiosk using pliers to straighten out component leads that already been prepped (cut and kinked) for manufacturing. They were not necessarily used components, but had been through an assembly process and were now gaining a second lease on life at this bazaar.
The upshot is that China’s LVHM infrastructure – in particular its component procurement infrastructure – is undeveloped and uncontrolled. As an outsider in this environment – or as a newcomer unfamiliar with the vendors – one runs the very real risk of sacrificing quality.
This reality, along with the challenges of communication with such a linguistically, culturally and temporally different country led OCM to establish a purchasing office in Shenzhen. The office is staffed by locals with all the necessary experience. The office manager is an electrical engineering graduate from Beijing University, with ten years experience in electronics contract manufacturing in southern China for Japanese companies. Another staff member used to run a counter at the Saige bazaar and has a great deal of insight into the operations of reputable and disreputable vendors alike.
This trusted local purchasing office has been essential to OCM’s successful Asian sourcing program. Through the office, we source custom electronics components that have a significant labour content – PCBs, cabling and metal cabinets, for example – at significantly lower costs than in North America. We also receive exceptional quality control. In fact, in nearly two years our quality record has been excellent, with not a single order returned to China. That’s an impressive track record and many companies fail miserably at offshore electronics outsourcing due to quality issues.
At the same time, we remain convinced that final assembly and the overall supply chain management of any offshore outsourcing is best done near the customer here in North America for low/mid-volume products. In OCM’s model, the client piggybacks on our full supply chain and quality processes – not simply on our outsourcing capability. Thus, smaller players can take part in global markets in at least two ways: they can successfully take advantage of significant cost savings on labour-intensive electronics components, and the resulting savings in turn allows them to better compete in the global market for electronics-based products.
Such partnerships between original equipment manufacturers and electronics manufacturers will become increasingly critical in the years to come, not least because the small- to mid-size business (SMB) sector is the fastest growing in North America. SMBs rely on third-party providers in order to maintain focus on their own core business, so contract electronics manufacturers serving them must invest in the time to research and develop new business models tailored to the SMB market.