White Paper: Security of Supply

Security of Supply & Cost Reduction

Security of supply and cost are the top priorities of any supply chain. Failure to achieve high levels of performance in either can be catastrophic. Failure to get food and munitions to soldiers in times of war is disastrous for any nation as is the inability to achieve cost targets and profitability on commercial products for a company. While levels of performance differ across supply chains and the relative importance of security of supply over cost may vary with time, these two criteria are always the top priorities.

Supply base design, selecting which company is going to supply what, is a critical element in supply chain design. It has major impact on both current and future security of supply and cost as well as product architecture and overall competitiveness. These critical selections require thorough due diligence to ensure that the chosen suppliers will meet current and future operational and technological needs as well as to verify that their values and operating philosophies align with yours. The selection of capable suppliers, aligned to your philosophies and needs, is a critical step in enabling a high performance supply chain.

High performance requires visibility. One needs to be able to see what’s going on so that one can act appropriately to keep the supply chain performing. Communication along the supply chain is critical as is a set of metrics that signal potential trouble. The metrics need to be complemented with feedback loops that allow corrective actions. The greater the transparency, the better the supply chain performs. Unfortunately today’s tools and operating practices often hide vital information making supply chain optimization difficult.

This whitepaper considers how transparency, enabled by Lytica’s freebenchmarking.com reports, can improve both security of supply and cost. Suggested actions to further improve security of supply and cost can be found in our whitepaper titled Fast Track Cost Reduction.

Freebenchmarking.com is unique and, because of this, can provide capability and insight previously unavailable to electronics supply chain professionals. It is an innovation in price assessment and is highly effective at aiding in cost reduction of electronic components while improving security of supply. This innovation creates transparency to cost and supply risk that allows effective mitigation actions.

The Freebenchmarking.com application is comprised of the world’s largest independent database on current electronic component pricing, powerful component match engines and report generators. The Freebenchmarking.com Gold Report provides an analysis of your provided information against our reference data using statistical and empirically derived algorithms. The Gold Report provides you with:

  • The competitiveness of your company’s spending
  • Your companies worst priced components and appropriate pricing targets for them consistent with your demonstrated performance
  • High probability drop-in replacements for single sourced components
  • Coding duplications and sourcing redundancies – these duplications and redundancies are costing you moneyFreebenchmarking.com can also provide you with a list of pricing errors and a list of component mismatches that may have your product’s quality in jeopardy.

    Using this previously unavailable knowledge, you can act quickly to reduce single source supply risk, weed out bad components and improve the cost of your materials through more effective price negotiations.

 

Security of Supply

Security of supply is enabled by designing a supply chain with a high probability of delivering what you need when you need it. This depends upon the careful selection of capable suppliers and a communications system that gets your forecast to suppliers in timely fashion. While the accuracy and volatility of the forecast is a critical component influencing security of supply, its impact can be dealt with through a combination of supplier agility management and inventory strategy. Supplier agility is a parameter embedded in the term ‘capable’ as it relates to supplier selection.

The term “capable” has within it a number of needs in addition to agility. These include confirmation that the supplier is a going concern, acceptance of the supplier’s policies on quality, environmental position and social responsibility, verification of historical supplier performance and audits of business processes and practices to confirm fit to your requirements.

Agility can often be enhanced through second sourcing. By our definition, second sourcing is achieved when you have two separate manufacturers capable of delivering a component that will work in your application and meet all quality, performance and cost criteria. Our definition requires independence of the manufacturers’ supply chains so that you are not vulnerable to a single point of failure. A single point of failure might be a common factory that could be disabled by fire, strike or natural disaster. Verification of complete independence is a very difficult task.

Unfortunately, we often see companies confident in their second sourcing when, by our definition, they are single sourced and vulnerable. These companies have accepted as second sources:

  • Components from the same manufacturer differing only in tolerance, voltage or speed grade
  • Components from the same manufacturer with different part numbers
  • Under specified components compared to others in their approved materials list or as described in their component description creating a reliability exposure
  • Components from different manufacturers where the price of the alternative make them, except in emergency situations, unusable – this last category we refer to as virtual second sources Second source reviews often miss these devices leaving you exposed.Freebenchmarking.com reduces the supply chain risk by identifying these questionable components and then facilitates second sourcing by providing clients with an excel file that lists true alternate sources that are equivalent in form, fit and function to those shown on your submitted Approved Vendor List. The list identifies components by part number and manufacturers but it is not an endorsement of any supplier; it is only a statement that we believe this supplier has a matching component. These alternative components are believed to be drop-in replacement components because other clients are using them as drop-in replacements in their application.

    This list simplifies the component engineering job of identifying and validating suitability. In our experience most companies have a relatively high and unnecessary level of single sourced components and vulnerabilities on their approved materials lists. Our analysis of client data shows that Freebenchmarking.com, with current match rates, could immediately reduce their exposure by 30%. Most of this reduction would impact component vulnerabilities that they are unaware of.

 

Competitiveness

Before we discuss cost improvement, the term “competitiveness” needs to be defined. Lytica has a very specific definition to allow quantification of the sometimes qualitative term.

Using our definition, competitiveness is a company’s ranking based on spending for its materials against our estimates for everyone else buying the same bill of materials using their prices and your volumes. This ranking is a statistical estimate, the concept of which has proven useful as a characterization of a company’s purchasing effectiveness. We use competitiveness in a related manner as a means of predicting attainable fair market price targets for worst price components. In our ranking, the higher the percentage the more competitive one is.

With your competitiveness characterized at the overall spending and commodity level, we are able to determine your worst price components and what an appropriate price would be that fits your typical performance level. This way, we are not recommending price targets that bear no relationship with your market reality. We also observe a high level of success with clients as they negotiate for these target prices.

Freebenchmarking.com’s unique approach to characterizing spending competitiveness represents a departure from traditional purchasing. The idea of using competitiveness as a characterization and price estimation parameter is foreign to many procurement professionals. Many in procurement think of pricing in terms of the factors that they consider in their negotiation. They see pricing as a function of the total spending with a supplier, the volume of the item being purchased, payment terms, minimum order quantity, reel sizes, NCNR, channel, geography, and more. The idea of thinking in terms of a price amalgam for components from which a distribution is formed, or that anything relevant could be derived from such a distribution, requires an initial leap of faith even though it is a leap yielding high rewards.

 

Fast Track Cost Reduction

Fast Track Cost Reduction has proven effective for OEM and EMS companies in reducing the cost of electronic components. It is based on combining Lytica’s statistically derived component target prices with quarterly negotiations to significantly improve spending competitiveness.

This new and innovative approach works. We know this because our customers tell us it works. We consistently rate very high (4’s and 5’s with 5 being best) in customer satisfaction, and have never received a claim against our money back guarantee.

The approach combines negotiation using Freebenchmarking.com’s target prices with quarterly negotiation cycles and active component management. The graph on the right is illustrative the cumulative improvement impact of this approach on overall spending competitiveness.

It has been our experience that most companies need cost reduction
but lack the tools and knowledge on current market component pricing
to be truly effective. Most companies use management judgement to set blanket cost reduction targets that may or may not bear any relationship to component market realities. Their cost reduction targets are often a function of their end product market needs and may fall short of the component market potential.

We often observe that the most competitively priced components within a portfolio are the ones where the customers have had focused efforts. These are usually the high valued components that fit the overused 80% – 20% rule; those in the 20% – 80% space are the least competitive. We also observe that the priority a company gives to cost management has a significant impact on their spending competitiveness ranking. Management attention and focus make a significant difference. Freebenchmarking.com analysis facilitates both.

 

One reason that Freebenchmarking.com works is because it brings focus to items that have previously been under the radar of most companies. It finds the low hanging fruit. It simplifies the management of often overlooked long tail components. These components are usually managed by third parties like contract manufacturers or by overworked internal resources.  Freebenchmarking.com’s database contains information on what others are actually paying for components. Lytica uses this information in aggregate to form price distributions of current market pricing. Statistical and empirically derived analysis using these distributions provides powerful insight into savings opportunities.

The steps to Fast Track Cost Reduction begin with a spending characterization and target price setting exercise provided by Freebenchmarking.com’s Gold Report. Negotiations using these targets yield immediate savings. Our customers’ negotiation success is for two reasons; we have identified the supplier’s uncharacteristically higher margin components and their negotiators have more confidence in pushing their negotiation position.

The initial Fast Track Cost Reduction round of the negotiation cycle reduces costs in three ways:

  1. It achieves price reductions with suppliers on the worst price 25% of components by moving the majority of these component prices to appropriate market levels
  2. It finds and allows correction of pricing errors. Mispriced components, identifiable through a separate Lytica report, require no negotiation to effect savings and identified duplications are usually addressable by making the supplier aware of the situation
  3. It identifies areas of coding duplication or multi-location price discrepancies that can be eliminated

Subsequent negotiation rounds bring the next worst 25% prices into market price alignment as part of a cycle of continuous cost reduction and spending competitiveness improvement. Subsequent reports continue to yield saving as the next worst 25% components are targeted and alternate sourcing options are explored. The power of alternate sourcing is evident when the cost of unnecessarily single sourced devices is considered. Using an analysis based on freebenchmarking.com target pricing of single sourced and multi-sourced components by customer, we discovered that companies are paying, on average, 10% more when they are single sourced. The Freebenchmarking.com Gold Report lists drop-in replacement components for single sourced devices when alternatives are known. As previously stated, these suggested alternate devices are believed to be drop-in replacements because our customers are using them as drop-in replacements in their applications and as such are high probability of fit components.

Returns on the Gold Report investment are typically off the charts with millions of dollars of savings realized by clients for a low cost, single report investment. The lowest savings result reported to Lytica by a small company was a 5 times cost and we rated a 5 on their customer satisfaction score.

 

Fast Track Cost Reduction is a straight forward solution that works. We are so confident that it works we offer a money back guarantee if you don’t save more than the report cost. There is no risk! If you want to try before you buy, you can obtain a free BENCHMARK REPORT that will summarize the savings findings to be had with a Gold Report. For this, you simply populate the upload template and follow the upload instructions on our website.

Find out what some of the world’s premier companies and your competitors already know- how to reduce costs using Freebenchmarking.com.

This whitepaper has shown actions that can be taken based on the findings of a Freebenchmarking.com Gold Report to improve cost and security of supply. With Freebenchmarking.com your data is protected and kept confidential. Our analysis is respectful of all client and supplier information. Freebenchmarking.com is a confidential and secure service; no one’s actual pricing is ever revealed.

White Paper – Security of Supply & Cost Reduction: By Lytica Inc.

Download: SecurityofSupplyWhitePaper

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