The world of high tech manufacturing is like an alternate universe where up is down and down is up. Most other industries are consumed with trying NOT to raise their product prices to customers every year, or conversely, stocking up on manufacturing parts from suppliers before the year-end price increases hit. But high tech? No way. It was the only time in my career where the price for raw materials three months later was lower than what you paid last time. And falling faster than that, is your sales revenue that you can charge your customers.
So if your marketing group just cut the price on your $800 computer to $700 what is your average CEO going to do? He’s going to look at his VP of Operations and ask him where he’s going to make up that shortfall so that gross margins don’t suffer.
So if your marketing group just cut the price on your $800 computer to $700 what is your average CEO going to do? He’s going to look at his VP of Operations and ask him where he’s going to make up that shortfall so that gross margins don’t suffer.
Working in Gateway’s flagship computer manufacturing plant I could see right away that there wasn’t a lot of opportunity to save money with electronic goods. Most of the cost of goods sold was either in material or depreciation for the products. Labor as a percent of the cost was already so small that trying to save money there was further down on the priority list. And depreciation is sunk cost, you couldn’t do anything about that and it might be two or three times what you spend in labor. So we followed a two pronged attack of buying only what we needed and not a dollar more and another avenue that you wouldn’t think is so significant, reducing scrap.
First, only buying what we needed. It’s a cardinal sin in PC manufacturing to have excess inventory laying around. Imagine purchasing a hundred thousand hard drives at $80 per unit. If the price of that hard drive falls to $60 per unit three months later and you still have twenty five thousand hard drives sitting in your warehouse, you just vaporized a half million dollars. I have no clue what hoops Apple has to jump through when they procure material months in advance for a product launch. It seems that in some way they have muscled enough clout to minimize what manufacturing insiders lovingly dub “revaluation risk”.
Second, minimizing scrap. Labor may be relatively cheap, but the damage that the assembly workers inflicted was not. I used to roll up the manufacturing metrics for our North American Plants and consistently, damaged parts during assembly was always a problem. No matter how much you tried to fool proof inserting CPU’s and chips, a certain amount were always damaged. And not only that, parts would get mixed up periodically so you had to rework units produced with the wrong specs. And parts don’t just sit in a warehouse, they somehow walk away in the middle of the night or get run over by forklift trucks. So you can see where I’m going with this. There are only so many ways to squeeze the cost of manufacturing down but minimizing the amount of loose parts in your factory that get damaged or lost is one of them. Purchasing circuit boards that require little assembly may be more expensive in the short term but it is more than offset in other areas downstream.
So when the VP of Marketing tells the VP of Operations that he needs to be ready to make up the revenue shortfall, the VP of Operations is going to respond with a “Be careful what you wish for”.
First, only buying what we needed. It’s a cardinal sin in PC manufacturing to have excess inventory laying around. Imagine purchasing a hundred thousand hard drives at $80 per unit. If the price of that hard drive falls to $60 per unit three months later and you still have twenty five thousand hard drives sitting in your warehouse, you just vaporized a half million dollars. I have no clue what hoops Apple has to jump through when they procure material months in advance for a product launch. It seems that in some way they have muscled enough clout to minimize what manufacturing insiders lovingly dub “revaluation risk”.
Second, minimizing scrap. Labor may be relatively cheap, but the damage that the assembly workers inflicted was not. I used to roll up the manufacturing metrics for our North American Plants and consistently, damaged parts during assembly was always a problem. No matter how much you tried to fool proof inserting CPU’s and chips, a certain amount were always damaged. And not only that, parts would get mixed up periodically so you had to rework units produced with the wrong specs. And parts don’t just sit in a warehouse, they somehow walk away in the middle of the night or get run over by forklift trucks. So you can see where I’m going with this. There are only so many ways to squeeze the cost of manufacturing down but minimizing the amount of loose parts in your factory that get damaged or lost is one of them. Purchasing circuit boards that require little assembly may be more expensive in the short term but it is more than offset in other areas downstream.
So when the VP of Marketing tells the VP of Operations that he needs to be ready to make up the revenue shortfall, the VP of Operations is going to respond with a “Be careful what you wish for”.
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