SMTA International Conference Proceedings


THE EFFECT OF CONTRACT MANUFACTURING ON OEM FINANCIAL METRICS

Author: Milt Gregory
Company: Gregory Associates
Date Published: 9/12/1999   Conference: SMTA International


Abstract: OEMs commonly use metrics to allocate assets and develop strategies for future performance. Department budgets are calculated, goals are set and success or failure is measured by a carefully predetermined set of metrics. Unfortunately, this same level of precision is often not applied to calculate the return on investment provided by outsourcing.

Some OEMs still take a tactical approach to maximizing profitability by cutting costs to the bone. The strategist, however, uses outsourcing to restructure the corporation around core competencies and outside relationships, thus focusing on longer-term issues connected with the organization’s vital strategic direction.

Accurately evaluating the financial ramifications of outsourcing is especially important in the volatile semiconductor equipment market, where technology advances rapidly and faster time-to-market is the Holy Grail. For OEMs manufacturing very complex systems (defined as $3 million-plus, with 10-20,000 parts and a dozen integrated technologies and with order-to-delivery timelines of under four weeks), evaluating outsourcing with accurate financial metrics is imperative.

Financial metrics enable OEMs to accurately quantify factors affecting capital investment decisions and inside-versus-outside costs. Metrics also provide data that can be used to manage and control the level of economic and product volatility. This paper will demonstrate how to employ standard metrics (e.g., ROA, ROE, and ROIC), see Table 1, to effectively evaluate the outsourcing decision. Examples of leading semiconductor capital equipment suppliers using Electronic Manufacturing Services (EMS) providers are included. Engineers and managers will also learn why attention to financial metrics, especially new metrics such as EVA, can no longer be considered the exclusive concern of executive management.



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