As with most corporate initiatives this decade, companies are looking for better ways to manage and reduce costs and increase profitability. In many industries, outsourcing has allowed companies to focus on core competencies and potentially reduce costs. Semiconductor manufacturers, for example, incur significant capital expenses to start up and maintain a production facility. Outsourcing all, or major portions, of the chip fabrication process is vital for some companies to even open their doors for business. But the decision to outsource production does not equate to the decision to outsource managing the costs of production. With the industry becoming more competitive, even “manufacturing free” companies realize the key to staying profitable is in the data.
Why would companies care about tracking manufacturing costs? And why business do outsourcing? As many manufacturing free organizations are learning, understanding costs associated with outsourcing partners is equally vital to successful cost and profitability management and reduction efforts as the decision to outsource in the first place. These companies must respond to the same global changes like shifting product demand, increased global competition and increasingly shorter product life cycles. Manufacturing free organizations are typically at a disadvantage because they have access to a narrow view of the costs associated with manufacturing. Important metrics such as tracking lot movements, analyzing yield losses at each production step, measuring performance against standard and actual goals and computing manufacturing costs are paramount to business leaders looking to make better decisions about product mix, sales forecasts, budgets, vendor relationships and more. Leaders in these organizations can respond quickly and effectively to industry shifts only with immediate access to vital manufacturing data.
Traditional manufacturers invest in Bill of Materials or Product Master systems, shop floor control systems, yield reporting systems and costing systems to track costs and performance in their facilities. Business leaders control costs and make decisions with the production information generated by these systems. But in an outsourced production scenario, the decision makers have very limited exposure to true manufacturing costs – making it virtually impossible to identify potential cost reduction opportunities.
Decisions are based on negotiated pricing deals with vendors. In many instances, the company has little access to true production costs when agreeing on terms and conditions of their outsource partnership. Now manufacturing free companies need better access to information to create vendor relationships that are both profitable and transparent.
By implementing a fully-integrated cost and profitability solution, cost managers working with outsourcing vendors can compute and report yield variances, purchase price variances (including the price variance related to subcontractor substitution), expected units out for planning purposes, scrap value and more. Centralized coordination of Bills of Materials and Routings for all goods produced allows decision makers to better plan for subcontractor spending for anticipated volumes. Manufacturing free organizations can also increase exposure to vendor information by also integrating data from the outsourcing partner directly into the costing system. By creating initiatives that promote transparency with suppliers, those companies who outsource no longer fall victim to poor planning due to lack of information.
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