Makers target savings on R&D, production

	Many suppliers save on production costs by subcontracting some processes to specialized factories.

Suppliers are refocusing efforts on essential business investment to improve cost management.

China suppliers of consumer electronics and telecom and computer products are undertaking cost-reduction initiatives under efforts to manage outlay better and improve the bottom line.

Manufacturers that stayed afloat through last year’s roughest tides have learned that more than just being a part of routine financial management, controlling the overhead is a crucial strategy.

Many realize that it is important not only to weather economic uncertainty but also to boost competitiveness in the long term.

Although the objective is the same, strategies vary from one company to another. Some reduce expenditure on sales, marketing, financing, administration and facilities, while others prefer to save on purchasing, production and R&D.

Several of these areas are relatively easy to manage but a few, including raw material sourcing, are more challenging due to external factors such as fixed-price contracts.

With the goal of retaining satisfactory services and quality, a number of makers turn to other alternatives such as subcontracting or relocating factories, reducing capacity and avoiding small orders.

Only a handful of operations, however, are able to analyze every link that affects outlay and adopt relevant strategies to curb spending.

These enterprises carry out cost analysis from research, design, materials supply, manufacturing, sales and transportation to aftersales service. With in-depth evaluation, the management can understand fully the production cycle and control processes at each link, enabling maximized profits throughout.

About 90 percent of outlay is determined by project research, and technical and product design. The last has the most critical effect on overhead management as 20 to 80 percent of costs are identified at this stage. It is at this point where target expenses and profits are set and analyzed, eventually letting a manufacturer decide if a plan is feasible or not.

Large or specialized makers build their own facilities for long-term development work and to handle big volume orders. Small companies, on the other hand, cooperate with design houses to shorten the cycle. Some CCTV DVR suppliers, for example, outsource cosmetic and software designs and SDKs from major vendors.

Technical manufacturing outlay is also considered as early as the R&D phase to ensure that the housing is optimized to meet target costs.

Ideally, designers identify a viable market and source suitable components to maximize design, purchasing and manufacturing investment. DVR card specialist Shenzhen Hawell Advanced Technology Co. Ltd implements cost reduction at the R&D stage. The supplier has established a long-term technological collaboration with IC provider Techwell to ensure quality components and stable chip inventory.

A manufacturer’s purchasing department is often in control of 40 to 50 percent of a product’s sales value since prices are mainly dictated by raw material outlay. It is responsible for making accurate forecasts on component and material trends, particularly regarding supply and shortage probabilities.

Cost-reduction efforts at this stage can be improved by simplifying procurement methods. Most companies nowadays use enterprise resource planning or ERP software, which consolidates and manages integrated resources such as various inputs and assets.

As for sourcing raw materials, many often maximize savings by collaborating with players in the same field when purchasing specialized components or bulk orders.

Some try to establish and maintain good working relationships with providers and target long-term contracts or guaranteed minimum annual purchase volumes in return for lower costs.

Others engage domestic vendors, which offer a range of general-purpose inputs or parts.

It is at the manufacturing stage where suppliers can have the most flexibility when it comes to cost-control strategies.

Companies usually carry out several measures to achieve optimum savings. These include trimming back selections, increasing production runs and modifying practices to minimize wastage of raw materials and energy.

To avoid investing heavily in fixed facilities, many subcontract key processes, including PCB and mold making, plastic injection and SMT. Improving QC to reduce rejection rates is also emphasized.

Most standard operations across the consumer electronics, telecom and security equipment industries have become mature over the years, rendering outsourcing much easier, particularly for many small and midsize players.

As an alternative strategy, Shenzhen Hawell has partnered with a company in the same factory building for shared surface-mount work. This cuts both suppliers’ expenses for this process by half, a significant saving considering that each SMT line can cost as much as $120,000.

More enterprises are also adopting proactive methods to increase cost efficiency and ROI simultaneously. Such strategies consist of targeting zero inventory and defect via “just-in-time” manufacturing systems and total quality control.

Other measures many employ in routine manufacturing processes include energy conservation and accident prevention.