The Leaning of Electronics

A groundbreaking study commissioned by Technology Forecasters Inc. and Electronics Supply & Manufacturing, and written by eKNOWtion’s Kathleen Geraghty and Hitesh Attri, revealed significant albeit uneven progress in the application of Lean principles across the electronics industry. Contract manufacturers and electronics OEMs led the way in Lean implementation while electronics distributors and component manufacturers lagged behind. In addition, the study found a strong correlation between the adoption of Lean practices and a company’s financial performance.

In all, 75 percent of the 250 electronics manufacturing managers surveyed for this study said their companies were engaged in Lean implementation. (See Figure 1) About one third of the respondents claimed extensive Lean implementations. The area of greatest focus was on using Lean to improve efficiency and processes, removing waste, reducing production costs and improving material flows in the factory.

Not surprisingly, the companies that are most advanced in the adoption of Lean have their roots in manufacturing. EMS providers, which accounted for about 15 percent of the survey sample, led the way in adoption rates, followed by Electronics OEMs, which represented 32 percent. EMS and OEMs had the highest percent of Lean adopters and the greatest concentration of experienced Lean adopters ("advanced" and "extensive" adopters) compared to the other supply chain segments. (See Figure 2.) Distributors and component manufacturers were the least likely to have extensive experience in Lean.

Why the dramatic difference in Lean adoption across the supply chain? Part of the reason is lineage. Many OEMs and EMS providers introduced Lean on the factory floor and have expanded from that base. Distributors, of course, do not manufacture anything. Their primary function is to carry inventory which some have argued is contrary to the principles of Lean. Of course, this is not the case as Lean principles can be applied to improve the performance of any process, including inventory management.

The low incidence of Lean among component manufacturers is harder to explain as many of these companies are themselves manufacturers. It could be that initiating Lean is often brought about as a result of a business or financial crisis. Many contract manufacturers in the early part of the decade faced such a crisis when the electronics industry plunged into a severe recession. Component manufacturers, on the other hand, were not hit as hard, and today enjoy margins considerably higher than the EMS sector. The pressure to go Lean is simply not there.

Lean Supply Chains

While Lean is still predominantly a manufacturing phenomenon, the study found that companies are starting to drive Lean practices across the supply chain, working with both customers and suppliers on joint Lean implementations. Over 50 percent of respondents said they were applying Lean principles to supply chain processes.

When asked about progress of these implementations, however, the results were modest perhaps because many of these implementations are still fairly nascent. The payoff from Lean often takes a few years to materialize. The expectation among many of these companies is that given more time significant reductions in waste and cost savings are possible.

The success of Lean in the supply chain is also a function of cooperation between enterprises. So customer and supplier involvement is a factor contributing to the success of driving Lean through the supply chain. The study found that nearly two thirds of respondents indicated their customers had improvement expectation but give them autonomy to achieve the results. Few customers (33 percent) actually pressured their suppliers to implement Lean.

Still, 50 percent of companies report that their customers are involved in some capacity with their Lean initiatives. The more common area of participation was in supplier meetings (24 percent), training (14 percent), and investing time and money (12 percent) in Lean implementations.

Reading between the lines, even with a significant commitment to Lean and the implied collaboration, there is room for improvement in how companies apply Lean through their supply chains. The majority of respondents remain inward focused — they have not yet turned their attention to their suppliers and are not working to boost their supply chain performance through Lean supplier collaboration. This presents a significant opportunity.

Profiting from Lean

One important finding of the study was a positive correlation between Lean implementation and financial impact. Indeed, three quarters of the companies with advanced Lean programs reported net profit margins greater than 5 percent of revenue, compared to 28 percent of non-adopters. Non-adopters accounted for the highest percent of companies with net profits less than 1 percent. (Figure 3)

This is not surprising given that eliminating waste often leads to cost reductions, which leads to improved profitability, all things being equal. According the study, 63 percent of the respondents reported lower overall costs as a consequence of Lean. The most common level of cost reduction reported was between 5 and 10 percent.

The majority of respondents cited reduced manufacturing lead times, improved delivery times, and increased customer satisfaction as key benefits with financial implications.

Indeed, among the companies that reported cost savings from Lean of 5 to 10 percent, 60 percent had net margins greater than 5 percent and only 10 percent less than 1 percent. The implication is clear: the more profitable companies see Lean as a means to remain profitable.

The web-based survey of 250 industry respondents was conducted in January and February 2007 and included electronics original equipment manufacturers (OEM), electronic manufacturing service (EMS) providers, contract electronic electronics design firms, original design manufacturers (ODM), distributors and component manufacturers. Figure 4 shows the distribution by type of company of the survey sample.

Figure 4 - Respondents by Type of Company (Technology Forecasters Inc.)

The Technology Forecasters Inc. study, entitled "The State of Lean Adoption in the Electronics Industry," by Kathleen Geraghty and Hitesh Attri,  Quarterly Forum in Monterrey, Mexico on Thursday, March 29. For information on this and other Technology Forecasters’ studies, please contact Bruce Rayner, Vice President of Consulting and Research at brayner@techforecasters.com.