A unique Business Model overcomes Electronics Supply Chain challenges.
The electronics supply chain offers some unique challenges for medium and low volume production.
The two biggest problems are the delivery delays for components (lead times) and the use of counterfeit components when trying to overcome lead time problems.
Lead times for electronic components are typically 2 to 12 months. It is of course the single longest lead time part that will affect delivery.
When manufacturers can not get the part on time through official distribution they turn to the spot market which is a mix of excess from other manufacturers, stock from unofficial distributors and outright criminal counterfeiters. On the reports we receive, about 10% of this stock is counterfeit with items of such poor quality that the product is substantially impacted and the customer’s reputation is put on the line.
Every electronics manufacturer will offer to do better to overcome lead time and prevent counterfeit components but when reviewed in detail they are just offering to try harder and work better with their suppliers. This is not very effective.
Don Alan Pty Ltd has a game changing solution to the problem that allows us to operate at a higher level of performance when it comes to on time delivery and accommodating variations in demand.
Don Alan’s game changing solution is based on a unique business model that provides a ‘turnkey’ solution but still leaves customers in control of their product. To understand the Don Alan business model we will first look at two conventional modules for the supply of electronic products into businesses that use electronics but are not ‘electronics companies’ themselves.
Product Manufacturer Model
Product manufacturers design products that they believe the market will want and possibly adapt them to individual customer’s requirement. Smarter product manufacturers have the advantage that because they control the design they can re-use the same parts across designs. This means that they have some ability to overcome component lead times as demands fluctuates because they can hold inventory and then at the last moment turn it into a specific product as the customer requires.
This all sounds really good – and it is – for the Product Manufacturer. But things are not so good for the customer.
Product Manufacturers almost without exception own the IP or design even though customers often pay for the design work or customisations. The result is that the Product Manufacturer has a captive customer. If the customer wants to change supplier they need to redesign their product around an alternate Product Manufacturers part. Product Manufacturers with captive customers almost always provide poor support and seldom remain competitive – Product Manufacturers are often difficult to manage commercially because in the short and medium term they have so much power in the relationship.
Further more, because the product is adapted to each customer’s requirement the customer’s requirements are not always well met. They are often compromised by the demands of other customers who want some thing different or do not value a particular feature that is important to the customer. The Product manufacturer may decide to discontinue the product or go out of business leaving the customer in crisis with no quick way out.
Design House and Contract Manufacturer Model
The other less common solution is to engage a design house to design the product. The customer then takes the design to a contract manufacturer that will make the product for the customer. The customer gets the design they want and the manufacturing price can be very competitive because the work is portable – it can be taken from one contract manufacturer to another without redesigning it. If one contract manufacturer performs poorly or goes out of business there are many more to choose from.
This sound like win – win. In practice this system is manageable but there are two problems that will almost certainly arise.
The first is that major issue we first spoke about – lead time of components. The contract manufacturers are very lean organisations. They can not take risk in your inventory. Because they make products for many different design houses your product is likely to use many parts that are not used by any of their other customers. There may be a 100 different microcontrollers that are suitable for a particular design but once a design is complete only the 1 chosen is suitable. The chances that another customer of the contract manufacturer has chosen the same part are low. As a result the contract manufacturer only orders the parts once they have a firm order from their customer – and that is when the lead times start.
What makes this situation even worse is that the manufacturers of the components know that the contract manufacturer can not change the design to use other parts so they are now under no price pressure.
Contract manufacturers can at best negotiate a few percent on price by getting a distributor to reduce their margin.
The second issue is that there is always feedback from the field (faults and performance issues etc) or components that are no longer available. Is this a problem for the Contract Manufacturer or for the Design House? If the customer is not an expert in electronics how can they hope to adjudicate these issues? The usual result is that both of these matters are handled poorly or if they are handled well it is expensive.
The Don Alan Model
The Don Alan model integrates the best of the two models above.
At Don Alan we can design a product exclusively for the customer and the customer can use the design.
The customer can take the design to other contract manufacturers to quote and manufacture the product. The customer is not locked in. Don Alan must compete for ongoing manufacturing and design support work.
Mostly though, Don Alan will also manufacture the product. We have some advantages in manufacturing a product we have designed – and we only manufacture products we have designed.
The first advantage is that most of the parts will be the same as those used in other designs we make – and hence they will be ex stock from our inventory.
Not only ex-stock from our inventory but at a price negotiated based on our total usage. A price negotiated before they were designed in which is when we are in the best negotiating position.
The second advantage is that when it comes to feedback from the field or component supply issues we can handle these with minimal involvement of the customer.
We also have a competitive advantage in handling these issues as the issues are likely to be similar across multiple products the cost of addressing these is lower (on a per product basis).
When an initial supply order is placed at the same time as the design order we can order any unique parts at the design stage so they will be available for the initial supply.
Our components take as long as anyone else’s to arrive. The difference is that we have ordered them before the customer has even approached us for the design.
The merits of each model is summarised below
|Product Manufacturer||Design House/ Contract Manufacturer||Don Alan|
|Customer Can own IP||No||Yes||Yes|
|Competitive Unit Price||Rarely||Yes||Yes|
|Ability to protect customer from component lead times||Maybe||No||Yes|
|Counterfeit Components avoided||Maybe||No||Yes|
|Security of supply||Poor||High||High|
|Ease of Ongoing supply||Medium||Low||High|
|Design suits customer need||Maybe||Yes||Yes|
|Designed for lowest cost||Maybe||Maybe||Yes|