Manufacturing Companies Balance Sheet
As OEMs have embraced a broader, more holistic set of outsourced manufacturing services, their balance sheets have reaped the benefits of jettisoning those assets traditionally associated with the “M” in being an OEM – namely (1) .... The Honorable Marco Nobili, the Consul of Italy from the Consulate of Italy in Detroit, welcomes U.S. manufacturers to partner with Italian companies to achieve the goals of profitability, efficiency, productivity, process improvement, and ...
Manufacturing Companies Balance Sheet
The decoupling of manufacturing assets from te returns they traditionally earn is creating significant tension in the supply chain.
In the early days of contract manufacturing, the primary motivation for outsourcing was the OEM’s desire to achieve peak factory loading. Vertically integrated OEMs would outsource overflow capacity of a single process or set of processes to a Contract Manufacturer (CM) so that they could run their own factories at near peak capacity and eliminate some incremental capital expenditures on plant and equipment. This early outsourcing evolved into the turnkey outsourcing of the production of entire products to leverage the CM’s ability to aggregate material spend and drive a lower product cost. Eventually, outsourced manufacturing – at least for some companies – developed into the asset-light model of relying broadly on external manufacturing service providers to perform all of the supply chain and manufacturing functions that were once an integral part of the firm.
As OEMs have embraced a broader, more holistic set of outsourced manufacturing services, their balance sheets have reaped the benefits of jettisoning those assets traditionally associated with the “M” in being an OEM – namely (1) property plant and equipment for manufacturing, and (2) material and product inventory. Although most OEM executives would strongly argue the tremendous financial merits of their new, “outsourced balance sheet,” the improved Return on Assets (ROA) these OEMs enjoy often comes at a price. The outsourcing of major components of the balance sheet has led to a broad decoupling of the ownership of these assets from the returns that these assets have traditionally earned, creating significant tension and goal misalignment in the supply chain.
Let’s look at a few statistics here as we examine the impact of the outsourced balance sheet. First we’ll look at Inventory Asset Productivity (IAP) which is a measure of the financial productivity of a firm’s inventory. In 1996, the average Inventory Asset Productivity (IAP) of the electronic product OEMs that we follow as a proxy for the overall industry was 3.66. This means that these firms on average earned $3.66 of gross margin for every dollar of inventory they held on their balance sheets. Fast forward to 2011 and the average IAP for the same proxy group has doubled to 7.30.
Now let’s compare that to the Inventory Asset Productivity of the CMs; those firms to whom the manufacturing portion of the balance sheet has been progressively outsourced. In 1996 the average IAP of the CMs in our industry proxy group was 1.53, meaning that they earned on average $1.53 in gross margin for every dollar of inventory on hand. Today the IAP for that same proxy group is a scant .53.
To really put this into perspective we need to look at the relative changes in IAP for the two groups over the time period. In 1996 the ratio of IAP of OEM users of manufacturing outsourcing to the IAP of the CM providers of outsourced manufacturing services was roughly 2.4 to 1. Today, as the outsourced balance sheet has become virtually the norm for most major electronics OEMs, the ratio of IAP between outsourcing users and outsourcing providers has risen to an alarming 13.8 to 1.
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In the early days of contract manufacturing, the primary motivation for outsourcing was the OEM’s desire to achieve peak factory loading. Vertically integrated OEMs would outsource overflow capacity of a single process or set of processes to a Contract Manufacturer (CM) so that they could run their own factories at near peak capacity and eliminate some incremental capital expenditures on plant and equipment. This early outsourcing evolved into the turnkey outsourcing of the production of entire products to leverage the CM’s ability to aggregate material spend and drive a lower product cost. Eventually, outsourced manufacturing – at least for some companies – developed into the asset-light model of relying broadly on external manufacturing service providers to perform all of the supply chain and manufacturing functions that were once an integral part of the firm.
As OEMs have embraced a broader, more holistic set of outsourced manufacturing services, their balance sheets have reaped the benefits of jettisoning those assets traditionally associated with the “M” in being an OEM – namely (1) property plant and equipment for manufacturing, and (2) material and product inventory. Although most OEM executives would strongly argue the tremendous financial merits of their new, “outsourced balance sheet,” the improved Return on Assets (ROA) these OEMs enjoy often comes at a price. The outsourcing of major components of the balance sheet has led to a broad decoupling of the ownership of these assets from the returns that these assets have traditionally earned, creating significant tension and goal misalignment in the supply chain.
Let’s look at a few statistics here as we examine the impact of the outsourced balance sheet. First we’ll look at Inventory Asset Productivity (IAP) which is a measure of the financial productivity of a firm’s inventory. In 1996, the average Inventory Asset Productivity (IAP) of the electronic product OEMs that we follow as a proxy for the overall industry was 3.66. This means that these firms on average earned $3.66 of gross margin for every dollar of inventory they held on their balance sheets. Fast forward to 2011 and the average IAP for the same proxy group has doubled to 7.30.
Now let’s compare that to the Inventory Asset Productivity of the CMs; those firms to whom the manufacturing portion of the balance sheet has been progressively outsourced. In 1996 the average IAP of the CMs in our industry proxy group was 1.53, meaning that they earned on average $1.53 in gross margin for every dollar of inventory on hand. Today the IAP for that same proxy group is a scant .53.
To really put this into perspective we need to look at the relative changes in IAP for the two groups over the time period. In 1996 the ratio of IAP of OEM users of manufacturing outsourcing to the IAP of the CM providers of outsourced manufacturing services was roughly 2.4 to 1. Today, as the outsourced balance sheet has become virtually the norm for most major electronics OEMs, the ratio of IAP between outsourcing users and outsourcing providers has risen to an alarming 13.8 to 1.
Attend Technology Days, a free event to foster innovation. See mature NASA technologies ready for commercialization, network with new supply chain partners & create new business opportunities. Learn more.
Everyday Innovation, Part 3: Achieve the Impossible through Process Innovation How to Leverage a Performance System to Drive Operational Excellence Everyday Innovation, Part 2:
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A strategic plan is only as good as the thinking that goes into it. Strategic thinking happens in a number of different ways, formal and informal but fundamentally affects your ability to execute on your long term process improvement objectives. Therefore, when the plan is lacking, we need to step back and consider the thinking. Even thinking is a process....More Jul.
After a long day of learning at the conference, attendees took over the field -- having their pictures taken with the Lombardi trophy, touring the Colts locker room, kicking field goals, throwing passes, and enjoying a live band....More Jul.
IW Best Plants winner Lockheed Martin Missiles & Fire Control, Lufkin Operations, shares how it develops the goals and objectives of its annual Site Excellence Plan, as well as the role Performance Management Teams play in carrying out those goals and objectives. Learn how the annual plan is developed and broken down into projects, kaizens and "just do its."...More Jul.
What kinds of IT application downtime problems are manufacturers currently facing, and what are they doing to prevent downtime from impacting their operations? Watch this 4-minute video featuring IndustryWeek IT editor Travis Hessman....More Jun.
Learn how Italian manufacturers can provide U.S. manufacturers with technology and machine tools to increase productivity and sustainability, as well as how they’re investing in and bringing high-quality manufacturing jobs to the country....More Jun.
The Honorable Marco Nobili, the Consul of Italy from the Consulate of Italy in Detroit, welcomes U.S. manufacturers to partner with Italian companies to achieve the goals of profitability, efficiency, productivity, process improvement, and organizational results....More Jun.
A leader in building a sustainable business by developing eco-sustainable products, Mr. Giancarlo Losma addresses the business imperative of transitioning your business to become more environmentally sustainable....
AAF HydroShield gas turbine filtration solutions recover lost power, boost performance and reduce fuel usage in some of the harshest, wettest conditions on earth. Learn more at aafgtsolutions.com.
Download UL's Indoor Air Quality Journal to learn more about our innovations around VOC content and emissions, our unique air databases and advanced testing methods to detect SVOCs.
Enhance your operations, reduce waste, and streamline your activities by learning from the best. Using IW's Best Plants Benchmarking Database, find out how top plants have achieved their success.
When a disaster hits your small or midsized business, you'll lose $1,230 per minute on average. Download this free white paper to learn how the cloud can help you recover your critical data more quickly, to get you up and running faster.
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