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April 26, 2007
Designers are being put between a rock and a hard place balancing material costs with product quality.

Brad Kautzer
Honeywell Sensing & Control
Electromechanical Products
Golden Valley, Minn.

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For most industries today, raw materials are becoming more costly and have begun to affect product bottom lines. Rising prices of copper, gold, and silver, for example, have squeezed OEMs and their component suppliers significantly over the past several years. In fact, the cost of these key ingredients in applications such as electronic components rose more in 2005 than in the previous two years combined.

Manufacturers didn't get a reprieve from the escalation in material prices last year either, with major year-over-year increases in silver (50%), copper (60%), zinc (122%), and nickel (150%). Companies everywhere are feeling the pinch.

Some in the industry view big rises in market price as an anomaly. Increases of this scale have not been seen in more than 25 years.

However, rising prices are likely to be the norm for quite some time because of demand coming from developing regions such as China. This isn't good news for OEMs: Regardless of the cause, rising material costs may threaten the health of many companies if not addressed immediately.

Material costs typically account for half a manufacturer's cost of goods sold. One of the key questions, thus, becomes how designers respond to rising raw material costs without jeopardizing product quality by specifying inferior alternative materials or components.

A recent PriceWaterhouseCoopers Manufacturing Barometer survey of 62 senior manufacturing executives sheds light on the issue. The study found that raw-material costs have risen for 53% of the companies. Nearly as many — 45% — report raising product prices. The survey says an increase in margins will let many OEMs make major capital investments in new products, services, and R&D over the next year. Such reinvestments would be impossible if material costs restricted cash flow.

OEMs are looking within their own organizations to help minimize the impact of material price increases. Engineers significantly influence development costs because they specify certain product qualities. For the first time in many industries, designers are actively working with procurement departments to ensure the materials they're selecting meet the company's margin requirements.

The issue of sacrificed product quality speaks to a broader set of concerns. It has forced many OEMs to examine what is important to their business. There is often a delicate balancing act between managing material costs and delivering a quality product. As most OEMs know, there can be a lasting negative impact from going to low-cost, low-quality component suppliers as a way to manage raw-material costs.

Most designers understand that a low-quality component in a critical application could bring product recalls and costly warranty issues down the line. When it comes to important product attributes, saving a few pennies is not usually the wisest decision.

Obviously not all components are made the same. Product quality and engineering expertise in sensors and switches, for example, can vary widely among suppliers. The rise in raw-material costs has made it increasingly difficult for most high-quality suppliers to remain competitive. Strong suppliers are unwilling to sacrifice product integrity — and thereby place their customers at risk — by specifying inferior materials in their components.

Reputable component suppliers are finding that they've exhausted the potential for cost-reduction practices such as productivity programs to optimize manufacturing processes. To improve margins in today's world of automatic "cost-down" contracts, there is often little choice but to remain competitive by adjusting prices. These necessary adjustments have not been easy decisions; suppliers know that rising prices directly affect customer purchasing power and supply chains.

Some OEMs may choose to respond to price adjustments by procuring less-expensive, low-performance components from suppliers in low-cost manufacturing regions. But they may soon realize price is only one factor in a relationship with a component supplier.

OEMs can benefit in numerous ways from working with suppliers having a long legacy of providing high-quality components. Suppliers new to the market typically lack engineering expertise to deliver innovative designs. They may also find it difficult to deviate from the standard model to generate a truly unique solution for a critical requirement. And it may be unwise to specify a component made with less-expensive, inferior materials to replace one with features or performance qualities unique to a specific application. Many times, even subtle differences in material content, tolerance, or specs have significant consequences on performance.

Designers needing higher levels of product sophistication may also have a tough time working with emerging suppliers because they specialize in a limited number of components. In contrast, suppliers with deep product offerings often have well-established engineering R&D groups that can give valuable assistance in new-product development.

Technical support and responsive customer service may also be important to consider. These factors may turn out to be invaluable once the design gets "thrown over the wall" to the OEM's manufacturing team. It's critical to have the right component on the production line when it's needed. Suppliers should serve as partners committed to an OEM's business rather than just as order takers.

Consider a water-level switch used in a dishwasher. Suppose a failed switch floods a kitchen floor. This type of failure is relatively minor but brings a service call and perhaps warranty costs for the OEM. The failure of more important components such as a thermal switch that regulates the heating cycle may bring more devastating consequences involving fire trucks, insurance companies, and legal liability. Both scenarios make saving a few cents on lower quality components seem penny-wise and pound-foolish.

In the transportation sector, sensors can be critical to vehicle performance. Their functions are important so defect levels have been driven to below 10 ppm. In many powertrain applications, failed sensors may force the vehicle to limp home or stop completely. This ultimately leads to expensive repair and costly downtime. No question the car owner will be dissatisfied. An occasional failure may require deep-dive failure analysis, but the ultimate risk is in vehicle recalls. One recall will far offset any material or labor savings in the quest for lowest cost. So it is critical to focus on not just price, but on the best total cost, which includes risk mitigation relative to quality or delivery.

Honeywell Sensing & Control,
(815) 235-6847,

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