“Just because you can fly a hang glider does not mean that you will make a good 747 pilot.” -John Knight, vice president of Knight Electronics
In the latest PD&D Fireside Chat, John Knight, vice president of Knight Electronics, talks absurd shipping polices, companies that suffer from NIH (not invented here), soaring Asian lead times and material costs, the future of contract manufacturing, big government and fears over the massive proliferation of new government rules and regulations — and a potential screaming halt to the global economy.
PD&D: How did you get your start in the industry?
John Knight: I graduated from the U.S. Merchant Marine Academy and got my first jobs working for large shipping companies both ashore and at sea which enabled me to view the global supply chain from a unique perspective.
PD&D: What did you learn as a graduate of the Merchant Marine Academy that you still hold with you today?
Knight: Most of my skills learned are still used today. Intermodal logistics, engineering, stowage, international supply chain formalities, international customs … it’s a pretty long list of acquired skills.
PD&D: How does Knight Electronics’ new contract manufacturing service assist small- to mid-sized OEMs?
Knight: We level the playing field for small and medium customers by using our resources to ensure quality production from each individual component through a full turnkey assembly.
Our staff is on hand in Asia to ensure the customer specifications are being met, which is cost prohibitive for all but the largest OEMs with full time engineering staff on hand in Asia.
We then eliminate all the guess-work in currency exchange and logistics problems by just giving the customer a single cost without any variables. Since we spread our staff over many projects and customers, the cost burden disappears for the customer so it enables him to compete with companies significantly larger with a proven skill set.
PD&D: Why go after the small- and mid-sized OEMs rather than the bigger players in the industry?
Knight: Unfortunately, many larger companies suffer from the NIH factor (not invented here) and they are so compartmentalized that they don’t have one person that sees the entire total acquisition cost for a product. It’s just easier for the larger companies to push a cost off on a different department as long as it is not affecting their department budget.
A good example would be a company that has a purchasing manager who sees only the product cost FOB China and does not consider the FedEx charges or customs duties paid to get the product into his facility — because it’s in the transportation budget and not the product cost.
It sounds absurd saying that, but we see it all the time. That’s not to say all large companies do this — many of our customers are Tier 1 companies and have found value in having us manufacture some part of their product for them.
PD&D: Is it necessary to eliminate offshore sourcing?
Knight: No, far from it. It should just be performed by companies that are well-qualified to handle all of the potential problems and pitfalls that can occur. Just because you can fly a hang glider does not mean that you will make a good 747 pilot.
Our 30 years in Asian manufacturing has clearly demonstrated that the cheapest price is not always the lowest cost. Knowing where the hidden costs and potential problems are can save companies significant cost and headaches with defective product, warranty claims or even hidden logistics costs for inland freight charges that are not routinely disclosed to overseas buyers up front.
PD&D: Why are Asian lead times and material costs “soaring”?
Knight: There are a number of reasons. Lead times are out, because many of the Chinese workers didn’t come back to work after the Lunar New Year holidays and stayed in their hometowns because of Chinese Government incentives. This left the traditional Southern China manufacturing hubs seriously lacking in manpower.
This was also coupled with a mandated wage increase. On top of that, ocean freight rates have gone through the roof.
Raw material costs have increased because of the strengthening economy and some serious fluctuations in currency exchange rates, which can negatively affect companies that have to buy raw material from the U.S.
This has made for a tough climate to keep stable pricing, and has also caused lead times to stretch.
PD&D: You’ve been in the industry for 30 years. What was the one project that stood out the most?
Knight: Probably the gate opener project we did for an OEM several years back.
We started out only producing a custom transformer and relay for the customer. We of course discussed a full turnkey solution for the customer’s product, but they were quite adamant that they wanted to produce the finished product in-house. If they “off-shored” the product, they would have to layoff most of their employees and they would lose their good standing with the Chamber of Commerce, etc.
A year later, they booked some significant business at a level that would not allow them to make a profit, so they came back to us and said they wanted us to look at it as a turnkey to try and salvage the deal.
We were able to give them a delivered cost that put them back in the black and the giant “P.S.” on this was that [the company] didn’t have to lay anyone off and they nearly doubled the size of their U.S. facility.
They had to hire more workers — in a different capacity than stuffing resistors in a board. It was the ultimate example of the counterintuitive result.
PD&D: How will the contract manufacturing industry change in the next five years?
Knight: That’s a good question because a lot of that has to do with how much government interference plays in all of this. Not just from the U.S. Government, but from the foreign governments where manufacturing plants are located.
In order to be a viable alternative to companies doing their own in-house assembly, contract manufacturing has to be fast and flexible enough to accommodate what customers are demanding from the OEMs, and they have to do it at least as cost effectively as doing it themselves.
Some things, like the mandated healthcare bill, will also tip the scales in favor of more contract manufacturing. If you had a small company with a handful of employees and a product that needed to be manufactured, would you want to hire 50 new employees, pay all the benefits and hassle with all of the bureaucracy to build your own product?
It would be far simpler to just have a contract manufacturer do it and let them worry about the employee problems. It’s sad commentary but true.
On the opposite side of the Pacific, if the Chinese Government doubles wages and logistics costs continue to skyrocket, that would have the effect of driving production back towards North America, but might end up in the domestic CMs.
PD&D: Why do you think people often lose site of total acquisition cost?
Knight: Properly calculating total acquisition cost is not simple so [people] don’t bother to try and really nail it down.
How do you estimate what your lost goodwill cost is when you have a quality problem with an offshore supplier you couldn’t supervise?
If you have an inland freight charge of $350 no matter if the quantity is 75 pieces or 7,500, and you don’t have consistent quantities, what do you do with that?
How do you calculate for potential currency fluctuations? It’s easy just to use the FOB product cost and some arbitrary percentage for duty and freight, so that’s what most people do. That only covers a small fraction of the total acquisition cost of a product.
PD&D: Given the current state of the world economy, what keeps you up at night?
Knight: The massive proliferation of new government rules and regulations.
Just in the U.S. alone, the past few years have seen the addition of CTPAT, the Lacey Act, 10+2, mandatory cargo screenings and huge fines for companies that make even minor typographical errors that may be beyond their control.
You have RoHS and REACH requirements and a host of other tree killing pieces of global legislation coming. If all of the other U.S. trade partners do the same, the global economy has the potential to come to a screeching halt as systems with conflicting information become gridlocked.
More about the man:
- John is an accomplished musician who plays both trumpet and piano with weekly gigs (St Gabriel’s brass ensemble).
- Afloat, he sailed as a deck officer with the International Organization of Masters Mates and Pilots as well as MEBA during Operation Desert Shield and Operation Desert Storm.
- He is a past director of the U.S. Merchant Marine Academy Alumni Foundation and currently sits on the Congressional Selection committees for both Congressman Pete Sessions and Congressman Sam Johnson for their Service Academy selection boards.
- John has been married to his wife Gina from Valley Stream, NY since 1988 and has two daughters.
For more information on Knight Electronics contract manufacturing services, visit www.knightonline.com.