Posted on 05 Jan, 2017 by Neil Sharp
It's a question that gets to the very heart of things: why do original equipment manufacturers (OEMs) outsource to electronics manufacturing services (EMS) providers?
In many ways, the actual manufacturing process is a necessary evil for OEMs. Of course, they can't sell their products until they have had them assembled and tested but their real expertise lies in the conception of those products in the first place. OEMs are on the front line when it comes to the big ideas - for them, manufacturing is more of a means to an end. By contrast, for EMS providers, it's an end in itself.
Besides transferring the responsibility for one of their non-core activities, OEMs have a host of other benefits to gain by venturing down an outsourcing path. Let's consider why OEMs outsource in more detail.
1. To focus on designing, marketing and selling
OEM company business models typically focus on product innovation and development. They design most of the products themselves and own the "rights" to them - i.e. the intellectual property (IP). Outsourcing frees up more time to focus on these areas: it really is that simple.
The impending Fourth Industrial Revolution (or Industrie 4.0) and its implications – industrial automation, smart manufacturing, etc. - is putting more and more pressure on OEMs to innovate, in order to stay ahead of the curve and keep up in a constantly shifting landscape. Today, change is occurring on an exponential scale and it's all too easy to get left behind.
2. To save money
While cost is rarely the primary motivating factor in deciding to outsource, in doing so, OEMs are able to reduce their operating costs. Many EMS suppliers will be able to help their partners cut costs further – for instance, through implementing lean manufacturing processes, by replacing certain components with better value alternatives, or though using different suppliers.
Additionally, the OEM no longer has to invest in expensive capital equipment required for electronic assembly and test and can reduce their raw material and finished goods stock holding significantly. And with more time to focus on marketing and sales, an OEM is likely to see more business coming their way as a matter of course - all of which improves the bottom line.
3. To free up capacity
Naturally, OEMs want to grow and win new customers. But there's a downside to success – in that you outgrow your current situation. OEMs that have acquired more business may soon find that they no longer have enough factory space to accommodate it.
So, they face a choice: acquire new premises (along with additional staff and equipment) or outsource. The latter option is often the more favourable and the more cost-effective – both freeing up capacity and removing the burden of finding all the resources needed to meet demand.
In fact, if an OEM chooses to outsource their entire manufacturing operation – from procurement right through to shipment – they can remove their shop floor altogether. This allows them to focus 100 per cent on designing, marketing and selling.
4. To benefit from increased purchasing power
While an OEM manufactures their own limited line of products, an EMS provider has experience across a breadth of products and industries. And, consequently, they also have access to a wider range of suppliers.
This puts them in a superior purchasing position. For instance, an EMS supplier will be able to buy certain items used across multiple customer products in much larger quantities, allowing them, in some instances, to secure a better price – and these savings can be passed on to their OEM partner.
Many OEMs decide to hand over responsibility for their entire supply chain to their EMS partner. The best providers will have in place stringent procedures to vet their suppliers – so OEMs can rest assured that they are in safe hands.
5. To benefit from expertise/ value-added services
Their range and depth of expertise means that EMS providers can bring a unique and knowledgeable perspective to an OEM's manufacturing operation. They have experience in lots of different products and tend to be well-versed in overcoming different challenges and obstacles.
An EMS supplier's consultancy and advice can help across the entire manufacturing sphere, enabling OEMs to build strategies for product development, test solutions and global operational processes.
There are multiple reasons why OEMs outsource but, ultimately, it all boils down to the same thing. In entering an outsourcing relationship, an OEM becomes one half of a mutually beneficial relationship, in which both sides can focus on their strengths. For an OEM, the manufacturing process is simply the way they get their products to market - it's not a differentiator and is unlikely to be valued greatly by the end user. By handing over this responsibility to an EMS provider, they can put all their energies into ensuring that those products are of the highest quality and best suited to their customers' expectations - and the capricious business environment that exists today.