Posted on 11 Feb, 2016 by Neil Sharp
Many contract electronics manufacturers (CEMs) sell the concept that they are an extension of their customer’s shop floor. Over the years, this analogy appears to have worked well and is relatively easy to relate to. After all, a number of "shop floor" activities are transferred over to the CEM's manufacturing facility by an original equipment manufacturer (OEM) once they embark on an outsourcing strategy.
But surely one of the end goals of outsourcing is to remove the shop floor completely? How will you be able to focus 100 per cent on designing and selling great products if you still have elements of manufacturing and logistics to distract you?
So you don’t really want to extend what you have already. Of course, that’s not really what the CEM means; what they are trying to convey is that, through the solutions they offer, they become such an integral part of your business that it’s as if they are working alongside your staff on a daily basis across a number of different areas.
Which got me thinking: how many areas does an OEM need to relinquish to their CEM in order to be in a position to remove their shop floor completely? Let’s find out!
In simple terms, there are four areas, providing you agree that, as the OEM, you remain responsible for product design and the sale of your product. Reputable CEMs will be able to support you with procurement, assembly, test and, finally, shipment of your goods. Of course, each of these stages can be split down into much more detail.
Many CEMs will have a global reach when it comes to component sourcing and will be happy to hold "buffer stocks" of raw materials and finished goods, to support your future demand. They will be responsible for managing the supply chain and remaining at the forefront of industry legislation changes. They will need to protect you from the very real threat of counterfeit components from entering the supply chain by utilising in-house inspection equipment, like X-ray and high magnification scopes.
Internally, they may operate "Kanban" or "line-side" replenishment systems, in order to support lean-line production. This all sounds impressive and it is - but, once you cut through the jargon, essentially these all fall under the procurement category.
It’s generally accepted that the more of the services and solutions offered by a CEM that an OEM takes, the greater the benefits they will see. Relinquishing control of procurement and assembly are often the first two areas OEMs look to outsource. These are typically the areas they feel most comfortable to "let go" and where they can see tangible cost benefits.
The testing of products can sometimes take a little longer for OEMs to outsource. Quite often, this stage requires bespoke equipment and instructions being handed over to the CEM. A lot also depends on "how far" the OEM has agreed to outsource the assembly stage.
For instance, if the OEM is only outsourcing the printed circuit board assembly (PCBA), then before it can be sold it will require a "box build" service and fitting into some kind of enclosure, cabinet or electro-mechanical assembly. If the CEM is not in control of the full assembly they obviously can’t offer a complete test solution and, therefore, this additional work falls back to the OEM.
The area I want to look into further is shipping, or outbound logistics as it’s also sometimes known. I believe this to be one of the most significant areas for an OEM to outsource - yet very few embrace it. And I’m not talking here about simply shipping a product from the CEM out to the OEM - that clearly happens as standard. No, I’m talking about shipping product directly from the CEM's facility straight to their customers’ customer - the ultimate end user.
As a result, this requires the CEM to take full responsibility for all "goods receipt" transactions on the OEM's IT system, as well as sales order processing and despatch paperwork creation. In this scenario, the OEM never gets to see or touch the product they have sold. Quite often, this is a step too far for most; but, when you think about it, it makes perfect sense.
After all, why would you want to receive, open, handle, test, repackage and then ship product out again when it could all be done by your CEM? Not only are you introducing the potential for delays and damage, but you still need sufficient space to store products and packaging - plus the overheads relating to the people, equipment and procedures required to manage incoming deliveries and outgoing shipments.
What value does your customer get from receiving your products from your warehouse compared to someone else’s? Do they really care as long as they turn up on-time, in full, without damage and to the specification they expect?
Maybe you don’t see enough value in outsourcing this function. After all, shipping goods only really involves putting things into cardboard boxes and then sending them out through a courier, right? Or perhaps it’s because you feel you have to control the final stage. It’s certainly critical, as it’s the first time your customer is going to see the goods they ordered from you.
Don’t get me wrong: this solution requires a huge degree of trust between you and your CEM partner of choice. They must be able to demonstrate that they already offer this level of service to other clients, and you will want to understand how they control issues like customer returns or quality issues.However, the benefits in outsourcing this final stage can be huge. Specifically, taking this step results in the removal of your shop floor once and for all - so you can focus on the areas of your business that matter the most.
Image by Nitram242