Posted on 04 Feb, 2016 by Neil Sharp
As an original equipment manufacturer (OEM), once you’ve outsourced your manufacturing to an electronics manufacturing services (EMS) provider, you will have very little hands-on involvement with your materials supply chain. And that’s a good thing because it means you have more time to focus on your core competencies - i.e. designing and selling your products.
Many OEMs allow their chosen partner to procure all the materials on their behalf using their own suppliers. From a cost perspective, it often doesn’t make sense for the OEM to maintain their own procurement team alongside their EMS supplier's operation.
A good EMS provider is likely to have long-standing relationships with their suppliers. And they tend to choose suppliers that have an intimate understanding of the market, are capable of producing a wide range of products, and can cope with peaks and troughs in demand.
However, to ensure that going down the outsourcing road will benefit your business, you need to be absolutely certain that your EMS provider's supply chain is efficient, excellent and transparent. Any gaps or weaknesses are very likely to travel down the chain and have an impact on your own company at some point.So how can you be sure that your EMS supplier has a robust supply chain in place?
1. Demand planning and forecasting
Most EMS providers will use some form of Materials Requirement Planning (MRP) system to break down your orders and forecasts into a requirements schedule. It's important that these forecasts are as accurate as possible since the EMS supplier will use them to calculate how they can best meet demand. Reliable forecasts can also enable a degree of flexibility during the manufacturing process.
Projects involving long-term forecasts are usually the easiest to manage. However, for this process to work effectively, you will need to make your delivery expectations clear to your assembly partner. Predicting exactly when your end customer will want product can often be a challenge. So, if you suspect they will demand product at short notice and are aware your design contains components on extended lead times, it is good practice to implement some kind of service level agreement (SLA) with your EMS partner. The best SLAs allow you to react to unpredictable demand without having to order "just in case" stock, while providing a robust framework for you and your EMS partner to manage on-going stock liabilities and commitments.
2. Inventory policy
An inventory policy determines the amount of stock that an EMS provider is prepared to hold on site on behalf of all their customers. This feeds directly into their ordering policy.
The SLA between you and your EMS partner will largely determine your finished goods stocking policy. To calculate this policy, many EMS providers will use a supply chain ratio called the P:D ratio (production cycle: demand requirement). This system compares the production lead time for a particular product with the demand or market lead time expectation.
It is good practice to continuously monitor inventory and ordering policies. Sometimes, EMS providers will adopt sophisticated statistical approaches to improve their policies. For example, where requirements are not consistent, standard deviation of demand might help to spot trends.
Furthermore, a good EMS provider will have a strategy in place to manage component obsolescence. They should work closely with their key partners and have in place early warning processes to identify "at-risk" parts. In this way, a transition to an equivalent part can be made before a particular component becomes prohibitively expensive or completely unavailable.
As electronic devices become scarcer the chances of counterfeit or non-conforming versions entering your EMS suppliers' inventory increase. So when it comes to the integrity of their chain of suppliers, mitigating the risk of these "suspect" electronic devices is a key priority. This requires investment in an array of inspection tools, trained inspectors, and robust procedures. It's no longer possible to simply rely on a couple of basic checks and, increasingly, combinations of inspection equipment have to be used in order to identify suspect parts.
To help ensure that customers' demands are met, most EMS providers will have some form of contract in place. A simple but effective supply contract would include, at a minimum: agreement on pricing, lead times, batch quantities and any stock commitments.
Every EMS provider will have a chosen mechanism for sharing information electronically with their suppliers. It is becoming increasingly common for EMS companies to utilise electronic procurement processes to request quotes, place orders and even manage invoices with suppliers. The technology underpinning this has moved on massively since the early days of electronic data interchange (EDI) and nowadays a complete electronic interface, from the customer through the EMS provider to the initial supplier, means the information flow can be quick and accurate.
The reasons for the increasing use of E-procurement tools are simple - they cut out unnecessary administration, reduce errors and speed up processing. It is now possible for an EMS supplier to receive a forecast from a customer; raise a purchase order with a supplier; send the purchase order; and receive confirmation of the order in 24 hours using E-RFQ. In the past, these processes would have required a considerable amount of administration and would have taken several days to complete - eating into the originally quoted lead time.
Hopefully, this blog has given you some useful insight into areas to consider when looking into how your EMS supplier approaches their planning, inventory control, and supplier relationships. Once you have discussed these with them, you will be better placed to judge just how robust their supply chain is.
The points highlighted in this post are, of course, not the only criteria to take into account. For more detailed information, download our eBook below.