Posted on 28 Jan, 2016 by Neil Sharp
Electronics manufacturing services (EMS) providers have traditionally been categorised into three distinct tiers, according to their annual revenue.
But, while this approach may seem logical (and is certainly a simple classification system), it is not necessarily the most helpful for original equipment manufacturers (OEMs), who are looking to outsource all or part of their operations.
Although there is no precise rule, these tiers are commonly laid out along the following lines (or similar):
- Tier 1: >US$3 billion
- Tier 2: $300 million to $3 billion
- Tier 3: < $300 million
However, the amount of revenue a company generates doesn’t necessarily dictate where their strengths lie - nor how good a fit they will be for you, the OEM. Yes, you want to work with a partner that is financially sound but you also want to know about their technical capabilities, experience with products similar to yours, skills and expertise, and the like.
So how can you make an informed decision and find the best partner for your organisation?
Well, there are other ways of classifying EMS providers. In this blog post, we will put forward four alternative categorisation methods, which may better illuminate the defining factors you should take into account when selecting a supplier.
1. Complexity and volume
One option is to classify providers based on product complexity and unit volume. Companies are distinguished by whether they specialise in high volume/low complexity (HVLC) manufacturing or low volume/high complexity (LVHC) manufacturing. Complexity refers to the number of component parts in a product and the number of man/machine hours it takes to manufacture it; volume refers to the number of units built.
Consumer electronics, such as smart phones, tablets and televisions, are a good example of HVLC products. While these items may be highly sophisticated regarding the technology they contain, they are often made up of a select number of mass-produced parts. Therefore, the manufacturing process is relatively simple.
By contrast, LVHC products, such as scientific instruments or industrial machinery, can be made up of thousands of component parts, meaning the manufacturing process is complex and lengthy.
As a consequence of the very different skills and expertise required to build these two types of products, EMS suppliers usually specialise in one or the other.
In this instance, high volume consumer electronics products are generally manufactured by tier 1 suppliers, such as Foxconn Electronics and Pegatron. LVHC products are more likely to be manufactured by tier 2 and 3 suppliers.
2. Technical capability and service offering
EMS providers can also be categorised by their technical capabilities and service offerings - that is, the particular services they offer or the capabilities they can demonstrate that distinguish them from others.
For example, one company might specialise in a particular aspect of the overall manufacturing process - such as printed circuit board (PCB) assembly or cabinet build - while another might have the capabilities to fulfil every stage of the process.
To differentiate themselves in the market, many EMS partners now also offer value-added services that supplement either end of the manufacturing process. For example, they may help at the design and concept stage or offer “through-life” or “end-of-life” services that involve taking on product repair or refurbishment and even servicing products as they move through their product lifecycle.
By going this extra mile, an EMS supplier can play a vital role in supporting an OEM’s operation and its future growth - and, in the process, grant you the valuable time and resources you need to strengthen your core competencies.
3. Lifecycle stage
You may decide to choose a partner to work with based on where your products are in their life cycle. If you have a brand new design concept that you want to prove, then upfront product design and the ability to rapid prototype (deliver within hours not days/weeks) may be a priority - but it will come with a price tag.
If your product is on the upward growth curve, stability and continuity of supply are now likely to be important. Here, you will be looking for a reduced price (compared to the prototype stage) and increased levels of flexibility regarding stock holding/service agreements as you have a forward order book, which allows the EMS supplier a level of forward visibility/lead-time to plan around.
4. Markets served
It is also possible to rank EMS providers according to the markets they serve. For example, if you have an industrial machinery product, you will want to know which EMS providers have the people, skills, equipment and experience in manufacturing these types of products.
Since tier 1 suppliers largely specialise in communications and computer products, basing your choice on annual revenue is going to be of little use!
As you can see, there are different ways of categorising EMS partners. You may do well to forget what you know about the traditional tier system that ranks providers according to their annual turnover.
Unless your products "fit" (complexity, volume, price point, markets, etc.), this approach tends to be almost completely irrelevant when making a decision. Instead, look at your own products, business direction and the path that you want to take and partner with an EMS supplier that can offer the best solution for you.
4 different ways to categorise EMS providers