Posted on 30 Jun, 2016 by Neil Sharp
Original equipment manufacturers (OEMs) have been outsourcing their electronics manufacturing and test for decades. So it’s perhaps surprising that a number of myths relating to outsourcing still remain today.
Of course, there is no smoke without fire. I’m sure some of these are the result of bad experiences, which have then been shared time and time again. That's why I thought I would try and tackle some of these head on so that anyone considering outsourcing to an electronics manufacturing services (EMS) provider can base their decision on facts and not fiction.
Here are five common myths relating to outsourcing and my advice to anyone grappling with these or similar questions.
Myth 1 - I need an EMS provider with a manufacturing plant close by
An EMS provider with a factory close by makes it easier for the OEM to call in on a regular basis and keep track of how their orders are progressing. It’s also more convenient for their engineering team should they need to visit and support with a New Product Introduction (NPI) or test-related issue. But are these strong enough reasons to start limiting the available pool of potential EMS providers?
Provided you appoint the right supplier you shouldn’t need to micromanage them. Of course, if they are not performing or you don’t trust what they are telling you then I’d argue you have a much bigger problem. With the latest video conferencing equipment and even less expensive solutions like Skype, it’s now simple and cost effective to hold "face-to-face" meetings with your suppliers anywhere in the world.
So rather than limiting your search for assembly partners on distance or the time it takes to drive to their factory, perhaps a better way of approaching the question is: "How important is the location of the EMS provider's facility in achieving our growth targets?"
Myth 2 - The unit cost of my product will significantly reduce when I outsource
Unit pricing, specifically reduction, remains a hot topic between OEMs and EMS providers during the early stages of negotiation. Although it would be easy to say otherwise, outsourcing your manufacturing does not always result in significant unit price reductions. Yes, a good EMS provider should be able to negotiate competitive pricing on your behalf on components shared across multiple customers - like passives, standard semiconductors and hardware items. However, on bespoke parts, particularly those from single source suppliers, chances are they will be paying exactly the same price as you. Then there are material margin and labour rates to account for.
So what does this mean for your own products? Well, much depends on the volumes, the mix of components specified, the lifecycle stage of the product and how much cost reduction activity has been completed in the past. For example, if you have a highly bespoke product which is in a "mature" state and your production and purchasing teams have spent years proactively taking cost out of it then do you really expect the EMS provider to achieve much more? On the other hand, a relatively new product, built in low volumes now expected to ramp up, consisting of a high mix of components, presents a greater opportunity for the EMS provider to work with to produce cost savings.
It’s easy to focus on unit pricing. After all, this is the number we see on purchase orders and invoices. However, the significant cost reductions associated with outsourcing come from the removal of layers of overheads across the organisation. Sometimes these are hidden and can often take longer to calculate but it’s certainly worth carrying out this exercise first before focussing your efforts on trying to shave off a couple of extra pence here and there. In addition, the benefits associated with working capital efficiency and the opportunity of reduced capital expenditure on equipment and facilities need to be fully understood and factored in.
Myth 3 - I need a Tier 1 supplier to get the most value for my organisation
Tier 1 suppliers, like Foxconn, Pegatron, Flex and Jabil, are multi-billion dollar organisations. Due to the size and high profile of the customers they work with, these global EMS businesses often appear in the media and make headlines in industry-related reports. But just because they happen to be the most "visible" EMS providers it doesn’t always mean they will provide the most value. In fact, unless you have the right kind of products and build volumes and plan on spending multi-million dollars with them, you may struggle to get a foot in the door. To get the maximum benefit for your organisation you should look for compatibility and "fit". Fit between an OEM and EMS provider relates to a variety of things – from spend levels and product portfolio through to the capabilities on offer and the management teams leading the company. There are many different ways of looking at the EMS supplier market and categorising them by turnover is just one.
Myth 4 - I need to partner with multiple EMS providers to spread my risk
It’s not uncommon for OEMs to use a number of different assembly partners. Sometimes this is out of necessity - for instance, one supplier could be proficient in PCB assembly only so the OEM needs another to support them with box build, cabinet wiring or electro-mechanical assembly. On occasions, the decision is made on the grounds of achieving greater levels of flexibility, price competitiveness or capacity when compared to working with a single supplier. If one of the suppliers doesn’t perform as expected they always have the other(s) to fall back on.
It would be difficult to argue that this approach doesn’t help spread the risk but what are the downsides? The most obvious one comes down to the time consumed by the OEM managing multiple supplier relationships. The more EMS suppliers the OEM partners with, the more internal resources they need in place across their business, to manage them. Then there is the issue of stock liability. If the OEM is using multiple EMS providers to build the same (or very similar) assemblies, they will need to have procedures in place to keep track of any stock liabilities that may be accruing in the background. Unfortunately, minimum order quantities (MOQs) on certain components can soon mount up. The worst case scenario is that each EMS company buys the same parts on your behalf, which ends up doubling or even tripling your future stock commitments with them.
There’s no right or wrong answer here - although, I would question the benefit of partnering with more than two EMS companies at any one time. My advice would be to carry out an in-depth risk assessment on each of the EMS partners you are looking at and determine if any of them can offer you a single solution. If they can then you will need to decide how much risk they present to your company and your customers. If it’s relatively low and you are confident in their capabilities in terms of their consistency, quality and delivery performance - plus behind the scenes aspects, such as the robustness of their finances and IT systems and disaster recovery policy etc. - do you really need to commit more resources by partnering with additional suppliers?
Myth 5 - My product is far too complex to outsource
Why is it too complex? How does it compare to other products that are currently outsourced? Is your product or solution uniquely complex? Sometimes it can be difficult to visualise exactly how a third party would be able to replicate the tasks your own team completes day in, day out. In some cases, this perceived hurdle can be enough to halt any further outsourcing discussions. But EMS providers work with multiple customers across a broad range of industry sectors. As a result, they are faced with complex production, test and logistical challenges day in, day out.
Before you put a stop to an outsourcing initiative why not get a second opinion? You will need to validate first-hand that the EMS provider is capable of taking on a project like yours, which is relatively straightforward to do. For instance, a look on their website, watching any service videos that they may have available or, better still, a walk around their production facility, should be enough to get a pretty good understanding of the types of products and customers they currently support. Provided your business and products are similar in either material make up or process, there shouldn’t be any reason why you couldn’t also make the transition from "in-house" to "outsourced" assembly.
Hopefully, this post has been of use and provided some guidance on five of the more common myths we hear relating to electronics manufacturing. There are plenty more when you start getting into the detail but I thought I would save those for another day!
If you are considering outsourcing to an EMS provider and have any other questions that you haven’t been able to find satisfactory answers too, then feel free to drop a comment below or arrange a consultation with us at any point.
Image by Alberto Elia Violante