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Fighting Back: U.S. EMS Providers Are Winning Against China
December 31, 1969 |Estimated reading time: 7 minutes
The transfer of North American electronics manufacturing to Asia presents a challenge to domestic electronics manufacturing services (EMS) providers.
By Ty Eggemeyer
Looking specifically at China, research by Global Sources and eMedia Asia Ltd. shows China's electronics revenue grew 17.8 percent over the previous year to $169 billion.
This movement of electronics manufacturing offshore has, in some ways, spurred domestic EMS providers to evolve and refine their relationships with OEMs. As these relationships grow, EMS providers that understand the new dynamics are thriving.
Just a few years ago, managing an outsourced manufacturing relationship was a new and at best, challenging opportunity. Turning over technical expertise, inventory and often the all-important product shipment deadline to an outside source was an unsettling proposition. In many cases, outside sourcing decisions were driven by a lowest quote mentality. Inventory costs were not as important as component shortages. Today, the story has changed. The OEM with a constant eye on profitability is more likely to consider the full costs of manufacturing. For example, finished goods coming by boat from a Chinese manufacturer are in inventory for three weeks. Components tend to be in inventory longer as well, all contributing to higher costs of the finished product.
Effective communications with an offshore manufacturing partner also can be difficult. Communicating design changes, technical issues or quality concerns when partners are on opposite sides of the globe can be difficult, even in this age of electronic communications. Any part of the process that puts change implementation or manufacturing deadlines at risk is a serious concern. Additionally, geopolitical concerns cost many OEMs millions of dollars in lost revenues. The offshore sourcing strategy has lost some luster. Singapore is seeing less foreign investment, and a recent study concluded that 70 percent of U.S. companies manufacturing in Asia have yet to profit from those operations.
More Sophisticated Relationships
As a result of changes in this dynamic marketplace, domestic EMS and OEM relationships by necessity have become more sophisticated. For example, OEMs now realize that when they collaborate with an EMS partner on design and inventory issues, costs that traditionally were hidden now are exposed. The design engineer wanting to improve product functionality can be aware of excess inventories of the about-to-be-replaced component, and make the proper decision regarding component changeover timing. This way, an OEM is not suddenly hit with a charge for obsolete parts in the EMS provider's inventory that often can affect already thin product profit margins.
No longer does an OEM engineer design in a component, while later purchasing assigns the cost, and no one talks to manufacturing. Modern electronics companies understand the value of the team approach. The OEM and the EMS provider now work together much earlier in the process. The EMS provider supplies engineering support at the design stage. Designers even run proposed engineering change orders past their contract partners to determine the impact of the change on the manufacturing process and when the best cut-in time would occur.
The best EMS providers now have strong relationships with component manufacturers and distributors. This provides the EMS provider with insight into obsolescence schedules six months in advance, and gives the OEM time to source alternatives or make design changes to the boards. The most capable contract manufacturers (CM) have component engineers on staff, continually searching for cost reduction opportunities.
An EMS provider should review every engineering design to ensure that the manufacturing process is properly considered and appropriate design changes are implemented. Even if an assembly has been in production for years at another location, it should undergo a formal review for design for manufacturability (DFM) and design for test (DFT) specifications. Considerable collaboration is required between the OEM and EMS to ensure the success of this process, which is so vital to attaining high first-time yields and cost efficiencies.
In this current manufacturing economy, OEMs are downsizing their work forces, including their engineering staff. The domestic EMS provider can augment an OEM's stretched engineering resources. While design and R&D functions remain with an OEM, the EMS provider often can address sustaining engineering issues.
As in any relationship, open communication is critical. For example, if an OEM does not clearly communicate regarding a design or manufacturing issue with an assembly, those issues carry over to the EMS company. For example, assume 15 percent of assemblies are failing at the OEM's facility and this is not communicated to the EMS provider. It may be because the OEM is somewhat embarrassed, or the OEM may be counting on the expertise of the EMS provider to solve the problem and absorb the associated costs. No matter the reason, this lack of communication may cause the production run to fall short of projections, and the CM to spend unnecessary time troubleshooting a problem known to the OEM.
In another example of a communications gap, a CM assumed responsibility for manufacturing an RF product that an OEM had been building in-house. The OEM knew the product was difficult to build, as yields were barely acceptable. After the first assemblies came off the production line at the EMS, four separate tests at the OEM resulted in unacceptably low yields. In this case, the OEM and the EMS worked together to discover the cause of the problem. It seemed that the devices were passing tests at the EMS, but failing at the OEM. The OEM/EMS team discovered that the test fixtures at the EMS were different from those at the OEM. The team standardized the test fixtures and after further analysis, made some minor board changes. New tests showed yields now are around 99 percent. In addition to solving the problem, the team was able to reduce production costs by 5 percent, as the OEM no longer had to inflate orders to get the units required. In this case, communications and data sharing, not finger pointing, made success possible.
Conclusion
Communication is key to any OEM and EMS long-term partnership. Reviewing manufacturing costs, discussing in advance how cost savings will be shared, regular meetings between OEM design and EMS manufacturing teams, and sharing critical information make relationships successful.
Ty Eggemeyer, president and CEO, may be contacted at Pinnacle Electronics Inc., (412) 829-4800; E-mail: teggemeyer@pinnacleelectronics.com.
Eight Tips for Picking the Right EMS Provider
- Financial Stability. Many EMS companies that quote extremely low to win the business often cannot afford to honor the quotation. The exceptional EMS provider will give an OEM access to financial data that backs up a manufacturer's claims and proves its ability to add staff, buy equipment, meet schedules, etc.
- Price. The biggest mistake an OEM can make is to choose an EMS provider solely on price. Many EMS providers under-quote projects just to get the business. Pick the EMS provider best for individual manufacturing requirements, then negotiate pricing to acceptable levels.
- Quality Processes and Controls. Ask your potential EMS partner for yield data from other products. Does the EMS provider have ISO-9001 certification? Talk to references the EMS company provides to learn their experiences.
- Cost Reduction Programs. The EMS provider should have a proven methodology for cost reduction in both process and materials. What is the policy for sharing cost savings? One EMS provider passes 50 percent of the cost savings on to the OEM the first year, and 100 percent of the savings in subsequent years.
- Clear Communication Channels. An account manager that learns your business, has technical ability, is proactive and offers suggestions is an ideal complement to the team. Access to key executives of the EMS provider when necessary also is important. An account manager can be instrumental in gaining that access.
- Effective Materials Management. Look for proper inventory management and controls. Watch for cost reductions over time.
- Component Engineers. These engineers will find obsolescence issues early, have an open channel to component manufacturers and distributors, and will be able to recommend cost-effective alternatives for the OEM. Check to see if your EMS provider has component engineering capabilities.
- Openness. An EMS provider should give an OEM a detailed cost breakdown of the project before manufacturing begins. This breakdown should include labor, overhead and component-by-component materials costs. Few providers are willing to do this, but this open analysis gives both parties the information needed to ensure no potential savings have been missed. Does the EMS provider have the appropriate customer and banking references? Check with their suppliers to be sure there will be no interruption of component availability. An EMS partner should willingly provide this type of information.