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Is Outsourcing for Everyone?
December 31, 1969 |Estimated reading time: 17 minutes
By Stephen F. ScheiberOver the past few years, contract manufacturing (CM) activities have exploded. Before eagerly embracing this alternative, however, these elements should be evaluated: What factors are encouraging the trend? What criteria determine the decision to outsource? Should everything be outsourced? And, how is control maintained when products are made by others?
Outsourcing originally began from OEMs' need to manage the manufacturing peaks and valleys resulting from volatile, often unpredictable, sales volumes. In order to perform their own manufacturing, OEMs had to face three difficult choices:
- Maintain sufficient staff to deliver product at sales peaks, knowing that workload would later drop along with volume.
- Staff at some compromise level, carefully scheduling and distributing tasks to accommodate peak loads.
- Hire staff at peak times, lay them off when sales drop.
Obviously, each of these options presented drawbacks. On the other hand, CMs, now more commonly called electronics manufacturing services (EMS) providers, offered to handle peaks easily with their production capacity. As they grew more common, however, and as OEMs gained more experience in dealing with them, routine manufacturing also shifted to EMS companies (Figure 1).
Today, many OEMs perform little or no manufacturing of their own. Computer makers in particular adopt this approach, nimbly reacting to instantaneous changes in the marketplace. It is no longer unusual for a half dozen different brand-name computers to come off a single assembly line. (However such products are not identical. Each OEM designs products with unique characteristics and specifications, while the EMS provider keeps customer jobs strictly separated to avoid conflicts of interest and other difficulties.)
EMS AdvantagesEMS alternatives add enormous flexibility to an OEM's arsenal of available tools. Because they make a broad range of products for an equally varied group of customers, EMS providers accumulate a wider array of knowledge, experience and expertise than their OEM customers. So an EMS provider often can suggest other manufacturing (including test) strategies and tactics to improve product performance, manufacturability, quality, reliability and, most importantly, cost.
Figure 1. The growth of outsourcing over the past few years will continue to accelerate. (Data comes from the 7th edition of The Worldwide Contract Electronics Manufacturing Services Market report, by Randall Sherman and published by Electronic Trend Publications Inc. Used by permission.)
Moreover, variations in throughput requirements, product changes and product mix generally present less of a challenge to an EMS provider. Many products go through regular manufacturing cycles. In the automobile industry, for example, test development and product requirements peak at the beginning of each model year. Others, including computers and cell phones, experience a bump during the holiday season. EMS providers smooth out their own production schedules by carefully managing the needs of individual customers so that their peaks seldom coincide.
Still, perhaps the largest single factor sending OEMs to EMS companies is start-up cost. Manufacturing operations are notoriously expensive to build and maintain. Therefore, the cost-of-entry for a start-up company is considerably higher if the company plans to manufacture its own products than if it plans to purchase production capability elsewhere. Uncertainties in predicting sales volumes and product profitability make predicting financial returns on an OEM's manufacturing operations exceedingly difficult. Investors are increasingly reluctant to fund such endeavors. Engaging an EMS provider means that a much lower investment is necessary at startup, reducing investors' risk and helping assure profitability more quickly. In fact, a prominent CM executive referred to his company as "infrastructure for rent." (He also referred to large vertically integrated companies that still do their own manufacturing as "relics of a bygone era.") The trend, therefore toward the "virtual corporation" in which different parts of the process are handled by different legal entities will continue to accelerate. Table 1 summarizes these points.
No Solution Is PerfectDespite its growing popularity, outsourcing presents its own challenges, as Table 2 illustrates. Working with EMS providers requires tighter management practices over the entire manufacturing operation as well as better process documentation. Both are imperative to ensure that what the OEM wants and what the EMS provider builds coincide. Although many engineers regard these requirements with disdain, tight management can minimize the likelihood of design errors and ensure that production processes remain in control, thereby maximizing product quality and functionality and increasing chances for market success.
For the OEM, the primary drawback to outsourcing is loss of control over the manufacturing process. Geographical distances affect delivery schedules for both inventory and final product. Calling in a product designer or manufacturing engineer to solve a production problem generally is slower and more expensive when the process involves an EMS provider. Time-zone distances may aggravate delays. Transportation costs are higher than with in-house operations.
Out of necessity, an EMS provider will learn intimate details of product design and construction. Revealing such proprietary information makes many OEMs uncomfortable, especially when the same provider may be working for competitors as well. This situation has become increasingly common, and offers no easy solution. OEMs must exercise a "leap of faith" that the provider's reputation, potential loss of business or (as a last resort) threat of legal action will sufficiently protect their interests.
Situations in which the EMS provider's manufacturing facilities are far from the OEM's design team underscore the need for local control by the provider. Manufacturing and test strategy engineering and modification also must occur locally because manufacturing departments cannot afford to wait two days or longer for answers to engineering problems. The logistics of such relationships encourage the breakdown of the wall between engineering and manufacturing something that most test experts have long advocated. Note that OEMs setting up their own centralized manufacturing facilities often share these same experiences.
Realistic ExpectationsUnderstanding the relative capabilities, responsibilities and limitations in the OEM/EMS relationship helps ensure its success. OEMs must understand that outsourcing does not eliminate all manufacturing costs. A staff of experienced people must support the OEM/EMS relationship and deal with any problems that arise. Unfortunately, without a significant manufacturing operation of their own, OEMs may find a dwindling supply of people with the necessary skills to perform this function.
OEMs also must recognize that EMS providers are not magicians. They cannot wave magic wands and turn a pile of bare boards and electronics parts into perfect working systems. Additionally, and contrary to popular opinion, contractors are not all alike. Their skills are as different as the products they make, so sending contract specifications to several EMS providers and blindly accepting the lowest bid can spell considerable trouble. Selecting a CM requires as much diligence as any other large investment. The right EMS partner can turn even a difficult job into a high-quality, profitable product. The wrong choice can hurt even a good product's quality and financial performance.
Choosing the "right" EMS partner depends a great deal on the nature of the OEM's product. Some CMs, for example, specialize in high-volume, low-mix, low-margin products such as cell phones and personal computers. Their strength lies in reducing cost and product-to-product variation. These companies expend their resources developing efficient manufacturing and test strategies, as well as creating, debugging and optimizing test programs. Contractors in this category prefer to concentrate their efforts on programs and strategies rather than on the products themselves. The automobile industry, for example, prefers this approach. Most carmakers would rather spend extra time and money optimizing fixtures, programs and developing self-tests than add a $0.75 or even a $0.0075 component to every board.
Figure 2. Balancing manufacturing lines to accommodate volume requirements that may change without a warning can be accomplished either by moving the product to another line or increasing the number of lines manufacturing the product.
Some complex, low-volume products offer higher margins and require higher quality, making them less sensitive to manufacturing costs. Typically, product failure consequences demand that defective products never reach customers. Manufacturing pacemakers, for example, is not inherently more difficult than making cell phones or PCs. But test program development costs, as well as product upgrades and other changes must be amortized over a much smaller product volume. Additionally, PC and cell phone failure may cause user dissatisfaction and annoyance, even incur warranty costs, but pacemaker failure can cause user death. EMS providers address these customer functions as an extension of the OEM's own resources, often serving as partners during the design stages and early stages of manufacture. The link between the OEM and EMS provider is tighter here than in high-volume/low-mix cases.
Finally, it is important that EMS providers have sufficient resources to exercise a measure of autonomy over the production process. A problem that the contractor can resolve independently of its OEM client reduces the engineering load on the manufacturer, and the time saved reduces the product's time to market.
Striking the Right BalanceEMS services vary widely. Some EMS providers concentrate on reducing costs while others emphasize achieving unparalleled quality and reliability. At one extreme, an EMS provider may populate boards from bare, and furnished parts. It also may perform some kind of manufacturing defects test (such as in-circuit test [ICT] or X-ray inspection). The OEM receives finished boards, subjects them to environmental-stress screening and functional test as appropriate, then assembles, tests and packages the systems for shipment. Sometimes several EMS providers manufacture different boards for large systems. Here, the OEM retains most control over the manufacturing and test process, including the methods employed at each step.
On the other hand, an OEM may provide the CM with only design and functional specifications. In this case, the provider controls every aspect of the production process, deciding strategies and tactics, and may significantly re-engineer boards and systems to enhance their manufacturability, testability, quality and reliability. The EMS provider may even box systems up and ship them directly to distributors or end users. This arrangement requires that the provider share engineering responsibility with the OEM, pooling expertise to best benefit both parties. The OEM gets a better-engineered product for less, thereby swelling profit margins.
Between these points lies a continuum of alternatives. Deciding where along that continuum an OEM should "drop anchor" represents the crux of the vendor selection and planning process.
Vendor FactorsA PC manufacturer, for example, may want to engage a large enough contractor to ensure sufficient resources to meet production schedules. General business rules-of-thumb recommend that a customer should provide no more than a third of a vendor's total business. More than that and the vendor becomes too dependent on the patronage of that one customer, which distorts the vendor/customer relationship. The vendor, on the other hand, would prefer that no customer provide more than 10 percent of its business to avoid undue exposure to wide swings in the customer's operations.
A large EMS company generally encounters a wider variety of manufacturing and test strategies and philosophies than a smaller company. Bringing an unusual situation to a small EMS provider may not permit the best solution simply because they lack sufficient experience with similar problems. Yet the wider experience cuts both ways. Rather than evaluate each situation entirely on its own merits, the large provider may attempt to fit every problem presented into one of the alternatives in a menu of suggested strategies. The OEM must always ensure that the EMS provider's final strategic decisions address the constraints and parameters in the best possible way.
At the same time, a small OEM generally does not want to engage a vendor so large that the amount of business generated gets lost in a sea of much larger projects. A small company often can get much more personal attention from a small EMS provider (subject to the same size caveat as before). Rather than impose a "best" solution, the small contractor may be more willing to design a manufacturing and test strategy in cooperation with the OEM. Although a small contractor may have fewer resources and less experience, if the contractor's skills match the OEM's needs, the result should be a strong and mutually beneficial relationship.
OEMs should take advantage of manufacturers' expertise in another vital area as well. Many EMS providers offer extensive engineering services extending far beyond buying bare boards, parts, chassis and setting up assembly. These providers can potentially re-engineer products; for example, a board measuring nearly a meter square that boasts 26 percent node-access for an ICT may defy conventional attempts to achieve acceptable yields. Sometimes the solution requires changing strategy, e.g., supplementing ICT with X-ray inspection. Alternatively, savvy engineers with manufacturing experience and the right tools may be able to redesign the board to provide additional access, add self-test coverage to supplement conventional test, and otherwise make the board more "manufacturable" and testable. Where re-engineering is appropriate, an EMS provider that specializes in such activities generally will produce higher-quality, higher-reliability products at lower cost.
The EMS Provider's ViewpointAn OEM looking for the right EMS partner must recognize that the provider's manufacturing challenges differ from those the OEM would experience. First, the provider generally enjoys little or no control over the design itself. Layout changes, adding or enhancing self-tests, etc., will not compensate for a design that is inherently difficult to manufacture in the required quantities. An experienced EMS provider may work with a customer during design to encourage manufacturability and testability and discourage the reverse, but ultimate design decisions rest with the company whose name goes on the product.
One primary concern in accepting a contract is to keep costs down and avoid unpleasant surprises that can make thin profit margins vanish completely. OEMs need to be sensitive to this situation, remembering that the object is for everyone in the relationship to come out ahead. Keeping costs down requires remaining flexible. For the provider, that might mean balancing manufacturing lines to accommodate volume requirements that may change without warning. A board assembled and tested on line "A" on one day may be assigned to a different line the next day because line "A" is running another product. Similarly, volume ramp-ups may demand increased lines manufacturing a particular product, as shown in Figure 2. Achieving this level of flexibility with the least amount of pain requires that manufacturing plans, test fixtures and test programs perform identically from one line to the next. Therefore, different pieces of equipment of the same make and model must behave identically, which is not always the case.
A contractor may send production from one geographical location to another for many reasons. Tax benefits and import restrictions such as local-content requirements may encourage relocating part or all of a manufacturing operation elsewhere in the world. The EMS provider may send manufacturing to another part of the world just to reduce costs. Shipping distances and other logistics may make spreading production over several sites in remote locations more attractive as well. Again, seamless strategy transfer from one place to another will reduce each location's startup time and costs.
The first six to 12 months in a relationship with an EMS provider are critical. That period establishes procedures and defines work habits and communication paths. Schedulers should allow for longer turnaround times to implement product and process changes than with in-house projects.
The Bottom LineAs an OEM, specific needs must be evaluated to select an appropriate EMS provider. The OEM must not permit a contractor to diverge from a desired test strategy unless it convincingly represents a better solution. Each vendor generally has an installed base of test systems and certain preferred manufacturing and test procedures. Although the EMS provider usually has great experience in making those systems and processes work, such capabilities must match customer needs. Completely surrendering control to the contractor is like going to an investment advisor who recommends the same vehicle for everyone. The EMS providers' "vehicle" is manufacturing. Accordingly, OEMs must pay attention to what they have to say with the proviso that their assertions can be justified.
Identifying the right partner requires that a satisfactory tradeoff among quality, cost and delivery factors be found. If the product reach is global, the EMS provider should have a worldwide presence as well. Because the product could ship from manufacturing lines anywhere in the world, the provider's choice of test equipment should minimize the effort and cost of that wide implementation and distribution.
In final analysis, there are no "canned" solutions. One size cannot fit all. The best EMS provider for others may not work for a specific OEM in search of a manufacturer. And the best reputation has no value if circumstances are sufficiently different from what that provider generally faces.
STEPHEN SCHEIBER, consultant, may be contacted at ConsuLogic Consulting Services, 276 Longhouse Ln., Slingerlands, NY 12159-3012; (518) 452-9228; Fax: (518) 452-9216; E-mail: sscheiber@aol.com.
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Supply Chain ManagementAs distributed manufacturing becomes the norm for the electronics industry, rapid product introduction increasingly depends on OEMs' ability to efficiently link their information systems with those of their suppliers. The most recent roadmap from the National Electronics Manufacturing Initiative (NEMI) indicates that the greatest potential for productivity gains in electronics manufacturing lies within improving supply chain management. However, OEMs were struggling with integration and interoperability when all facets of producing a product from design to assembly to distribution were handled within one company. Efficient integration becomes more difficult when several companies are involved. The challenges are even more daunting for the EMS provider who must accept designs produced by various systems and return both product and formatted information back to the OEM customers.
Information Exchange StandardsNEMI's Virtual Factory Information Interchange Project (VFIIP), which was launched last year, is defining standards to shorten the time and reduce the cost required to establish and maintain information exchange partnerships across the electronics manufacturing supply web. Efforts are focused on the problem of communicating product content information between OEMs, manufacturing providers and component suppliers. The standards being developed are based on extensible mark-up language (XML), the universal format for structured documents and data on the Web, which provides a simple yet powerful and flexible way to encode structured data into a format that is both human- and machine-readable.
In October 2000, VFIIP submitted specifications for three proposed standards to IPC Association Connecting Electronics Industries. These specifications are the first of the product data exchange (PDX) suite of standards that will give partners a way to exchange product content and changes in a common language. The PDX standards provide, for example, a way to exchange product genealogy information, describe product content bill of materials (BOM), handle engineering change orders (ECO) and more all in an XML format.
The initial standards in working draft form:
- 2571 provides an "overview" of the entire suite of standards for supply chain communications. It also describes how PDX is expected to work in conjunction with other related standards and formats.
- 2576 defines how manufacturing product genealogy information the build history of boards and final assembly is exchanged. All product characteristics are represented, including serialization, lot information and manufacturing. This information may be used to support products through the equipment's life.
- 2578 facilitates quote, manufacture, configure, test and kit interactions among supply chain partners. It defines an XML encoding scheme, which enables a total product definition to be encoded at a level appropriate to facilitate supply chain interactions. An encoding scheme is defined for BOM, approved manufacturer list (AML), approved vendor list (AVL), changes (engineering, manufacturing, product), and references to documents describing geometric and other part characteristics (Table 1).
Other Standards in ReviewNEMI is working in partnership with the IPC, which has established the 2570 series of supply chain communication standards specifically for the standards generated by the VFIIP. PDX standards, along with other standards suites such as the 2510 series for CAD-to-CAM data exchange and the 2540 series for shop floor communication, provide manufacturers with a standard approach to robust, negotiation-free technical data exchange.
The initial PDX standards specifications currently are in review and IPC expects them to achieve formal standard status this June. VFIIP's next step is to initiate standards focusing on quality (IPC-2577), work in progress (WIP) and tracking (IPC-257x), to be introduced in the second quarter of 2001.
NEMI also is working with RosettaNet to ensure synergy between the two groups' efforts. RosettaNet is a global consortium working to create and implement industry-wide e-business process standards. Its Partner Interface Process* (PIP) specifications are specialized business-to-business XML-based dialogs that support business processes between information technology, electronic components and semiconductor manufacturing supply chain partners. NEMI has become a coalition partner of RosettaNet and is collaborating with that group to leverage VFIIP standards into the RosettaNet PIPs. Toward that end, RosettaNet has established a new manufacturing cluster and reorganized its product information cluster to integrate the work performed by the VFIIP team. The IPC-2578 standard will flow into a series of PIPs relating to product design information while IPC-2576 will enable manufacturing information distribution (including genealogy and quality).
- Partner Interface Process is a trademark of RossettaNet.
For more information, contact JIM MCELROY, executive director and CEO at NEMI, (703) 834-2082; Fax: (703) 834-2735; E-mail: jmcelroy@nemi.org; Web site: www.nemi.org.