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As demands for products with increasingly smaller packages and enhanced performance grow, OEMs are looking for CMs that offer one-stop shopping.
By Frank Mokry
With January 1, 2000, drawing near and technology changing at a frenzied pace, the contract manufacturing industry is challenged more than ever to serve OEM customers with increasingly complex needs. Market pressures for new products containing more functionality, speed and performance in increasingly smaller packages have resulted in giant leaps in miniaturization and enhanced performance of SMT devices.
On the macro side, OEMs search for ways to incorporate new and developing technologies into their products in the most cost-effective manner, and increased global competition has resulted in price erosion on many new products even before their release to the marketplace. To help combat the effects of this price erosion and the resulting profit-draining price reductions that an OEM may have to endure to gain market share, many OEMs turn to a contract manufacturer (CM).
Before CMs can commit to supplying OEMs with a complete array of vertically integrated services, there must be a return commitment by the OEM. In 2000, will OEMs be ready for a true manufacturing partnership?
OEM/CM RelationshipsOEMs compete in markets with rapidly shrinking margins and product lifecycles. This requires them to refocus efforts in their core areas of competence innovative new product design and sales/marketing of these products to identified customers while turning to CMs for manufacturing expertise.
OEMs have come to realize that a CM with a broad customer base, producing products for many market segments, is often able to more cost-effectively manufacture product than an OEM can. The outsourcing strategies of many of the world's leading OEMs prove this. More and more utilize the CM industry for their manufacturing needs (Table 1). Some OEMs outsource nearly all manufacturing needs; even those OEMs who traditionally did all of their own manufacturing are seriously rethinking their internal manufacturing strategies because of intense competitive pressures. The shift of manufacturing from the confines of an OEM's facility to a CM represents a significant change in the way a CM is viewed and valued. This has influenced the creation of more equitable CM/OEM relationships.
With rapidly increasing demands for CM services, come greater responsibilities to offer OEMs more services. Progressive CMs offer a more vertically integrated array of services in support of their customers. It is becoming common to see CM companies configured similarly to the vertically integrated OEMs of the 1960s, '70s, and '80s with internal sheet-metal fabrication, plastic-injection molding, cable-assembly capabilities as well as other internal subassembly capabilities. This allows a CM to closely control cost, quality and supply. The benefit to the OEM is the co-location of widely divergent resources in one place one-stop shopping from paint and plastics to high-volume processes that speed time-to-market while keeping prices in their place.
The vertically integrated CM of today differs from yesterday's vertically integrated OEM in several important ways. Today's CM utilizes its equipment to service many different customers in multiple market segments. This makes for more cost-efficient utilization of capital assets on a more consistent basis because of the lessened impact from a reduction in demand from any particular market segment. The vertically integrated OEM suffered significant financial impact from asset underutilization in the event that their product faltered in the marketplace. Another significant OEM benefit is the control that a CM has over its ability to react to unforeseen schedule changes.
When a vertically integrated supplier internally controls the majority of the historically long-lead subassemblies, such as plastics, sheet metal and cables, they are better able to accommodate significant upsides and push-outs. At the same time, they can minimize or eliminate the financial impact normally incurred by the customer when dealing with a traditional CM that procures such items from outside vendors. Another OEM benefit is greatly reduced exposure to costs related to uncancelable, nonreturnable items such as specialty plastics, sheet metal and cables. A vertically integrated CM can produce the exact quantities required for manufacturing when they are needed, eliminating inventory associated with transportation, engineering change orders (ECO) and minimum lot-size runs imposed by many outside vendors. This is in keeping with the just-in-time (JIT) philosophy and moves towards the optimum lot size of one.
Additional services are being offered to the OEM market by CMs in response to the increased need for overall project management. These include project managers in residence at the OEM that manage and coordinate the manufactured product. Another service is in-house storage of consigned components at the CM's facility by the component distributors; this facilitates faster response to changing OEM demands. Also, OEMs are turning to CMs to provide engineering services for front-end design and support of products being manufactured.
As more responsibilities are transferred to CMs, the need for enhanced communications becomes critical to the success of both organizations. No longer will CMs be considered outside suppliers but rather extensions of the OEM's capabilities. Real-time data exchange becomes a necessity, as does the OEM's ability to "see" into the manufacturing environment. This provides the OEM with real-time manufacturing data the same data the CM uses to manage its factory. These data may include detail of assemblies progressing down SMT lines, specific to an individual board, including its location on the line. Additional data shown include the profile the board experiences during reflow, and first-pass-yield information with detail down to the component level. Data shared with the OEM illustrate the assembly's progress to shipping or finished goods inventory. The customer accesses this data as if the product were running in its own shop. This depth of visibility, provided through secure, password-protected Internet sites, is a radical departure from traditional manufacturing, and requires a profound level of trust between the OEM and CM.
ConclusionWith the changes occurring in the marketplace and the increasingly important role that a CM plays in relation to the OEM, key cultural changes must take place to allow and foster cooperation and the free flow of information between the two companies. Along with these cultural changes are the mutual integration of information systems that allow the level of communication that facilitates success in this new environment.
True partnerships between OEMs and CMs are becoming more common today as OEMs come to rely upon CMs for product line manufacturing. Many OEMs have divested themselves completely of their manufacturing resources and depend totally upon a highly skilled CM supplier to become their "virtual" manufacturer. Moreover, a vertical offering of services provides OEMs the luxury of one-stop shopping. This allows the OEM to fully focus on the timely and competitive development and deployment of future products, which in turn allows continued profitability by the OEM in today's cutthroat marketplace.
FRANK MOKRY, vice president of sales and marketing, may be contacted at K*Tec Electronics Inc., 1111 Gillingham Lane, Sugar Land, TX 77478; (281) 243-5000; Fax: (281) 243-5440.