Managing Productivity and Relationships with OEMs

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The heart of all OEM/CM relationships is trust derived from the knowledge of their capabilities and demands of the market.

By Luke C. Kensen and C.P. Chin

Because outsourcing is a reality that works, there is no reason why it cannot work for original equipment manufacturers (OEM) as long as they keep their eyes open and their brains on fast forward when entering into an agreement with a service provider or contract manufacturer (CM).

69340-th_68340.jpgFigure 1. This combines high-speed placing with a PCB loading system to increase throughput. These systems achieve placing speeds of 0.09 seconds per shot and can be loaded with up to 140 types of parts.

By providing the latest capital equipment (process knowledge and manufacturing expertise), the OEM can use CM resources not only to remain competitive with each successive product generation, but also to shorten time-to-market, lower manufacturing (and total product) cost and increase returns on investments (Figures 1 and 2).

69340-th_68341.jpgFigure 2. Component pick-and-place chipshooter (rear view tape-and-reel). Pick-and-place system can handle a maximum of 140 types of parts and has a pallet circulation mechanism that increases flexibility for continuous production.

While the CM industry is a fairly new, worldwide business component, it is insulated from global downsizing and shutdowns because its growth is largely fueled by the trend toward OEM outsourcing. Current uncertainties in the electronics industry are likely to hasten these efforts even further as OEMs delay or cancel construction of new manufacturing plants and announce personnel layoffs while fighting to lower operating costs and protect profitability levels. If this acceleration does occur, CMs are positioned to sustain robust revenue growth even if end-user sales moderate.

Emerging growth companies in the electronics industry have met and exceeded their most optimistic expectations because of the availability of CMs and their ability, in turn, to meet demand spikes and manage inventories. Large electronics OEMs such as Lucent Technologies, Hewlett-Packard, NCR, Philips, Ericsson, IBM, Nokia and Apple Computer have liquidated some of their manufacturing capability to either strengthen or reposition their competitive advantage. These plant divestitures by some of the industry's largest OEMs represent strong support for the future growth of the CM industry and should help ensure that these companies remain primary sources for the products that comprise the worldwide $1.5 trillion electronics market.

Why Trust Is ImportantIf many of the world's foremost electronics companies use outsourcing as a major component of their business models, then why is employing it such a big deal? The answer is simple: Outsourcing can either make a company a stronger, more profitable business by allowing the technical staff to concentrate on design and product development while allowing others to perform the assembly and test operations; or outsourcing can lead to disaster by giving away the essence, vitality and control of the company. Delegation should not include abdication. That is why trust in the CM by the OEM is critically important, particularly with startups and small companies with new, breakthrough products and sharply limited finances.

When setting up OEM/CM relationships, OEMs must be careful not to allow financial constraints (or other factors) to influence them into outsourcing something "precious," whether it is special customer relationships, proprietary knowledge or unique technology.

Some OEMs believe their CM must know everything about the business in order to be productive. That is not true. The reality is if OEMs share everything about their business with someone of no integrity, there is a risk of that person literally stealing the business. Not only should OEMs be very selective when entering into an outsourcing agreement, but they must be aware that there is a fine line between sharing relevant information and giving away too much (do not disclose what makes the company unique).

Choosing and Managing the Right CMBecause no one can afford or be good enough at everything in these complex, fast moving times, using third-party contractors with the pertinent skills can be advantageous. Outsourcing the right work to a capable contractor with complementary skills and a good culture match can be a rewarding strategy. But first, OEMs must know what is core to their business. Is the technology widely known or is it proprietary? Who has the best skills? What will be outsourced entire products, certain components, raw material supply or non-core service? And what is needed a conventional or complete turnkey service? Additionally, OEMs should be clear about what is actually expected from outsourcing. If outsourcing is used in a thoughtful manner (not as a reaction to some short-term problem), it can become a profitable and powerful tool in the competitive tool kit.

It is implicit in the OEM/CM relationship that the CM will bring value-added expertise to the customers. Therefore, CMs should continually strive to update and improve their manufacturing and engineering services to bring optimal value, on-time delivery and the best opportunity for positioning their OEM customers in the marketplace.

Evaluating and Resolving Manufacturability ConcernsWhat are some technological factors that are driving this phenomenon? The higher array densities, associated with chip scale packages, are having a direct impact on printed circuit board (PCB) specialists who are finding that design layout, PCB quality, ultra-fine-pitch assembly and machine operation directly affect process yield. Also, a major advantage that ball grid array (BGA) and microBGA packages have over leaded components is their small footprint. By reducing the bump to 0.5 mm, there is a threefold increase in packaging density, significantly enhancing product performance.

69340-th_68342.jpgFigure 3. BGA/rework station. These systems combine the technology to rework the entire range of SMT devices, from chip components to large quad flat packs and BGAs.

Typical surface mount process factors include component placement, reflow, cleaning and electrical test. Additional operations may be required depending on the product design. Specific factors must be evaluated and resolved before optimum electronics manufacturability concerns are introduced into a high-volume assembly line. Those factors include: materials and cost analysis; design for manufacturability; design for testability (DFT) (Figure 3); PCB design and layout; automated SMT and through-hole services; burn-in with environmental stress screening; conformal coating and encapsulation; and aftermarket refurbishment depot.

Notwithstanding its many obvious advantages, it has been an uphill battle for many OEMs to bring outsourcing into their overall business strategy. Historically, OEMs have taken the position of "tell us what to produce, let us produce it as efficiently as we can, then (logistics) ship it." But increasingly, advances in manufacturing technology, the cost of highly specialized machinery, and the difficulty of finding skilled and knowledgeable employees are making outsourcing an attractive and viable solution.

Market DriversMany business analysts who have studied today's CM industry see an ever-increasing demand for advanced packaging capability, particularly miniaturization. Consumer demand for portability and the need for smaller, lighter, faster, higher performance, less expensive, yet more reliable products are driving most of today's developments in packaging. If this trend continues (and there is no reason to believe it will not), many products will be approximately five times smaller within the next five to 10 years. Products such as mobile telephones, notebook computers, pagers, modems and camcorders are driving this miniaturization revolution. These products demand innovations in integrated circuit technology, flexible circuitry, flip chips and other developments to allow for higher densities, lower profiles and reduced mounting areas with less height and weight than ever before. As PCB density continues to grow, alternate packaging solutions will be a daunting problem for those in the CM industry (Figure 4).

69340-th_68343.jpgFigure 4. To meet SMT demand, this CM expanded its capability to include 17 high-speed continuous flow and 14 modular SMT lines.

Because SMT has become so important in the CM universe, CMs are concentrating more of their capital assets to supporting the trend. Finally, to fulfill their partnership role, the CM should implement such measures as JIT delivery and other buying strategies that will help drive down costs.

The Complexity of Test ServicesTest problems are certain to increase with the ever-decreasing component geometries and the resultant difficulty in accessing PCB test nodes by conventional contact testing. To satisfy the demands of DFT, it is important for the CM to professionally engineer the entire manufacturing process, and to become actively involved in concurrent engineering and design conferencing with the OEM at the outset of an outsourcing program. The CM must also assign a senior test engineer to establish testability guidelines; conduct DFT reviews; and ensure that critical testing demands such as burn-in, temperature cycling, manual and automatic in-circuit test, functional test, and other strategies are integrated when and where they become critical to the overall manufacturing process (Figure 5).

69340-th_68344.jpgFigure 5. This test station is designed to meet the growing technological challenges for accurate test voltages and more useable digital resources.

A well constructed test program not only ensures overall product quality but also improves throughput, reduces inventory, enhances delivery and becomes a launch point for continuous process improvement, and the introduction of next-generation strategies such as process simulation and virtual manufacturing.

Engineering Services SupportFor most CMs, concurrent engineering is essential in supporting OEM customers and the design process. Before prototype design is completed, many OEMs download their computer-aided design information to be reviewed for manufacturability, testability, packaging and other factors affecting overall product yield. This type of input from the OEM's design, component and test engineers is necessary to optimize the variables involved in production.

CMs are continually faced with PCBs that have no areas for test points, no tooling holes, boards that are virtually impossible to manufacture, and boards where component selection could greatly improve both design and manufacturability. An engineering review involving the CM is essential in finding design flaws that will eliminate engineering trade-overs and stabilize costs, all while adhering to the standards and documentation requirements established by the OEM.

The Role for DistributionDistribution's core competency is material and material management while the core competency for a CM provider is assembly, test, engineering, material procurement and management. In a turnkey arrangement, there are many ways a CM provider can sharpen the pricing strategy to the mutual benefit of the CM and the OEM customer. For example, the CM can obtain the best costs via franchise alignment with first-tier distributors. Also, when possible, the CM should exploit distribution's contract manufacturing market channels, maximize multiple customer buying leverage and utilize second sourcing on critical components. And if there is a distributor partner who has strong franchised line cards, the CM can usually expect return privileges, minimal inventory liability, more support in "allocated" products, better pipeline management, availability of end-of-life products, reduced cycle time and lower logistics expense. These are strong arguments for OEMs to designate turnkey manufacturing outsourcing in their overall business plans.

For additional information, contact LUKE C. KENSEN, director of business development, at Express Manufacturing Inc., 3115 West Warner Ave., Santa Ana, CA 92704; (714) 979-2228; Fax: (714) 556-0575; E-mail:



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