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High Expectations Force Action
December 31, 1969 |Estimated reading time: 8 minutes
In this issue, our roundtable participants grapple with issues pertaining to the growing needs of their OEM customers. Rising customer expectations have forced many contract manufacturers (CM) to reevaluate the services they provide. Establishing a global network, using the Internet for real-time customer service, and maintaining a top-notch engineering staff to either drive technology or assist the OEM in the design phase are all musts for today's CM. The following participants shared their insights on these pertinent issues:
C.P. ChinPresidentExpress Manufacturing Inc.Santa Ana, Calif.
David J. GarciaVice President Sales, Marketing and Program ManagementMCMS Inc.Nampa, Idaho
Q Provide a brief description of your CM facility.
CHIN: Express Manufacturing has been providing advanced technology, experience, flexibility, time-to-market delivery and cost-effectiveness to its customers for more than 16 years. The ISO 9002-certified company provides a "one-stop-shop," total turnkey solution for electronics manufacturing services. My company's experience in offering diverse electronics manufacturing solutions is carefully tailored to meet specific customer needs. The company offers automated SMT, ball grid array (BGA) and micro-BGA, assembly, rework, X-ray, through-hole assembly, flip chip, dedicated prototype line, in-circuit testing and development, functional testing, conformal coating, burn-in with environmental stress screening, box-build/system integration, final packaging, materials management and design for manufacture (DFM)/design for test (DFT).
GARCIA: We operate four ISO 9001- certified facilities worldwide. MCMS provides a broad range of services for the manufacture of custom complex printed circuit board (PCB) assemblies, memory modules, and systems including design, product engineering, procurement and material management, assembly, test engineering, quality assurance and order fulfillment.
Q What specific outsourcing trends do you expect to see in the PCB assembly business?
CHIN: Bumping service and flip chip assembly using laser technology along with complete turnkey projects, including box build, are part of the outsourcing trends that we expect to be more involved with in the near future.
GARCIA: Offshore-manufacturing capacity has been deployed traditionally by personal computer, consumer, and certain segments of the medical and telecommunications industries. We are now beginning to see a migration to offshore manufacturing for products of significantly greater mix and complexity within industry segments such as networking and telecommunications. This offshore deployment is often margin or cost driven, and is made possible by the increased complex assembly and test capabilities being developed overseas.
Q Do you expect to see more or fewer participants in the CM industry over the next five years? How will CMs distinguish themselves? How will they handle shrinking margins?
CHIN: Because of the record number of mergers and acquisitions in 1998, for the next five years, there will be fewer participants in the CM industry. It is expected that there will always be smaller CMs serving the customers that do not fit major CM business models. Shrinking margins are becoming more obvious and CMs must aggressively re-engineer the process of managing the supply chain. Maintaining programs involving automated SMT assembly in the United States while transferring labor intensive programs to Mexico would be ideal for managing my company's future business.
GARCIA: Fewer participants the CM industry is in the process of maturing and consolidating. Although the total number of CMs will decline, regional CMs will always be needed to support small- to mid-sized OEMs for new product introduction (NPI) activities as well as low-volume, turnkey production.
While the larger players continue to get bigger, it will be critical for the medium-sized or tier two and three CMs to focus on competitive differentiation. This becomes increasingly important as larger CMs begin to compete with the second-tier companies for similar customers to increase their margins.
In an effort to maintain gross margins, some CMs are targeting more profitable industry segments and providing a broader range of value-added services, from engineering services through distribution and fulfillment. Additionally, many CMs have expanded into areas of vertical integration such as PCB fabrication, plastic-injection molding and sheet-metal stamping. There are benefits to margins that come with mass, which is why we believe consolidation will predominantly affect the second-tier players.
Q How does a global network interact with regional markets? How do you ensure product uniformity among disparate facilities?
CHIN: A global network is an essential part of supply-chain management approximately 70 percent of all turnkey programs are directly related to materials that include PCBs and components.
GARCIA: A global manufacturing network is clearly the most appealing to multinational OEMs. Strategically placed regional facilities in large countries such as Brazil, France or Germany tend to appeal to local OEMs, as well.
Product uniformity among different facilities is a straightforward issue in terms of what needs to happen, but not straightforward in terms of implementation. One needs to start with a common set of design rules and platforms, so that when designing a circuit board or manufacturing process, it can be implemented in a consistent manner, regardless of geography. Common manufacturing and test equipment platforms, programming tools, enterprise resource planning (ERP), and other manufacturing and accounting systems are all part of the solution. For this reason, my company employs common processes and procedures throughout all four of its global facilities, including a common information technology (IT) platform, equipment set and quality system.
Q What are the characteristics of an ideal OEM/CM relationship?
CHIN: The most important issues between OEMs and CMs are trust, mutual understanding, conducting business in an ethical and responsible manner, keeping each other informed and sharing pertinent information of the future business plan.
GARCIA: It starts with a win/win partnership based on a set of goals and objectives that, when well executed, can benefit both companies. It tends to be a long-term partnership where successful execution of one program leads to both program extensions and new business.
It's a relationship that allows the CM to make an acceptable profit margin, yet requires the CM to be competitive with the range of services offered, in the pricing of those services, and in the quality and timeliness under which they are delivered. It's an open relationship, so that if issues arise, they are brought to the table and dealt with in a positive and constructive manner.
Q There has been much talk about a skilled labor shortage in the electronics industry. Is this myth or reality? If true, what can be done?
CHIN: My company has not experienced a shortage of skilled labor.
GARCIA: Labor shortages are occurring in many markets where there is a high concentration of CMs and OEMs. We're seeing this in regions like Silicon Valley, Raleigh/Durham, and Guadalajara, Mexico, where OEMs are competing aggressively with CMs for a limited labor pool. Skilled labor shortages are a reality and can drive up manufacturing costs.
What can be done to retain people in these tight labor markets? For one, we can provide a work environment that helps develop employees and support their specific needs. For example, in Mexico, companies are offering on-site classes in English, as well as other tutorial services, medical services, transportation and high-quality food facilities. These are benefits that employees appreciate and having them may help retain talented individuals. Another area of employee development is in team empowerment. Empowered teams can identify and resolve issues, implement corrective action, and improve overall quality and job satisfaction.
Q What role will the Internet play in future CM business strategies and customer relations?
CHIN: CMs will allow their customers to share the status data related to scheduling and material as well as quality performance reports. Using the Internet will allow them to speed up the process of handling the information.
GARCIA: The Internet is playing an extremely important role in current CM business strategies. With input from the customer, a CM can set up a secure Web site where the customer can review various business and metrics, including yield information at a specific test station, actual production output for that day, manufacturing problems that may have occurred and efforts to resolve them all in real time. Cameras can even be set up to enable the customer to monitor a given line. This makes the Internet an extremely powerful tool.
Q Do you feel it is the CM's responsibility to drive new technologies or respond to customer demands? What emerging technology will be most critical to CMs in the near future?
CHIN: For the level of services that my company has been providing, I do not feel that it is the CM's responsibility to drive new technologies. The company would rather respond to customer demands because of unpredictable investment return levels. Unquestionably, component packaging is becoming smaller and smaller for the future, as demand for flip chip assembly requirements increase.
GARCIA: Certain industry segments have greater demands for miniaturization than others. The CM, in conjunction with the semiconductor industry, must be on the leading edge of defining these new technologies. There must be a linkage between the OEM, component suppliers and CMs to ensure the successful implementation of new technologies.
Q Any other comments on the industry?
CHIN: The larger CMs are expected to be growing much faster than the CM industry overall because of their capability of acquiring other CMs in other territories. Also, OEM production facilities are being converted to CMs. Most major OEMs favor larger CMs for three reasons: significant revenue bases, greater financial resources and geographic research. On the flip side, smaller CMs will always be able to provide more flexible service than larger CMs for consignment and quick-turn projects. The industry is growing well above 20 percent annually; at the same time, pricing pressure is driving us to provide more volume and service.
GARCIA: PCB assembly has become a commodity service. Customer expectations have risen to the degree that they expect CMs to add value across a broad range of manufacturing services. These have evolved to include PCB layout and design through final assembly, distribution and repair. Customers expect the CM to help make them more competitive. CMs should strive for demanding, yet fair customers that drive the implementation of leading-edge services. Together, both parties benefit and the cycle becomes self-replenishing.