CBA’s 2nd Annual Outsourcing Navigator Council (ONC) member meeting was held last month at Teradyne’s headquarters in North Reading MA. The event’s first day combined presentations from host company Teradyne, industry leader EMS, Celestica, and CBA principals with a roundtable moderated by Circuits Assembly’s Mike Buetow. The second day was an interactive workshop. The event was sponsored by Avnet and Celestica.
The theme of the two-day event was ‘Finding Advantage in the Product Lifecycle’ and reflects recent ONC research into EMS and OEM current concerns. Many OEMs are in the process of restructuring their EMS relationships to reduce risk and cost, and to regain competitive advantage. EMS companies on the other side, are re-thinking the pure EMS business model, which is unsustainable, and are turning to other ways to enhance their bottom lines. These two intertwined trends created the context for the conference.
The first two sessions were focused on Prototyping and the NPI process. These two phases of the product lifecycle are related but must be planned separately; as the EMS business model evolves, it’s clear that these services require a different skill set from volume manufacturing. When OEMs first outsourced manufacturing, many retained skills required for prototyping in-house. As the model has now evolved, however, most OEMs have lost that capability internally.
Eric Miscoll, in introducing his presentation asked the audience to choose what was most important in a prototype supplier: the response was close proximity, reflecting the reality that engineers need to collaborate during this process. The presentation outlined the different scenarios available to the OEM for this critical part of the product lifecycle.
Charlie Barnhart continued the discussion of pre-manufacturing services with a short history lesson about the industry. “While the operating characteristics of the global EMS industry’s manufacturing capabilities complement much of the volume curve, a Low Cost Region (LCR) only solution does not harmonize with the requirements of the entire product life-cycle,” he warned.
In the beginning, OEMs designed, developed, and manufactured most —if not everything—that went into their products, hence the name ‘Original Equipment Manufacturer’. As technology evolved and became more pre-packaged and ubiquitous (e.g. integrated replaced discrete logic and modular construction supplanted elemental designs) product differentiation shifted from a matter of functionality to a cost/performance issue. This created a high-degree of ‘product churn’ in the market place and life-cycles began to shrink. As a result, sales forecasts became increasingly unreliable due to demand fluidity brought about by shifting user preference.
In response, OEMs looked for methods to shift their fixed-costs to a variable basis, as utilization rates in their internal factories became progressively more difficult to predict and control.
The outsourcing industry, initially on a consigned basis, began as a means by which to ‘buffer’ these peaks and valleys in the OEM’s manufacturing requirement, but soon gained greater responsibilities as the industry expanded. OEMs continued to shrink investment in internal capabilities and outsourced more functions, more often. Eventually they began to dismantle their internal operations and launched large scale divestiture programs. These actions coupled with the impact of globalization, and an unprecedented economic downturn post Y2K, created a supply-demand imbalance in the EMS industry (favoring the OEM) and prices for manufacturing services dropped precipitously.
This advantage was embraced by OEMs who quickly came to rely upon this recurring windfall to prop up their own eroding margins. So when EMS pricing ultimately hit the bottom of the pricing curve, they had little choice but to abandon their existing supply-base and transfer their outsourcing requirements to lower-cost solutions such as China. This left many OEMs without a supportive, low-cost, local alternative for the early and late stage elements of their product life-cycle, and many simply resigned themselves to off-shoring these requirement to suppliers whose value-proposition was little more than a high-volume producer of low-cost goods in some regionally remote geography. Result? A cumbersome, expensive, and ineffectual solution that still plagues many OEMs, who continue to struggle with a cascading set of front and back-end requirements that remain inadequately or totally unfulfilled.
In short, the “baby was thrown out with the bathwater” a consequence certainly not intended but very real—indeed!
Clearly, in-sourcing prototyping, NPI, EOL and on-going support would not be free, but neither would it be as expensive as many believe. High quality, well maintained equipment of all types is in surplus, as are the human resources necessary to perform these tasks.
For an OEM with a total outsourcing spend of as little as $100 million USD per year, a persuasive argument for insourcing the front and backend of the life-cycle can be made, he concluded.
Charlie also reported on the preliminary results from the Beyond Outsourcing Special Report. What he found is that OEMs are already embarking on a multi-year, multi-step in response to the trends CBA has been reporting on for the past 8 quarters or so. These include, disengaging/re-working solutions with ODMs; reconsidering regionalization (build-in-region); reengaging w/downstream supply chain. These changes/restructuring steps are being taken now to rework the supply solution. What’s even more remarkable is the amount of long-term re-structuring that is also in the planning stages. These strategies focus on the design process, as well as a continued determination to get more involved in the downstream supply chain. More on this will be included in the complete Beyond Outsourcing Special Report, due out by the end of July to ONC members.
After lunch, the group listened to a description of a tool provided by Avnet for estimating component spend. The tool establishes a company’s cost of acquisition model as a % of spend. The tool focuses on areas like logistics, warehousing, operations, finance, and so forth.
The next session of the day was a presentation on the history and current state of Celestica’s After Market Services (AMS) offering, followed by a response from the OEM side via Blue Coat’s Mary Emerton. This point-counterpoint approach prompted some productive discussion of what OEMs really want from EMS in this area. The reality is, the pure EMS business model will not survive for most companies — the addition of other services is a requirement for survival. Frank discussion of OEM’s requirements is necessary to ensure successful launch of targeted, mutually profitable services in this arena. Celestica has spent nearly a decade investing in and expanding into a complete menu of service offerings that, according to our presenter, Skip Boothby from Celestica, now encompasses just about everything from soup to nuts.
Do OEMs want or need these services? Blue Coat’s Mary Emerton indicated that these types of services could be very valuable to OEMs, if they are articulated clearly and executed competently. She had some caveats however. “You must support knowledgeable, local product developers to limit late night calls and emergency travel. It’s also important to prepare for long product lifecycles. We are interested in regional BTO and CTO services, so that’s a capability worth investing in, especially if it includes people knowledgeable about import/export requirements at the site. In my experience, regional repair and failure analysis services were something to look into; and lastly logistical and repair support for emerging end markets, e.g. Brazil, Russia, India, China and Argentina.”
Next on the agenda was Mike Buetow’s Roundtable entitled, “End-to-End Models for AMS.” Panelists were John Kovach, President, Mack Technologies and Rich Breault, President, Lightspeed Manufacturing, and Mike Jansen of Textron. Mack’s Kovach echoed earlier speakers in that for EMS players, the PCB assembly has become commoditized, and the added-value comes from getting access to farther up the supply chain. But he differed in terms of his assessment of risk: Risk, he said, comes not from where product is built but rather is tied to product knowledge loss and visibility. Interestingly, Kovach said that the day’s discussion gave him reason to reconsider Mack’s business model.
Last on the day’s agenda was an Industry Update, providing a 30,000 ft view of the current situation, based on CBA research and presented by Jennifer Read. EMS industry growth is flat, true to CBA’s predictions from 2009 for Q2 2012. The business model is being phased out by many companies; ODMs are pushing back, and pure EMS companies are finding other ways to generate revenue. The industry, CBA believes, is at a tipping point, which explains the current unsustainable level of risk: according to CBA’s Composite Risk Index, it is now likely that OEMs in all markets and of all sizes will experience a supply disruption, whether from labor disputes and rising costs in China, or any of a multitude of geopolitical and financial system areas of instability. The question is, what to do about it? Some suggestions were discussed, setting a context for workshop for the second day.