Loss of affectivity of the business development and/or program management function is usually the first and best indication of relegation which is an option of last resort for the EMS company. In other words, when you, as the OEM customer of an EMS company, are relegated to  ’lost cause’ status. This occurs when…

1.They are losing money on your account

2.They can’t collect  your receivables on a timely basis

3.You stop negotiating on some liability issue

4.You give them unreasonably low Quarterly Business Review (QBR) numbers

5.You do not give them the opportunity to quote on new business

This 85-page report covers 18 emerging geographies for electronics manufacturing, offering an analytical framework for decision-making.

In the past, the emphasis has been on labor rates alone. Now, CBA recommends that electronics industry strategic planners take a total cost approach. This report, coupled with CBA’s Outsourcing Navigator Series of tools and methodologies provides tested way to mitigate the risks of global outsourcing.

To receive your complimentary executive summary, contact Jennifer Read at jennifer@charliebarnhart.com, 623-293-6985.

This comment is from Christopher Janssen, who is managing director of GPC Electronics, based in Sydney, Australia.

As a member of CBA’s Outsourcing Navigator Council, I participated in the January 2011 Industry Update and was particularly interested in the Case Study for the Quarter. This case study is taken from CBA’s proprietary database that informs his Global Risk Constant. The firm’s clients use the data for making an assessment of a geography’s risk in doing a total cost analysis.
I make the following observations:

CBA has considered a particular case where the results did not achieve the expected outcomes. In both time and cost the transition project failed. My concern is that from a sample of one failure, conclusions are drawn for the entire industry, as if it was homogenous across companies, scale, geography and staff. This may occur in part because the companies likely to seek help from CBA are those who have difficulties or are struggling. This skewed sample may well create a coloured opinion.

To conclude with the lesson learnt in the report that “Unless you’re outsourcing >$50M USD/year forget about EMS or ODMs in China” totally flies in the face of the thousands of companies active in this space (less that $50M) who have been able to generate business advantages.

Having done many product transitions and New Product Introductions, I viewed this case study very differently.

It appears that the OEM was unprepared for the move, and so suffered the consequences. I don’t believe that the error was in the decision, but in the preparation and implementation. Similarly, bringing everything back to North America may well just have been a reaction that it was all too hard, so “We give up.” Has this now closed the opportunity to benefit from Asian sourcing in the future? It is unlikely that anyone internally would put that up as a recommendation again soon!

Early in GPC Electronics’ experience as EMS, we did a substantial amount of work for Toshiba’s laptop division. Timelines were always compressed, design changes kept coming and projects were complicated. Never did the Japanese mention ‘problems’, but through every project they had many small meetings and always brought up ‘risks’. These were addressed by ‘countermeasures’. At the time I thought that this was just a quirk of language as they spoke English to us. This approach seemed to be cumbersome and bureaucratic, and when we had so much to do and so little time to do it, it seemed to waste precious time. I later realised that taking the time up front to plan the processes allowed us to deliver the outcome with many fewer complications than may otherwise have happened.

In contrast, we in the Western world like lots of action and to get on with things. If things go wrong, we fix them as we go, and are impressed by the recovery. I have had senior executives personally thank me that we fixed an error and got them out of trouble. I don’t get many senior executives who ring me to tell me that the transition or NPI was uncomplicated. In fact, one customer asked me why they pay us so much because it is so easy to do! They didn’t see the irony.

Both through our work and through discussions with many others, we regularly see and hear of OEMs who are sourcing less than $10M, who are achieving great competitive outcomes. China offers a wonderful depth of supply chain, and infrastructure for electronics manufacturing that is vast, and labour which is still very competitive with North America.

We need to clearly understand our strategic decisions, and find the right partners to implement them. Then we need to make sure that the project is properly resourced to succeed. This is called management.

Culturally China is very different to North America. People there often do as they are instructed by a customer, and are much less willing to challenge authority. This may lead to miscommunication and frustration all round. Recognising this is part of the battle.

Our approach to manufacturing in China is to blend the advantages of different locations. For instance, we at GPC Electronics run SAP across all plants, so that the Chinese factory is just another location in our system. By preparing the projects out of Sydney, we are able to develop a customised product manufacturing and supply chain solution, which we implement in China. Because we work in the same time zone, we have real time visibility of what is going on. This is augmented by sending Australian staff to China at the time new projects are started.

CBA is right to warn of the risks and traps of moving offshore. Fixing problems on smaller projects becomes relatively expensive, that the benefits are often lost. On larger projects, it is easier to justify the cost of support to bring it back on track. Not everything is suitable for Asian manufacture. Perhaps the conclusion or lesson learnt should be to prepare more, and try to get it right the first time.

Editors’ note: Christopher brings up a good point about risk. Certainly, not every program under $50 million that is sent to China fails. However, our job is to assess risk, and we stand by our methods for bringing data-based tools to OEMs to judge the relative cost of risk for the geographies that we study. We agree with Christopher’s conclusion especially: preparation is the key, and we would add, data-based preparation based on benchmarks of like-kind programs, and an avoidance of solutions that we know have failed.

Check out Phil Stoten’s interview with Eric. He shares his thoughts about industry forecasts, prospects for 2011, and the implications of risk.  A link to the article is also on the page. Have a listen>>>

• Employment in the electronics industry is at its highest level ever.
• Through August, electronic exports for the year were at 62% of the 2008 level and 75% of the 2009 level.
• Other electronic companies are looking to transfer their operations from the more volatile border regions to Guadalajara.
• The local supply base is good for sheet metal, plastics, painting, and cable and harnesses.
• While there are no longer any IC fabs in Mexico, the electronics industry in Guadalajara has made arrangement for two direct flights per week from China to bring in electronic components, which normally clear customs within one day.  The flights then return to China loaded with agricultural products. 
• Government incentives and grants are still available for companies wanting to establish operations in Jalisco.

By John Constantine

Original design manufacturers (ODM)s offer key benefits to OEMs, who are facing increasing competitive pressures, e.g. requirements to accelerate speed to market, lower costs, shorten product pipelines (inventory) and the shorter of product lifecycle.  That’s why the business model is unlikely to disappear entirely, in spite of the fact that some of the distinctions between ODM and EMS have blurred in recent years, as discussed in this article by Eric Miscoll, CBA Principal.

The ODM model’s key benefit  is that the ODM:

• Controls the design and leverages their vendor base to ensure great pricing and supply;
• Spreads the costs and risk over several customers using this common platform;
• Brings new customers into production at different timing – allowing sampling to be done along with mass production parts and other manufacturing disciplines in place;
• Further expands sales since the ODM can also support an OEM’s private label customers.

Note: The advantage of this model (especially if the OEM is in the US) does not arise from elimination of all OEM staffing requirements. The OEM must be ready to fully support their ODM with:  1) the Industrial Design (to maintain the “look and feel” and product line identity for the OEM),  2) the product features and user interface, 3) the test and quality requirements (and sometimes a test program or jig), and  4) packaging, manuals, and other items to ensure that the product “matches” the  rest of their product line.

When all of these tasks are shared effectively between the ODM and the OEM, there can be a mutually profitable and long-term relationship. However, it isn’t always so, and the two parties must carefully align requirements and resources to ensure the proper fit between the two organizations.

One situation where the ODM is not appropriate is when the OEM needs to maintain control of the design and uses a CM (or internal manufacturing resource). For example,  the “Thermoscan” ear temperature device was built at a CM facility in China.  The OEM had to provide the CM with support of the four items above (ID, U/I, Test, packaging) but had a valuable patent that they needed to protect. An OEM using an ODM’s designs will not maintain control over the technology, thereby allowing other OEMs to “share” the design thereby diminishing the premium they could charge for the product to their end customer.

But the OEM certainly has other options to maintain a level of control of their designs:

• Completely design in-house (when the technology is not stable enough to use a partner)
• Use design consultants but maintain final design control (and document control)
• Acquire a board/circuit design (using a “reference design”) and do final assembly, test and configuration in-house
• Adopt a JDM relationship where the OEM’s engineers are partners with the manufacturer.

Another level of less design control, while still maintaining the benefits from these hybrid outsourced models, is  “Private Label” situations, where the manufacturer sells their product with a level of customization – i.e. cases, labels, colors, packaging, etc., Eric Miscoll, adds a slightly different model called OBM (Own Brand Manufacturing) where  a large ODM might feel like their product and marketing are so good that the ODM develops a “brand” name and sells those product under their own brand.

While the industry is changing and the distinctions among the different business models are evolving rapidly, the ODM model is not going away in the short term, since that will cause a loss of expertise, from a technical and product management standpoint, for the OEM. Some industry experts are predicting a long-term return to the OEM model in certain cases, where well thought-out product and product-strategies, deep R&D organizations that create innovation instead of model change gimmicks, and tremendous vertically-integrated companies show strong, steady earnings for their shareholders.

The ODM model has been in refinement for 15+ years – so think about this as you develop your OEM organization to have the “right” people: design engineers, test engineers, software developers and supply chain experts – to make this work. They’ll need understanding, patience and evenings free to call Asia!

John Constantine is a 25 year veteran of the electronics design and manufacturing industry with long tenures at ATARI, General Electronics (HK) Ltd. (acquired by Jabil Circuits) and Elite Industrial Group of Hong Kong – where he led these companies through several manufacturing model changes while supporting their OEM customers and their growth. He was trained in financial management at Villanova University, was an expatriate in Asia, opened a subsidiary in London and now lives in the San Francisco area.

What is the best way to assess and compare electronic manufacturing services (EMS) companies?

The industry has always defined the tiering or segmentation of the EMS industry in a convenient way: by revenue. From this perspective there have generally been considered to be four tiers of EMS: over $1 billion, $500 million to $1 billion, $100 million to $500 million, and under $100 million.

In recent years some people have even created a special tier of those EMS firms over $10 billion. While this segmentation method allows for analysis of the industry and creation of many possible micro-tiers for further analysis, it is limited in its insights and excludes those private companies for whom revenue figures are not available.

While providing essentially the same basic services (e.g., PCBA), there are important distinctions among the tiers, beyond financial size and performance, that should influence an OEM’s selection criteria.

Charlie Barnhart & Associates has always preached that a critical element to the success of an outsourced manufacturing relationship is proper FIT (Flexibility, Integration, and Timing) between the OEM and its outsourced manufacturing partner. This FIT must consider, not only revenues, but also scope of manufacturing capabilities and the presence of manufacturing facilities in the proper geographic location(s) to serve the OEM.

This FIT varies based upon the type of services and capabilities required. FIT also has as much to do with an OEM’s self-awareness of its own internal costs and capabilities as those of the EMS provider.

Thinking of the EMS industry as different types of monkeys, real and theatrical, can be a useful, and irreverent, way to consider the industry.

From this perspective there are only three sizes that matter — large, medium, and small. This is a sufficiently sophisticated segmentation methodology for OEMs looking for an EMS partner that will be a good FIT for their needs. Let’s identify and consider three types of monkeys and the ecosystems in which they live:

1. King Kongs control their own environments but can create havoc.
2. Gorillas are intelligent creatures that carefully manage their groups, but tend to get preyed upon by poachers.
3. Chimpanzees are active, engaging, and resourceful, but are highly dependent on the food available to them in the jungle in which they live.

Let’s now assess the EMS industry using the monkey analogy. Read more..

There have been a lot of words expended recently about the hoard of cash corporate managers especially in the US have been stashing the past 18 months. Many expected that by now business spending and hiring would have solved most of our economic woes. Why are companies like Hewlett Packard, Microsoft, Nokia, Intel and Chevron choosing to give money back to investors or engage in frantic M&A rather than invest in new products and hire some of the millions of unemployed people? They aren’t even using the cash to buy back their own stock.

It seems that Mr/Ms Corporate Executive has moved beyond risk aversion into a new dimension of risk paralysis. Like my Boston Terrier, who now walks a 50 foot circle around the family cat due to a brief but bloody encounter with her front claws a few months ago, Corporate C-suite executives are wary of making the wrong decisions in uncertain times. We know you have a lot of pressure and responsibility, but are things really that much worse than ever before?

Really, what’s different about today, compared to any other time since the industrial revolution created the business profession?

I would posit that we now have too many people who know too much about too many areas of the economy. In the old days, we relied on business journalists to keep us informed about our corner of the business world. There were a few publications that business executives read on plane rides, and then they went about their daily lives risking capital and commercializing innovation for the good of society.

Now we have bloggers whose agenda is not always apparent, and where fact checking is an ancient relic of a by-gone era. For example, I read a blog this morning called 19 Surprising Facts about the Deindustrialization of America. Pretty interesting, but I decided to find out who this guy was and what he did for a living. Turns out he has two law degrees (how can that be good?) and sells gold, silver, and emergency response products through eBay on his website, which is called www.theeconomiccollapseblog.com. I bet you wish you had secured that domain name early on. So is he really an objective source of news? There were some good points made in the article, and I might get one of those buckets of 275 freeze dried meals next time I’m at Costco, but I’m still hopeful we can avoid catastrophe.

Because ultimately, we live in a free society, and no matter what happens on a macro level, we have choices about how we live and do business. While certain sectors of the economy are certainly shaky, nothing is inevitable.

So, to the fine men and women running our global corporations, both big and small, I would say, “Fear not!” It’s time to start taking some risk and investing in your business. That’s what you get paid to do, after all. Not just trade currency and prepare for the next earnings call. Come on, everyone. Let’s stop being casinos and start practicing the noble profession for which you have been trained. Yes, the global financial situation is still weak; yes, demand in certain markets has tanked, but, heck, you’ve got money and there are people depending on you. So get off your duff and get moving, for heaven’s sake. Take some risks and start the innovatation cycle. And stop reading blogs and tweets. Except this one, of course.

Here are some dates you should note:

October 14: Outsourcing Navigator Council members-only webinar. Members, you will receive your link separately. If you haven’t joined yet, now’s a good time. The preview call with Charlie over the weekend revealed actionable insights about how to mitigate and monetize the risk of global electronics manufacturing just in time for 2011 strategic planning. You won’t want to miss this 90-minute interactive session.

October 20: OEMs-only plant tour and industry presentation by Charlie Barnhart, free event, sponsored by Express Manufacturing Inc.

November 10: All-day Outsourcing Navigator Workshop for everyone. Outsourcing Navigator Council members, free admission; others $595 per person. Location: ViaSat Headquarters, Carlsbad, CA. For more information contact jennifer@charliebarnhart.com.

And OEMS and EMS: please complete our Next Horizons survey to ensure your free copy of the executive summary. Outsourcing Navigator Council members will receive the complete report late Q4.

Recently we were asked to explain our Outsourcing Navigator Council dataset, so decided it was time for a more comprehensive description of our work and what it means to the OEM community. Bottom line, CBA’s research is designed to help OEMs gain competitive advantage by benchmarking their cross-enterprise manufacturing transformation costs. Business is an inherently risky activity. One way to be successful is to know something your competitor doesn’t know and to use that information to positively enhance the bottom line. Sounds easy, right?

We help OEMs of all sizes and in all end markets, whether they are currently outsourcing their electronics manufacturing or not. Sometimes, outsourcing is not the right decision, and we can help companies do a ‘make or buy’ call, or justify NOT outsourcing to upper management. We also help OEMs choose manufacturing geographies and suppliers.

One of the images we use during the Outsourcing Navigator workshops to illustrate how OEMs can capture their total costs of outsourcing is to visualize the outsourcing engagement as a movie, rather than a snapshot. This is useful in helping an OEM see their costs from a cross-enterprise perspective, over time.

At the risk of self-promotion, we must point out that this way of looking at electronics manufacturing is unique in the industry; our proprietary methodologies are intended to bring consistency and standardization to a quoting process that historically has been full of gamesmanship.

Costs for the OEM should be viewed as falling into three buckets: 1.) the price paid to the EMS; 2.) the sum of one-time and recurring costs accrued by the OEM internally; and the 3.) cost of geographic risk depending on where in the world the manufacturing facility is located and the destination of the end product. Unlocking the mysteries and leveraging the competitive advantage of these three buckets is the key to success.

Global Pricing Methodology
The price of EMS services can be a mystery to the OEM because of the games that are played in this arena. We believe these games arise from the often adversarial relationship between the OEM and the EMS industry. There is often a high level of mistrust between the parties – beyond the normal competing interests that arise between buyer and seller. The history of the industry, the complexity of electronics manufacturing and the disconnect between the skill sets of the two parties can explain the mistrust; however cutting through is essential to a mutually profitable engagement.

A good pricing model must include elements of scale, approach and complexity, as well as the GAAP-based metrics commonly used to estimate price. The ONS Global Pricing Methodology is a comprehensive approach to cost intended to bring consistency to this process. OEMs that use this model gain insider insights and visibility into the mystery of EMS pricing.

Benchmarking the OEM’s Internal Costs
The second area of cost that OEMs need to understand is their own internal cost to manage their outsourcing engagement. These costs are surprisingly opaque to most OEM manufacturing managers because of the silo-ed organization structure of most corporations. These include one-time costs (‘non-recurring’) and recurring costs. One-time costs include things like new product introduction (e.g. tooling, supplier selection), interventions (e.g. quality issues, component shortages, etc.) and initiatives such as RoHS, lean manufacturing, ERP implementations. Looking at this list, the savvy OEM sees that these “non-recurring’ costs do actually recur fairly often, so looking at the engagement over time is the only way to really capture total costs. Again, it’s a movie, not a snapshot.

Recurring costs include purchase price, cost of logistics, and internal support of the outsourcing program. To capture the totality of cost on a per unit basis, the OEM must add one-time costs and recurring costs, and then divide that by the total number of units produced during the life of the program. This number can be compared to industry benchmarks though the Outsourcing Navigator database to provide an objective analysis of an OEM’s internal costs.

Global Risk
CBA’s Outsourcing Navigator database comes from a case study analysis of hundreds of actual OEM quotations, from a wide range of end markets, engagement size and representing both PCBA and box-build. These quotes come from a panel of OEMs, and represent the pricing practices of dozens of reputable EMS companies. The database comprises the normalized data extracted from successful outsourcing programs. If we determine that an engagement represented by one of the case studies has ‘failed’ – defined as the abandonment of the program within a year – we do not include those figures in the dataset. However, valuable insights can be gained from failed cases. That’s where the Global Risk metric comes in. These geographic risk constants, which are included in the Outsourcing Navigator Council dataset, can help the OEM learn from the mistakes of peers and avoid the costs arising from geographic risk.

ONC membership includes Quarterly reports and webinars based on the 15 datapoints tracked in the Leading Indicators database; in-depth primary research reports on timely issues of interest to the industry; 8 hours of consulting time; and attendance at our Outsourcing Navigator Workshop training sessions.

Our Q4 2010 Outsourcing Navigator Council report will focus on the Next Horizon of global electronics manufacturing. This report will take a fresh look at current and emerging “low labor cost” geographies that are being considered now for electronics manufacturing. We will conduct an objective SWOT analysis on each of the regions based on the decades of experience the industry has accumulated at this point about what’s important to the unique practice of electronics manufacturing. We will look at which regions are ascending, which are being scaled back and why; and which areas that have been in business for years are now getting a second look.

The first phase of the research involves a practitioner’s survey: Please click here to participate; respondents will receive a free copy of the executive summary when it is published in November 2010.