CBA has been warning the OEM community for the past several years that the EMS/ODM business model was in trouble from constant pressure by OEMs to reduce prices while underlying costs have continued to escalate. Certainly OEMs face pricing pressure from their customers too, but margins in the EMS business have historically been much lower than those of the OEM, meaning the squeeze has become progressively more catastrophic for this industry. Today, without doubt, we are very near the tipping-point in many of these relationships.
Fortunately there is a “bright light” case-study in this dark reality. At our last Outsourcing Navigator Council meeting we heard from an EMS company who is emerging from a period of existential reconstruction and who may very well have redefined what it means to be a profitable and therefore successful manufacturing services company – Sparton Corporation.
Their journey hasn’t been easy and as in any enterprise there is always more work to be done. But to their significant credit Sparton’s ownership made the tough decision and brought in a turnaround team to shutter factories, disengage with unprofitable customers, and add on other non-EMS business to the company’s portfolio. Yes, the experience was traumatic for many of the employees of this 100-year old Midwest manufacturing company. But today the company is clearly on the road to sustainable growth and a much brighter future.
While CBA is not in the business of providing testimonials for one EMS company over another, I think it would be worth your time to hear Cary Wood (Sparton’s current CEO) describe the story of their turnaround by watching this 15-minute video.