Are Your Requirements Being Met?

2014-12-16 07:00:00


By: Charlie Barnhart

Dec 16, 2014  (Originally Published on 8-22-2011)

When counseling OEMs on their outsourcing strategy, I often make the point that even though the operating characteristics of Mexico and China’s manufacturing capabilities complement much of the volume curve, a Mexico or China only solution typically does not adequately fulfill the requirements of the entire product life-cycle. This is especially true on front-end activities such as engineering prototyping or new product introduction (NPI) and in latter stage requirements for End-of-Life (EOL) and on-going support. To put it simply, the diligent OEM who decides to manufacture in Mexico or China will need to craft solutions, for both the front and back-end of the curve, before finalizing their production outsourcing strategy.

In this article, we will examine three workable alternatives:

1.) Using the services of a multi-national EMS that offers local support facilities as well as low-cost manufacturing in Mexico or China.

2.) Sequencing the work between a smaller regional EMS and a larger low-cost manufacturer in Mexico or China.

3.) Electing to in-source the early and late aspects of the life-cycle while out-sourcing the production volume requirements to a low-cost EMS in Mexico or China.

  • MULTI-NATIONAL EMS SOLUTION

    If you work for a large OEM outsourcing hundreds of millions if not billions of dollars of manufacturing each year, you probably already know that the largest EMS companies have been re-engineering many of their US, Canadian, and Western European sites into dedicated NPI and Support centers. If on the other hand, you work for an OEM whose brand is not quite a household name but is in fact well on its way to becoming one, read on—as using a large EMS is an approach you should at least consider. Yes. You read that correctly. The largest EMS support facilities, for early and late life-cycle requirements are available to high potential customer, as these facilities are not being fully utilized. 

  • SEQUENTIAL SOLUTION

    This alternative uses a regional EMS for early and late life-cycle manufacturing and support. The sequential aspect of this solution is that the regional EMS provides local prototyping, NPI, and low volume manufacturing in the front-end of the life-cycle, and then facilitates the transfer of the product to a multi-national EMS site in Mexico or China for volume manufacturing. Then, on the back-end of the life-cycle the regional EMS executes a reverse-transfer and re-integration of the product back into their facility for EOL and on-going support. Obviously there are advantages and disadvantages of the “sequential solution” as compared to the multi-national EMS solution:

         Advantages:

    • May not require the depth of commitment, in volume and length of time, that a multi-national EMS would expect

    • Better scale compatibility between enterprises and therefore symbiosis

    • Reduced risk of EMS initiated disengagement if OEM volumes drop-off

Disadvantages:

    • Slightly higher cost in early/late life-cycle stages

    • Risks with three-party verses two-party communications pathways

    • Need to support interface with multiple business systems

Even given these disadvantages, the potential benefits to mid-sized OEMs utilizing this solution seem compelling. Not the least of these benefits being there are more regional EMS suppliers, in more areas, than there are multi-national EMS NPI centers—and when working the up and down slope of the product life-cycle proximity is a major advantage!

  • IN-SOURCING THE FRONT AND BACK ENDS

While in-sourcing is currently out of favor as a preferred methodology for electronics manufacturing, performing early and late life-cycle tasks internally—rather than externally—remains an efficient and cost effective solution for many OEMs, both large and small. Unfortunately the reason the internal approach was abandoned had far more to do with the production stage of the life-cycle than the front or back-ends of the process.

The following stylized timeline characterizes the electronic industries’ approach to product manufacturing over the past decades:

  • In the beginning, OEMs designed, developed, and manufactured most —if not everything— that what 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 an issue of cost verses performance.

  • 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 preferences.

  • In reaction, 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 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.

  • Which 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 requirements to suppliers whose value-proposition was little more than a high-volume producer of low-cost goods in some regionally remote geography.

In many if not most cases, this provenance resulted in 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 throughout the USA and Canada, as are the human resources necessary to perform these tasks.

Bottom-line, as each OEM’s situation is different, each OEM’s solution will be unique. We have examined three of many possible alternatives. So use these suggestions only as a starting point and aggressively seek out or craft a wholly custom solution that complements and harmonizes with your requirements—be it nested around a Mexican or Chinese based manufacturing solution. What is most important is not which option you choose, but that you choose an option that integrates a life-cycle based solution into your outsourcing strategy!


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