Properly evaluating an EMS means going beyond the published stats.

Baseball has convenient statistics to indicate the efficacy of a player. Simple stats for pitchers are wins, losses, strikeouts, and earned run average. For hitters there are batting averages, slugging percentages, strikeouts, walks and home runs. The beauty of these numbers is their simplicity. These stats give fans a good, quick read on whether the player is a stud or dud.

What does this have to do with the EMS industry? As in baseball, simple stats are often used to profile an EMS. Projecting the true profile of an EMS facility, however, is far more complex and requires information beyond quantitative measures.

Let’s look at a typical baseball card and the stats it provides (FIGURE 1). Now, using the same simplistic data, a typical EMS stat “line” may appear, as in TABLE 1.

fama1

Figure 1. Jim Bouton’s baseball card demonstrates ordinary performance for his first year in the major leagues.

Table 1. Typical EMS Stats

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The stats of this fictitious EMS company look solid. They indicate a Tier 2 company with sizeable facilities to handle high-volume mass production, with the geographic reach of multiple locations. Unlike baseball stats, however, EMS stats must be vetted with much more definition of how the numbers are tabulated. Without scrutiny, an EMS profile can skew OEM evaluations and cast a misleading picture of the company. Here is a rundown on how this can occur.

Annual sales revenue. The amount of revenue an EMS generates is a core parameter in the evaluation of a company. Per Table 1, an EMS may post its annual sales as $400 million. A closer look at the makeup of the revenue figure may result in a different assessment of the EMS, however. Is the number comprised of actual booking revenue, which includes the total cost of the bills of materials (primarily components) plus the value add (i.e., cost of assembly defined as labor, overhead and profit)? Or does the revenue figure reflect only the value add, with no contribution of BoM costing? This case occurs when an EMS chooses to “consign” or “free issue” the BoM. In our sample case, the $400 million figure needs much more definition and understanding on how the EMS engages its customers.

Only by defining the revenue figure can we distinguish the true sense of an EMS company’s business. The addition or deletion of BoM costs can change the nominal $400 million to a range of $100 million to $750 million. It hinges on the handling of the BoM costs. On top of these varied interpretations, EMS companies can skew the revenue ledger by “double dipping” into their internal transfer handoff. This occurs when the value of manufactured subassemblies are counted, then recounted after the transformation into finalized turnkey product. Another area of revenue reporting, EMS companies may report their market capitalization or total asset value as the “size” of the company, causing misinterpretation to the inquiring party.

Factory size. Factory size can be simply stated in its manufacturing space. This figure is the best quantifiable indicator of EMS plant capacity, as well as scalability. Yet, factory space can be manifested with the inclusion of office space and/or factory space that is leased to another company or repurposed for other businesses. I have been aware of companies that own a building of at least 150,000 sq. ft., but use no more than 35,000 sq. ft. for their actual operation. The marketing brochure proudly shows the building as the factory site. Another area of misdirection: EMS firms that use subcontractors and count their suppliers’ manufacturing space as part of their own overall factory size. All these associations regarding factory size create inflated and misleading reports.

Number of workers. A report of 1,500 workers can be the summation of several scenarios. Does the number include all direct permanent workers, or is this an aggregate of direct workers and temporary workers who come and go as needed?  Obviously, this category does give the EMS the opportunity to stretch total numbers without truly stating an untruth. At times, the EMS may include subcontract workers, causing further inflation of their reported number of workers.

Number of factory locations. Having multiple locations, domestic and foreign, enables a company to promote itself as multinational. Yet, the claim of foreign facilities is somewhat loosely defined, since it can be linked to business-to-business partnerships. Partnerships between American EMS firms and overseas collaborators are a growing trend in the global EMS industry. Yet, it is not correct to claim ownership of an offshore company following a simple handshake agreement or small number of shares exchanged between partners. This is a common exaggeration found in the EMS industry that requires a deeper look into the premise of ownership.

Number of SMT lines. A good size Tier 2 or 3 company may report having 10, 20 or 30 SMT lines. The number of lines is blurred based on the use of high-speed chipshooter equipment, in which one chipshooter accommodates two or even three SMT lines. Thus, the number of SMT lines can be two to three times higher (or lower) than reported.

Observations and Conclusions

TABLE 2 provides a comparative of probable variances underlying the stats. Comprehending how stats are derived is a must before any EMS profile is considered. To do so, the auditor must interrogate the EMS and seek the basis of each of the numerical reports. Through rigorous questioning of simple stats, much more information will be revealed.  

Table 2. Comprehensive EMS Stats

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Properly evaluating an EMS means going beyond the simplistic published stats. Visit the factory(s), meet the principals face-to-face and put together an accurate profile of the EMS operation beyond the stats.

Joseph Fama is an EMS consultant and business freelancer with 30 years in the EMS industry with specialization in business management among American, Asian and European EMS companies; joefama@gmail.com.

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