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Written by Peter Bigelow   
Monday, 31 October 2011 15:21

The only certainty of old trends is that they will be revived.

I’ve often used this space to remind readers of the old saying, “The more things change, the more they stay the same.” While most often used to characterize the periodic revisiting of fashion trends, the saying holds equally true in business strategy.

Like the narrow lapel sports coats that went from cool in 1965 to ridiculous in ’75, only to be revived in ’85 and again in ’05, some business models are embraced as new and cutting-edge when, in fact, they are the same strategies that were cast aside a few years earlier in the chase for greater profitability.

A reemerging business model seems to be taking hold in the printed circuit board supply chain, as more and more companies are eyeing, analyzing and embracing the concept of … vertical integration. What, you say? “No one is moving back to the old OEM ways!” Well, maybe, sorta they are.

Back in the ’60s most PCBs were manufactured by OEMs, which via in-house facilities also controlled design and assembly. The vertically integrated manufacturing model was alive and well. During the ’70s the pendulum swung toward boards fabricated by “merchant” shops (vs. “captive” shops), while design and assembly remained under the OEM’s roof. During the ’80s OEMs began to spin off assembly operations, culminating in the ’90s with the establishment of the EMS industry.
Over the past decade our industry has been highly focused on bringing customers the best value proposition via focused, lean companies with expertise in either fabrication or assembly to satisfy the cutting-edge needs of world-class OEMs that in turn design and market those products. Such a logical evolution was intended to reduce costs by focusing business talent, time and technology on attaining best-in-class within a specific segment of the supply chain.

However, as companies have worked this business approach – regardless of geographic location or size – along with reducing redundant overhead and increasing throughput and yields, most companies have seen margins erode. Lean, mean and focused cut costs and improved efficiency but did not necessarily translate to an improved bottom line.

In an entrepreneurial industry, when operating businesses theoretically should be returning higher margins, that entrepreneurial spirit seeks other ways of doing business: a new business “model,” as it were. And with that, voilà, bolting some of the pieces together from the “old” OEM approach reinvents an industry! Fabricators are adding assembly and design services; EMS companies are offering design capability. The migration seems to be beginning back toward some form of vertical integration. Of course, we can’t call it that. Marketing gurus have opted for the term “ODM.” Financial folks, for their part, have embraced ODM as similar to OEM, only better!

The ODM theory is to add value (read: add margin) by bundling related services (read: other segments of the supply chain) to better service customers (read: increase sales). Sound familiar? I’m not against this trend. It has worked well in the past and I believe can work well again. But I have to chuckle, as it is neither new nor a surefire way to succeed.

In many instances, having design, fabrication and assembly capability under one roof can really add value. Too often the end-customer is held hostage because of some communication failure between the product design, the board fabrication, and the assembly. More often than not, these problems are caused not by any one function or company, but rather the culmination of three organizations with different skill sets, cultures and maybe even languages involved in a process that could be seamless. These types of issues have always occurred – regardless of the number of many companies, facilities or people involved – and most likely will continue to do so. The true value any company or series of companies in the supply chain can offer a customer is to minimize the number and magnitude of wasteful communications failure in the supply chain.

Splitting the supply chain into segments with companies that were experts in a given area – design or fabrication or assembly – supposedly would achieve greater profitability by reducing the number of costly. That view seems to be evolving to the belief that bringing design, fabrication and assembly together offers the greatest opportunity to reduce costly waste and maximize both the value proposition to end-customers and profitability to individual suppliers.

Could it be that neither approach is right or wrong?

As popular as it is to reinvent an old business model, possibly the business model really does not matter. Maybe either approach – fully vertically integrated or single capability – is equally viable at providing maximum value and earning maximum profitability. What does matter is how well you execute whichever strategy you decide to embrace. Changing a business model will never fix lousy performance, or add value or profitability if the core competency is mediocre. Equally, those with outstanding core competency, focused on excellence and striving for flawless execution, likely are as profitable as they would be regardless of strategy.

Customers value commitment and competence. Committing a company to work with whomever and however many others in the supply chain, and having the competence to deliver exceptionally, is more important – and will be rewarded by higher margin – regardless of how many supply-chain segments are under your roof. The more things change, the more that stays the same!

Peter Bigelow is president and CEO of IMI (imipcb.com); This e-mail address is being protected from spambots. You need JavaScript enabled to view it . His column appears monthly.

Last Updated on Tuesday, 01 November 2011 12:59
 

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