First a Flood, Then a Flood Print E-mail
User Rating: / 0
Written by Mike Buetow   
Friday, 29 June 2012 16:23

We’ve often wondered whether the roughly 25 years of serious electronics outsourcing have been deleterious for OEMs. Certainly OEMs that have come to rely heavily on contract manufacturers now lack much of the know-how that comes with in-house product build. That’s a change that’s hard to measure directly.

But I’m getting at something more concrete. Indeed, is it possible the broad-based philosophy to “outsource everything” has not only led to a loss of manufacturing development but also actually cost more than had OEMs maintained their internal production capabilities?

Some OEMs are finding out. The ODM model, not so long ago the envy of the contract manufacturing world because of its higher margins, is being torn apart. Customers are pushing for additional services and, in the process, driving up internal ODM costs.

The flooding in Thailand, the earthquake and subsequent tsunami in Japan, the unrest in the Tunisia – all these unpredictable events are forcing OEMs to look ever more closely at their ever-more-fragile supply chains. Indeed, it took the decimation of the disk drive market in Thailand last fall to wake everyone up.

It’s been a long journey. When I entered the industry in 1991, OEMs like Digital Equipment, H-P, Texas Instruments and IBM had everything under one roof. And by
everything, I mean everything: chip design, board design, fabrication, assembly and test. But keeping up with all rate of change in every facet of manufacturing proved expensive. Then there was the trick of keeping all those factories full. “Outsourcing,” says analyst Charlie Barnhart, “began as a means by which to buffer peaks and valleys in the OEM’s manufacturing requirement,” but once the doors were open, the OEMs became enamored with the ability to offload both capital costs and what they viewed as the risk inherent with maintaining internal product build.

The profit model for fabricators and EMS companies has been much shorter-lived. That side of the supply chain has been forced to seek out cheaper and cheaper locales in order to maintain profits. With each successive new layer has come additional risk in the form of a greater number of suppliers, raised possibility for natural or political supply disruptions, and as John Kovach, president of EMS firm Mack Technologies notes, loss of product knowledge and visibility.

It all adds up to what Barnhart calls a “cumbersome, expensive and ineffectual solution that still plagues many OEMs, who continue to struggle with a cascading set of front and backend requirements that remain inadequately or totally unfulfilled.”

Change is happening. We are seeing OEMs shifting product around and even pulling product in. EMS companies are becoming ODMs, and ODMs are becoming OEMs. And who has more power to control the chain than the OEM?

Barnhart believes a profound shift has begun, one that will see OEMs first shedding internal design teams, even while pulling in final assembly, test and built to order, then eventually pulling inside everything from purchasing to production. Regional fulfillment centers will become the norm.

While visible now, it will be three to five years before the shift will come into full focus. Innovation, not incremental improvement, will be the driver. “People will stop outsourcing design (as they) see the value of being innovative,” Barnhart says. NPI will also return inside, and failure analysis, BTO and configure to order (CTO) will become fully regionalized with “a significant percentage” moved in-house. Assemblers and fabricators will be regionalized under direct OEM control, and the OEM will negotiate all material purchases throughout the supply chain.

So why, then, would OEMs be willing or able to maintain capacity at or near optimum levels today when they couldn’t two decades ago? Two reasons come to mind: better supply-chain management practices (for this we have Apple to thank) and risk management. In a highly leveraged chain, the sheer number of links becomes a huge liability. With so much riding on each product, fewer nodes might (and that’s questionable) mean higher fixed costs, but also less time-to-market risk.

What does this mean for fabricators and assemblers? If this comes about, many traditional EMS companies will be in trouble. If OEMs do all the design, NPI and procurement themselves, there’s not much room for all those EMS companies to make money just handling overflow production. Fabricators should be in better shape under this model because the bare PCB is not such a transferable product, and the emphasis would be on more regional buys. Barnhart believes EMS companies will end up converting as much as 40% of their revenue away from commodity-type assembly to higher-revenue services such as logistics, manufacturing private label products, and other after-market services such as warranty and repair.

Barnhart’s not alone in his thinking, but few analysts have gone so far as to characterize such a dramatic upheaval in the electronics ecosystem. If he’s right, North America will be a hot place for manufacturing. The flood in Bangkok will have washed electronics production all the way to Boston.

Last Updated on Friday, 29 June 2012 19:07


Eastern-US: China’s New Competitor?

Parity emerges among EMS Factories from Asia, Mexico and the US.

For the first time in years we see parity in the Eastern US among EMS factories from Asia, Mexico and the US. This EMS market condition will permit American OEMs (the EMS industry refers to OEMs as customers) to have more EMS pathways to choose from. Now more than ever, such EMS assignments will require deeper investigation relating to the OEMs’ evaluation of manufacturing strategies.

The Human Touch

For those who count on the electronics industry for big feats, it’s been a remarkable couple of years.



Advances in Concentration Monitoring and Closed-Loop Control

Contaminated bath water skews refractive index results. New technology can accurately measure aqueous cleaning agent concentration.

Circuits Disassembly: Materials Characterization and Failure Analysis

A systematic approach to nonconventional methods of encapsulant removal.





CB Login



English French German Italian Portuguese Russian Spanish


Panasonic Debuts PanaCIM Maintenance with Augmented Reality
PanaCIM Maintenance with Augmented Reality software provides instant communication and information to factory technicians -- when and where it is needed -- so they can respond to factory needs more...