Economic Trends Spawn New EMS Business Models Print E-mail
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Written by Susan Mucha   
Wednesday, 02 February 2011 15:38

Setting up alliances for local low-volume production.

One of the positives of the economic roller coaster of the last three years is that it is inspiring executives to look very closely at their business models, and that is creating more opportunity for US-based electronics manufacturing services companies and driving changes in traditional EMS business models and supply-chain partnerships.

I recently talked with Gary Burnett, Sr., CEO of Burton Industries (burtonindustries.com), on ways the regionally focused EMS provider is evolving as a result of changes in the business environment. Burton’s production takes place in a facility in Ironwood, MI, while administrative activities and sales are handled in Hazelhurst, WI.

According to Burnett, Burton is seeing several interesting trends in its Midwest customer base, including:

  • Greater focus on total cost, including the opportunity cost associated with the lack of schedule flexibility.
  • A requirement for shorter lead-time driven by lack of demand predictability combined with concerns over inventory.
  • Changes in business or product focus driven by the combination of an economic downturn and state economic incentives to add product lines that create jobs within the region.
  • Growth in local startups looking to keep jobs in the region.
  • Economic pressure on companies to focus on core competencies and outsource capital-intensive business activities such as manufacturing.

“These trends are creating projects that are best served by a one-stop shop, capable of full service support,” Burnett said. “However, these projects typically have volumes that aren’t a good fit for larger, full service EMS providers during the first two years of production. Yet, the requirement for product development assistance, mechanical and other custom components, and post-manufacturing support such as repair depot, makes it difficult for smaller EMS providers to support.”
In the past, Burton had set up appropriate supply chains and serviced these types of projects on a case-by-case basis, but acknowledges the approach can be labor intensive. More recently, the company has developed a formal approach, founding and participating in a supplier alliance group known as the Worldwide Industrial Network (WIN) alliance. “As we’ve seen demand for this niche grow, we talked with a few key supply partners and decided to join together in a formalized supplier alliance to support it,” Burnett said.

The project complexity challenge is typically non-electronic. Project volumes typically are less than 10,000 pieces a year, and at those volumes, tooling for the unit housing is often the most noticeable expense. One of the drivers for formalized partnering was the ability to recruit a base of custom component suppliers capable of offering both low-volume “soft” tooling solutions and higher volume hard tooling solutions. Working with companies able to manufacture locally, support smaller lot sizes and provide responsive service was also critical. As the  model has evolved, Burnett has also seen value in including suppliers that could support global sourcing requirements or customer desires for scalability in the event of significant volume increases.

According to Burnett, very specific criteria have been developed for the supplier alliance. While contracts aren’t signed relative to membership in the alliance, each new member verbally agrees to meet these criteria. (The reason for no contract is that membership in the alliance isn’t meant to drive exclusivity in sourcing or teaming. Instead, the goal is to create strong working relationships that align with common values and business models.) Membership requirements include:

  • A strong ability to support NPI.
  • The ability to scale production resources with project growth.
  • Local presence in the region and, in some cases, the ability to support offshore production in higher volumes.
  • Supplier business model that aligns with Burton’s customer niches and includes a high focus on customer service, quality and a willingness to meet Burton’s metrics for schedule flexibility/customer service.

Alliance partners now include a tooling and plastics injection molding firm with both US and Asia manufacturing capabilities, a manufacturer of soft-sided cases and a conformal coating supplier. Final sources for product design to augment Burton’s in-house engineering services, potting, metal fabrication as well as Asian sources for PCB fabrication, transformers and other price-sensitive components, and higher volume assembly options are also in the identification and evaluation stage.
“We recognize we are in a global manufacturing environment and the Alliance needs to reflect a range of geographic options,” Burnett adds. “We want our customers to see us as a cost-competitive option for product that fits best in the US. At the same time, adding some Asian supply base options helps us keep a customer who has a mix of onshore and offshore needs. Our formula of partnering with Asian suppliers that may not have much US presence lets customers have a strong US interface and project scalability without the excess overhead that can come with global EMS providers.”

In the alliance’s current EMS business model, Burton’s materials and program management personnel manage the alliance partners so that customers have a one-stop shop. The major difference between a typical supply-chain relationship and the alliance is the fact that common processes for project launch and production management are in development among alliance partners, eliminating the learning curve that occurs with a larger, more independent pool of suppliers. This focus on common NPI and production management techniques has the added benefit of disseminating best practices between the group. Alliance partners must be willing to support customer requirements for smaller lot sizes and greater flexibility. While that is currently achieved via close communication, systems compatibility has been evaluated in recruiting members and eventually a common production status data sharing portal will be developed. One final difference is that alliance is evolving from a model driven by Burton into one where all participants are equally interested in using the alliance framework as a value-added component in their manufacturing activities. Alliance partners share leads and sell each others’ services, when appropriate. And, any partner could effectively be the “program manager” with their respective customers.

According to Burnett, about 30% of Burton’s customer base is using alliance partners, and two of the past three customers the company won attributed their selection to availability of the alliance. (Production volumes range from 2,000 to 100,000 per year.)

One recent project focused on a water purification product. Burton teamed with a local design engineering firm and identified custom materials local sources such as a transformer and metal fabricated parts. The third-party engineering firm developed the BoM, and Burton fine-tuned the AVL and made DfM/DfT recommendations. The project is now in production.

Interestingly, the one thing Burnett isn’t interested in is standalone prototyping projects. “Prototypes can move away. We want to develop partnerships for sustaining production. We’ve structured a highly supportive, local, very flexible solution for projects whose volumes and complexity can make them hard-to-source,” he said.

Burnett also sees a margin improvement benefit to the alliance. “One of the challenges we face in this business niche is that sometimes we get projects with very bad approved vendor lists and significant customer resistance to supplier changes. It can be hard to recoup 100% of the cost driven by poor quality suppliers. Longer term, we hope the alliance framework will make it easier for us to enter the product development process earlier and/or better justify redesign recommendations when needed. High quality suppliers, efficient communications processes and well-designed product improves margins by eliminating hidden costs. In the EMS realm, even small margin improvements are noticeable.”

Burton is also looking for ways to team with Michigan’s Economic Development Corp. The company was able to tap some incentives when establishing its Michigan production facility by locating in a HUB-zone. There may be opportunities to team with regional prospective customers for additional incentives if projects it sources end up creating jobs.

“It is a true win-win situation when economic incentives help fund projects that ultimately allow us to add jobs within our company and the supplier alliance. The customer gets all the benefits of outsourcing and the region adds jobs,” he added.

While the WIN alliance model isn’t unique in EMS, it does highlight a workable solution evolving in response to changes in the market. US manufacturing continues to be a viable option for many outsourced projects. However, competitive cost in this environment is likely to be achieved through a combination of efficient production processes, closely-knit supplier networks, minimized logistics and transaction costs, and the inventory minimization achievable through enhanced responsiveness, rather than by internal EMS efficiency alone.

Susan Mucha is president of Powell-Mucha Consulting Inc. (powell-muchaconsulting.com), and author of Find It. Book It. Grow It. A Robust Process for Account Acquisition in Electronics Manufacturing Services; This e-mail address is being protected from spambots. You need JavaScript enabled to view it .

Last Updated on Wednesday, 02 February 2011 17:23
 

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