The OEM should focus on total cost and alignment with business requirements.
One of the interesting dynamics I’ve observed during my career in electronics manufacturing services is the evolution of sourcing strategy. In the ’80s, outsourcing was a risky decision that involved the highest level of the OEM organization. Final decisions looked not only at the immediate need, but at the ability of an EMS provider to support the business needs longer term. Today, outsourcing is more of a commodity decision, and sourcing teams are often staffed by people with far less knowledge of the manufacturing process or the softer issues in the total cost equation.
While the EMS business model has evolved, particularly at the Tier I level, the core benefits are still much the same. In the most common model, OEMs can save money several ways:
Many of these potential cost-saving benefits are business rather than technical in nature. While some sourcing teams do look at these issues, those with less experienced personnel may focus strictly on unit price or achieving a corporate goal to source in a specific region. Similarly, while some EMS salespeople highlight these benefits in illustrating why their company represents the lowest total cost, far more let the OEM drive the sales conversation.
Sourcing processes that look deeper into ways to leverage the outsourcing benefits most aligned with their needs will save more money than those simply focused on unit price. Why? Because outsourcing electronics manufacturing isn’t simply a matter of finding a company that can build a product. Virtually any EMS company working to industry standards can assemble a build-to-print product. And if you put a high-volume, mature product in a low-cost country with an established EMS provider capable of meeting quality requirements, costs will be reduced, assuming there is a suitable regional supply base.
However, many projects don’t fit that easy-to-build model. In those cases, whether the money is saved or spent lies in the ability of that EMS company to create a disciplined, well-aligned process that addresses inefficiencies and waste in the customer’s process. FIGURE 1 provides a good illustration of this concept. Per the figure, the bulk of product cost when outsourcing is identifiable: materials, assembly, overhead and profit. Once you’ve scrubbed the bill of materials and tested assumptions on the labor cost model, the only other pressure point is profit. Force an EMS provider to continually cut reasonable profit and eventually you’ll have to transfer your product elsewhere on short notice, either because they’ve found more profitable business or because they are going out of business.
However, the middle circle is often left untouched when a model is focused on unit price instead of total cost and alignment with the OEM business requirements. This can be particularly problematic when the products include a mix of easy-to-build product and lines that are more challenging to support. While there are assumptions that economies-of-scale will flow through the entire spend, the reality may be that high-volume product is built on time and other products consistently miss delivery windows. Additionally, the more misaligned a project is with an EMS provider’s preferred business model, the more likely OEM staff time will be required to address project issues.
Questions to consider when sourcing a mixed basket of products include:
In short, partnerships that eliminate hidden costs or help fill resource gaps are possible throughout the EMS industry, even at the regional level. Looking at total business alignment potential rather than just capabilities and unit cost opens the door to far greater cost-reduction opportunities.