When EMS gets treated like a commodity, quality becomes the hidden surcharge.

One trend in the electronics manufacturing services (EMS) industry that I don’t like is the commoditization of services. This isn’t new. It’s been going on for decades, but it has been getting worse. Part of the problem, I think, is that the EMS value proposition has gotten lost. The lengthy period of material constraints and forecast instability changed many business behaviors, not necessarily for the better. Also, purchasing organizations have undergone a generational shift. The result has been several unrealistic expectations that harm the business relationship on both sides.

Here are a few areas where I think expectations need a reset:

Quoting. Incomplete documentation packages are becoming more of a norm. While it may speed the process to have an EMS provider quote a supplied material cost and partial product documentation, it isn’t the way to get a great price. It doesn’t give a good indication of EMS provider expertise in material procurement or DfX, as they lack sufficient information to do more than a budgetary estimate with markups. Similarly, endless quizzing on the breakdown of assembly costs isn’t really a good comparative technique because EMS providers often cost differently. A low cost per SMT placement may not capture higher overhead costs accounted for elsewhere. The bill of materials (BoM) represents the largest percentage of product cost and, as such, is the best place to compare EMS and OEM costs to reduce prices.

Forecast and inventory. There was a lot of accommodation for forecasting changes during the Covid period due to unpredictable demand. Similarly, inventories ballooned to ensure parts would be available to accommodate demand. That can’t continue forever, however. The EMS business model depends on the speed of transforming raw materials into finished goods. That requires accurate forecasts and inventories sized to meet those forecasts.

While the business model positions the EMS provider as a bank that carries the cost of materials and production resources during the period that the product is being built, there are limits to how much cost an EMS provider can carry and still make a profit. When completed correctly, the OEM sees benefits to cash flow and its balance sheet, and the EMS provider makes money. When it is completed poorly, the OEM still sees those benefits, but the EMS provider sees increased cost. That translates to either higher prices for the OEM over time or a financially unstable supplier. The better option is accurate forecasts and provisions for OEMs to assume inventory costs if forecast changes create excess inventory.

Indemnification. Larger EMS companies typically see single-digit after-tax profits. Conversely, OEMs have significantly higher gross margins and after-tax profits on their products. Yet, many indemnification clauses are written so broadly that the EMS provider is asked to assume responsibility for all product failures, regardless of whether the root cause was design, materials or workmanship.

There is simply not enough margin in electronics manufacturing to assume that level of risk. An EMS provider controls workmanship. In most cases, design and material choices are controlled by the OEM. Indemnification clauses need to be mutual and written to include the indemnification requirement around the areas the EMS provider controls.

Test. A larger percentage of OEMs today seem to feel that no test at the EMS is acceptable. Some even see it as saving money because the tests will be done at their facility. That is false economy. An EMS provider with good process control will probably have minimal defects out the door due to workmanship. Nevertheless, defects can also come from material failure and handling during shipment to the customer. Defects can also be caused by poor practices in an OEM’s receiving department, overstressing solder joints during higher-level assembly at the OEM, or even issues in the OEM’s test operations.

When products are tested at the EMS provider, it establishes that they were working as they left the factory. If defects occur at the OEM, that simplifies finding the root cause. An even better reason for testing is the costs it eliminates when a defect is found earlier in the production cycle. When a defect isn’t discovered until after final assembly, the cost to fix includes two shipping legs, delays in product reaching the shelves and the cost of reworking a finished product. Depending on the type of added processing, the assembly may also be scrap rather than reworkable. So, testing at the EMS provider has significant benefits.

Inflation has increased costs across the board, so it is no wonder that many OEMs want to push back on unnecessary costs in any way possible. That said, viewing the EMS provider as a partner in finding ways to more efficiently manufacture often improves costs more than price negotiations alone could.

Susan Mucha is president of Powell-Mucha Consulting Inc. (powell-muchaconsulting.com), a consulting firm providing strategic planning, training and market positioning support to EMS companies and author of Find It. Book It. Grow It. A Robust Process for Account Acquisition in Electronics Manufacturing Services. She can be reached at smucha@powell-muchaconsulting.com.