Re-shoring, near-shoring, outsourcing, offshoring have all become more popular topics of discussion among technology OEM decision makers these days.
With regards to near-shoring and outsourcing, it can be argued by some that many of the offshoring, and outsourcing, decisions made the past several years occurred because companies only looked at wages or prices, and not total cost. Read through a visual explanation of a cost-benefit analysis for a partnership between an electronics OEM that outsources with a vertically-integrated EMS provider, complete with changes in cost structures for both parties, right here.
With companies today competing supply chain v. supply chain executives are allowed increased granularity into managing sales and operations planning (S&OP) because more and more attention is being focused on corporate profitability.
Furthermore, global manufacturing operations and supply chain decision makers not considering total cost of ownership (TCO) are quickly let go.
Some studies claim OEM executives can save up to 25% when re-shoring if true TCO is considered. It would be interesting to see this type of information broken into end-product silos (e.g., wood furniture, rubber, electronics products…). Savings of 25% incurred through re-shoring might be true for some product markets, yet may not be achieved in others.
Meanwhile, I’ve seen many technology companies save considerably more than 25% when outsourcing simply because the company relieves itself of the financial burden carrying a factory / plant, property and equipment on its books.
If you’re already outsourcing, try our Outsourcing Calculator for OEMs to locate where you might be leaving money on the table. You can change variables to see outcomes for different scenarios.
The ROIC equation above is similar in scope to activity-based costing (ABC) practices in one of the four types of service agreements preferred by contract manufacturers. The ROIC model is designed around the equation as it pertains to the outsource provider’s net profits. The ROIC model is also the most dynamic and the best choice for financially savvy OEM-EMS partners to work together for mutual benefit.
Fixed v. variable assets
In the comparison below, two companies in similar markets offer competing products. On the left is a company performing activities in-house.
At right is a competing company that outsources its none-core competencies. Variable costs (VC) and revenues (R) are equivalent for both organizations.
The competing company at right does not have the overhead operating costs associated with performing activities in-house. Therefore, the competing company also has lower fixed costs (FC) and an overall lower total cost (TC) of doing business, where:
Whether in the United States, India, China, or some other geography, in most instances, companies that offshore and outsource achieve a greater return on invested capital; greater return on equity, and greater return on assets than companies that do not outsource.
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Manufacturing companies that use outsourcing services also reach break even (BE) sooner, where profits begin, against less revenues and lower volume. (Search provider in our EMS Resources Directory Marketplace)
Unfortunately, many OEMs do not engage a contract manufacturing partner early enough. OEM executives considering outsourcing should take a core competency litmus test consisting of three questions:
- If starting from scratch today, would we build capability inside?
- Are we so good others would pay us to do it?
- Is this an area of our business from which future leaders will come?
If an executive answers yes to one of these question, there’s a good chance he or she may not want to outsource — for strategic reasons. Otherwise, it usually makes sense to outsource and engage the contract manufacturer as soon as possible.
The earlier the contract manufacturer is brought into the decision-making process, the sooner he can provide insight into design-for-manufacturing (DFM) requirements based on his years of experience and incorporate this knowledge into the OEM’s product to help minimize costly OEM design iterations that may otherwise disrupt the OEM’s time-to-market (TTM) strategy and, ultimately, could result in loss of market share in some instances.
In spite of all of this, many executives are still reluctant to embrace contract manufacturing. One obstacle has been executives are often required to assign value to business units—including outsourced functions—according to the contribution to their company’s bottom line.
The difficulty of properly deciding how these functions affect the value of a company’s fixed assets can sometimes prevent original equipment manufacturing executives from acknowledging the comparative value of outsourcing manufacturing or design activities.