EMS vs. ODM
The landscape for outsourcing electronics manufacturing services (EMS) has changed significantly in the last ten years resulting from a combination of the emergence of Taiwanese original design manufacturers (ODM) and the consolidation of traditional EMS providers.
Companies such as Foxconn, Flextronics, Jabil, Sanmina and Celestica are often referred to as EMS vendors, while companies like Compal, Quanta, Wistron and Inventec are referred to as ODM vendors.
Meanwhile, the convergence for these two types of service providers began a few years ago as both have been expanding their core disciplines and capabilities, so, OEM executives need to pay more attention to each vendor’s latest capabilities and performance to select one that does indeed match the OEM’s outsourcing objectives.
Acer founder Stan Shih was recently quoted in DigiTimes that many EMS providers will disappear and be replaced by (a term I believe he coined) design manufacturing services (DMS) companies, as EMS providers such as Flextronics and Foxconn (Hon Hai Precision Industry) started to strengthen their R&D abilities. Meanwhile, many ODMs are currently expanding their services to match the capabilities of EMS providers, so, they, too will end up being DMS providers.
An ODM differs from an EMS provider mainly on the capability of providing original design products, thus, saving the OEM customers significant non-recurring engineering (NRE) costs associated with product development.
While many ODMs do not yet have the expertise for very high-end system design, they are indeed experienced in consumer electronics due to deep design talent in Taiwan, and gradually expanding to China, as Taiwanese ODMs start to move more of their operations onto mainland China for even lower labor costs.
Asia Pacific’s growing consumption
Intel’s 2008 annual report showed revenues derived from the Asia Pacific region grew from 28% in 2006 to 40% in 2007 and to 51% in 2008.
Part of the driver for this incredible growth is attributed to the expansion of China as a consumer market; however, it is also driven by the growth of the Taiwanese ODMs who have established a large eco-system with full design, manufacturing, and integration operations in the region.
The EMS / ODM sector is a very dynamic market with recent rises in M&A as well as vendors re-focusing on newer markets. It is crucial for OEM executives to survey and understand their potential EMS / ODM partners’ latest capabilities and business strategies, core strengths, as well as historical performance verses the OEM’s own outsourcing strategy to enable the OEM to select the most optimal outsourcing partner to gain cost advantages while minimizing supply chain risks.
In this first article of a four-part series, we examine some of the critical factors for OEMs to consider when selecting their EMS or ODM providers.
Margins for both EMS and ODM vendors have been decreasing over the years, with many providers incurring losses, resulted in a series of mergers and acquisitions. Therefore, an OEM needs to evaluate the EMS / ODM vendor’s financials carefully prior to the final selection to ensure EMS / ODM vendors have the financial backing to take on the OEM’s business.
Some key financial criteria to look at to help determine the financial stability of the EMS / ODM provider and its ability to raise capital to meet potential growth needs of the OEM, and improve operation efficiencies include:
- Current ratio
- Operating margin
- Cash flow to debt ratio
- Return on assets and return on invested capital
- Inventory turns
Pricing, supply chain management
OEMs should not focus too much on pricing and cost reductions. Instead, the focus should be on finding real value in their EMS / ODM relationships. Total landed costs can include cost of purchasing, transporting, warehousing and distributing raw materials, semi-finished and finished goods.
Depending on the type of products and their geographic distribution requirements, an OEM can gain additional savings if its EMS / ODM vendor has manufacturing sites and supply chain capability to ship to local regions for the OEM.
An OEM can also gain additional savings if it’s EMS / ODM vendor has capabilities for build-to-order (BTO), configure-to-order (CTO) and can drop ship product directly to the OEM’s end customers.
Analyzing pricing with an ODM is also a bit more complicated as compared to traditional EMS since the OEM is taking an ODM designed product which also saves on development costs in addition to saving manufacturing costs.
OEM executives should focus on continual cost improvements from their EMS / ODM partners over time. Many cost reductions can usually be extracted from the initial ramping of product volume shipments and improvements in production processes.
While some EMS / ODM vendors can continue to drive cost reduction, EMS companies such as Foxconn and Flextronics do have vertical integration advantages because they also have ownership or equity in many components companies or other supply chain contributors.
Quality, services and ODM generics
Quality is an important factor when considering manufacturing outsourcing and extremely critical when the products are from an ODM as the product design and quality specifications are defined by ODM.
OEMs must understand ODM products are meant to be generic. This allows the ODM to reuse his design for many different OEM customers.
Due to price competitiveness, ODM will only specify minimum requirements. This does not mean ODM product designs are inferior in quality. OEM may have to pay extra for additional quality assurance processes to help ensure only higher quality products are released for customer shipment.
An OEM needs to make sure EMS / ODM vendors have both a specific process and particular production line dedicated to handle NPI, as sharing a volume production line for NPI internal EMS / ODM facilities can tend to create various different issues especially when the NPI process runs into problems.
In a typical new product development and introductory process run, new product design verification is completed by engineering before manufacturing / operations takes over responsibility. Once product verification is completed by manufacturing, OEMs should expect very high yields in product, even for newly released NPI product.
Other services OEMs should consider outsourcing to EMS / ODM vendors include:
- Agency certifications
- RMA and repair services
- Reverse logistics
- e-waste disposal / recycling
In order to achieve successful OEM-EMS / ODM relations, OEMs must understand the ownership of critical milestones each side must be held accountable for by determining a proper internal organizational structure, and staffing, to ensure smooth outsourcing operations management.
One of the first steps toward this goal is to establish competent working teams; define clear roles and responsibilities for each team member, and set up business processes for the teams to communicate project status, milestone reviews and an escalation process for critical issues that will inevitably surface.
Typically, OEMs might assign a supplier manager to manage on-going relationships with EMS / ODM vendors. This person will deal with all projects between the OEM and its EMS / ODM vendor, and will serve as the primary contact point to escalate critical issues that cannot be solved by the working teams.
Additionally, OEMs need to assign a program or project manager which is a critical post for handling all technical and project related communications between the OEM and its EMS / ODM vendor.
The program manager role is a critical position with varying responsibilities. OEMs should also consider bilingual speaking capabilities for their program management roles since EMS / ODM vendor team members could be located in different parts of the world, and may not be fluent in English.
Stay tuned. In part two of this series I discuss ways to conduct a proper EMS / ODM on-site visit.
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