Is investing in supplier development key to OEM success in the market and increasing supply chain performance? (Apple invested billions of dollars in the production of its LCD panel suppliers: LG, Sharp, and Toshiba) Or, can greater OEM reward be achieved through supply chain cost reductions with EMS providers and suppliers?
Can electronics OEMs lower outsource design and manufacturing costs through better EMS provider management? This question among others were explored during a number of conversations with Cuihong Li, Ph.D., assistant professor of operations and information management at the University of Connecticut’s school of business.
Dr. Li is actively involved in researching whether (and to what degree) dividing an OEM’s sourcing strategy into two discreet approaches (supplier development strategy and supplier contractual strategy) can considerably lower supply chain costs for OEMs.
Looking at these two approaches in more detail, Dr. Li considers cost reductions given to the OEM by ODMs and EMS providers / suppliers and, then she also evaluates in what ways OEMs can leverage known competition among EMS providers / suppliers competing for a particular OEM’s customer contracts with those outsourcing / supplier partners.
Supplier development v. cost reductions (contractual development)
The supplier development strategy platform determines the amount of resources (e.g., equipment) the OEM invests in each EMS provider’s / supplier’s operation to enhance delivery capabilities to / for the OEM.
The contracting strategy platform determines how the OEM should sequence over the time the price and investment decisions against the supplier’s cost reduction activities (e.g., guaranteeing the price and/or investment before the supplier engages in cost reduction effort, or vice versa).
Supplier development
Dr. Li cites Apple in an example of an OEM investing resources in its suppliers is Apple. Apple invested billions of dollars in the production of its LCD panel suppliers (LG, Sharp, and Toshiba) to help ensure ample supply for Apple’s end market /customers.
Our discussion thus turned to potential investments an OEM might make to enhance or improve the delivery capability of its suppliers.
For example, the OEM may invest in machines / equipment / tools for a supplier; investment in facilities for a supplier or investment in a supplier’s human resources (e.g., supplier worker training).
Cost reduction activities
In looking at opportunities for supplier cost reductions, we discussed production process improvement opportunities; improvement opportunities for manufacturing throughput yields, material cost reductions, logistics and so on.
Some of the potentially rewarding areas we discussed for OEMs to engage their EMS providers to then encourage them to locate internally for cost reductions and to then, hopefully, pass on EMS-internal cost reductions with the OEM (see, OEM Outsourcing Calculator to uncover savings) include:
- Process technology (e.g., equipment, automation, production process, testing)
- Sourcing (e.g., contract management, supplier relationship, logistics)
- Production management (planning and control of material flows, quality management)
- Facility (e.g., location, size, types)
- Organization (e.g., decision making process, performance measures, incentives)
- Human resources (e.g., skill levels, training, recruiting)
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We then discussed some of the risks and concerns any supplier might face in taking on such cost reduction activities, plus whether such cost reduction activities internal the supply might (should?) rely on an OEM’s investment in enhancing a supplier’s deliver capabilities.
Hong Kong
Posted at 9:58 pm on September 5, 2011
OEMs can lower costs in many different way, the problem is to analyze if the cost reduction is worth the effort, or indirect repercussions that such a cost reduction process initiated by the OEM might cause on the EMS's cost structure. Some OEMs force the EMS to purchase material from specified suppliers, at a lower cost for the OEM, but doing so, might increase operational costs, and risks that the EMS might not have without such cost savings attempts. Depending on the industry and product type of the OEM, the cost reduction initiative will prove itself worthwhile or not. Just my 2 cetns
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Founder at VentureOutsource.com
Posted at 12:08 pm on September 6, 2011
Hello Hong Kong, You bring up a few good points. In many instances, with more of the supply chain being outsourced to the EMS provider than being in control by the OEM, the EMS provider tends to have more leverage across the extended supply chain and thus has the opportunity to push back on vendors for pricing concessions which translate to reduced 'costs' for the OEM (but, only if the EMS provider notifies the OEM and then decides to share his (EMS-internal) savings with the OEM (as lower pricing). You're also correct about varying approaches for varying industry markets as some have greater supply chain costs built in (think: military, medical vs computing or server) All good considerations for OEMs. (And EMS/ODM companies) We've since added this discussion/article to our 'OEM Outsourcing 101' section (bottom of LEFT column) on the site, which contains other helpful/relative best practices and content for OEMs engaged in, or considering, outsourcing of their manufacturing supply chain operations.