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https://www.ventureoutsource.com/contract-manufacturing/industry-pulse/2008/11-reasons-electronics-manufacturing-services-ems-must-restructure

11 Reasons electronics manufacturing services (EMS) must restructure

By VentureOutsource.com Staff & IDC

VentureOutsource.com, in partnership with IDC’s Electronics Manufacturing research initiative, presents exclusively for VentureOutsource.com readers, a detailed look into 11 reasons why the electronics manufacturing services (EMS) industry must restructure. Also, considered in this analysis is original design manufacturing (ODM) services.

Changes in the EMS marketplace, combined with the nature of the EMS-OEM sales cycle and, industry-specific demands placed on EMS companies by their OEM customers, are just some of the reasons why the industry should take a serious look at restructuring how business is sought after, won and managed. (See, also: Defining a new value proposition for the EMS industry)

1. Organizational development remains a core issue for many EMS / ODMs

Large, U.S. based firms are undergoing realignment of capacity and reorganization of business units and regional operations. Flextronics is working through its acquisition of Solectron and other firms as well as its ODM PC and server group.

For ODMs, ASUSTeK has split itself into three components; Arima is refocusing on optoelectronics while milking its communications business, and Qisda has emerged from the reorganization of BenQ. Many large firms are devoting a significant amount of executive attention on various forms of organizational development to optimize operations.

2. EMS value proposition to OEMs includes: capacity, flexibility, and complexity management
EMS firms invest in the operations and management of global manufacturing processes, with the commiserate risks, while OEMs can tap into this capacity and operations on an as-needed basis. In the end, the risks and rewards appear to be unbalanced between EMS firms and OEMs.

3. Portfolio of products and clients determines the success of EMS / ODMs
EMS firms’ growth is tied to their customers’ success in the market, shipping sufficient volumes to allow the EMS partner to generate a sufficient run rate to achieve profit goals.

4. Profit sources remain steady, but limiting under current conditions
EMS / ODMs generate revenue and profits from manufacturing fees; the spread on component sourcing, various engineering, design, and test fees; fees for logistics; and fees for repair services, among other sources. All of these have been in place, with few real new sources being created within the industry. The challenge is the constant cost reductions OEMs require, which eat into the ability of EMS firms to grow profit margins within specific lines of business.
 

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5. End-market strength drives industry and demand forecasting remains critical for EMS / ODMs
Given the EMS industry business model and the inherent flexibility in contracts (when orders can be cancelled; delayed, or accelerated at the pleasure of the OEM), demand forecasting is critical for EMS firms to ensure they can meet fluctuations in demand, mitigate inventory risks, and plan investments.

6. Strategy and operational alignment is a challenge facing many firms
A complex mix of strategies; processes, tactics, systems, and investments need to be aligned with each other for EMS / ODMs to achieve their optimum value creation. Often the mix of business within an EMS firm creates conflicts in these critical areas, in some cases undercutting each other. Part of this challenge comes from trying to win contracts and grow relationships with customers without evaluating how these projects fit within an organization’s strategic map.

7. Complexity management is a core competency for EMS / ODMs
Worldwide operations, complex supply chains, demand for short lead times, and the proliferation of SKUs are among the factors that bring complexity to EMS operations.  Firms have to be successful in managing this complexity if they hope to be successful.

8. Attaining and managing scale is a challenge for many firms
Various EMS / ODMs feel that scale is critical in the high-volume segments to maximize profits opportunities. Some have chosen acquisition while others are focusing on vertical integration.

One of the challenges is once firms have grown their operations; they find challenges with developing the necessary management skills, processes, and systems to oversee a larger organization than they have been used to.

Additionally, maintaining contracts and relationships to keep them at a specific size becomes a critical issue; given the ease OEMs have of switching suppliers. Also, in some cases, for vertical integration operations to be successful these operations may have to have a production capacity greater than the demand from their OEMs. This means having sales operations to capitalize on this capacity as well as to cover any shortfalls from OEM demand.
 

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9. ODM sector challenges remain, including: concentration in limited product segments and geographies; falling profits; own branded issues; and leveraging engineering skills

ODMs face unique challenges to their business model.  Revenue growth rates in the key PC and mobile phone segments are slowing rapidly, driving increased pressure to reduce costs, which is eroding profit margins. OEMs discourage branded business options, which can be seen as sharing engineering resources with a competitor.

Additionally, OEMs are not keen on their ODMs working for key competitors, both of which limit ODM growth opportunities. Finally, with a large majority of manufacturing capacity in China, ODMs are highly exposed to risks from China.

10. Location is critical to profitability, supply chains, scheduling, staffing, and business wins
Where to locate, either for the best cost, fastest delivery, best access to talent, or the whims of corporate politics is a critical decision for EMS firms. Where a firm locates determines the cost structure for a firm. During the request for proposal (RFP) process for OEMs, the selection process works down to the specific factory or part of a factory, at a campus, in determining whether a firm will win the project.  Also, EMS firms cannot, on their own, shift production to another location without the permission of the OEM customer, so EMS firms have to live with their decisions.

11. Emerging segment penetration remains elusive

Despite nearly a decade of EMS firms targeting the automotive, medical device, and industrial product segments, with the hope of a watershed penetration of outsourced manufacturing, these segments remain a small part of the overall EMS industry: 12% in 2007 growing to 15% by 2012, according to IDC’s forecast.

While these small segments are growing fast, IDC does not expect any massive surge in revenues in these segments.  Opportunities will mostly remain small and fragmented, requiring greater investments in marketing and relationship building.

 




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