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Thin margin myth in EMS manufacturing

Fear of change and habitual thinking limit EMS capabilities

By Mark Zetter

Charles Darwin proved species that adapt survive better than larger or faster species that don’t. Competition among contract electronics solutions firms is no different. CEOs who cannot transform their organization find their services cast out from the changing marketplace.

EMS CEOs and investors often cite misalignment of EMS corporate strategy with marketplace changes (demand) as reason for poor performance. Misalignment went unchecked for years at Benchmark Electronics. Benchmark EMS sales and business development staff with little or no operations understanding, and unable to comprehend or articulate an OEM’s pain points, behaved like many of today’s EMS program managers — putting out fires instead of nurturing customer lines of business and prospecting additional or new program and business opportunities.

Then there was OnCore Electronics. Another EMS provider also serving non-traditional markets similar to Benchmark.

But unlike Benchmark who is still slowly turning the boat around since new leadership took over, OnCore sold its services to a large European program only to lose the farm to competing EMS provider Neo Tech, partly due to OnCore poorly quoting the European business.*

And while M&A can drive EMS growth, contrary to what many think EMS sales people do not drive EMS growth. The majority of EMS industry sales growth comes from current OEM customers wanting more services from existing partners and electronics OEMs seeking new EMS partners.

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EMS providers cannot free up excess amounts of working capital tied up in their business because they don’t have the proper tools to see its right in front of them. So they continue to cite low margins during OEM negotiations to win OEM favor – all while running their businesses poorly. You can read that last part again, I’ll wait.

EMS best practices burden OEM customers

EMS industry has not yet realized new tools exist able to measure the real cost of doing business for all EMS functions and activities and productivity across the enterprise.

EMS has evolved over the years from the early days of Hewlett-Packard consignment kitting and SMT/PCB assembly with non-vertically integrated EMS partners.

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Since then, EMS managers and executives have hopped from EMS-to-EMS company for more than 25 years further proliferating inefficient practices resulting in an entire industry embedded with antiquated problem solving techniques. In short, there is a high level of inbreeding thinking going on in EMS preventing management from escaped its own gene pool of poor reasoning.

Still, managing EMS is approached from the same perspective across industry. Nobody questions accepted management practices because they don’t know any better.

Even OEM management systems and acquired outside thinking (OEM hires) by EMS firms serves only to help the EMS attract like-minded OEM industry-specific prospects as customers and, while managing those OEM business lines equally poorly internal EMS continues.

Looking deeper into EMS operations here are a few areas EMS CEOs should be looking at more closely:

  • EMS marketers unable to accurately determine new business acquisition costs. OEM lead generation continues to be tied to marketing ROI. ROI is important but seems regressive serving to justify marketing budgets.
  • By definition S&OP (sales and operations planning) should enable executive teams to achieve focus, alignment and synchronization across all EMS functions. Demand planning, purchasing and scheduling are important, no doubt. But so is sales forecasting and accurate quoting. Regardless of pretty dashboards and ineffective technology stacks used today in EMS even the best tools available are no good if they don’t give executives an accurate pulse on their business.
  • EMS materials management and manufacturing operations: without understanding true internal costs with real visibility into productivity efficiencies (direct and indirect) EMS sales and program management further feed a cycle of improperly quoting subsequent OEM RFPs. Incorrect data then gets fed to EMS finance.
  • ROI for EMS ROE/ROA is a moving target because finance does not have access to accurate working capital numbers. EMS providers have little idea how much cash is tied-up in their business.
  • EMS program management putting out fires would not be part of PM’s job description if all functional groups supporting manufacturing operations were not also focused on building insulation to defend against pointed fingers when things go wrong.

 

EMS divisions operating independent of corporate business objectives, bad internal EMS execution and runaway costs are each easy fixes and should never be mentioned as excuses by EMS CEOs in quarterly calls with Wall Street.

EMS sales and business development professionals can no longer rely on customer relationships to drive EMS operations. The days are numbered for EMS providers who primarily rely on a OEM promise to convert past customer relationships into actionable purchase orders.

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EMS industry horizon increasing management effectiveness and freeing up working cash flow both influenced by a laser focus on productivity driven by measurable accountability.

Just five years ago it was a coin toss comparing Benchmark Electronics, KeyTronicEMS, Plexus, TT Electronics, Jabil, Sanmina, Flex plus, a two dozen other electronics solutions firms smaller and larger than Benchmark with equally capable services for certain complex systems engineering and assembly non-traditional programs.

Today, both Flex and Jabil have put in genuine efforts to differentiate from the pack with supply chain visibility offerings that would enhance OEM decision-making. Yet platforms and related supply chain services provided by both still fall short delivering real-time visibility aligned with driving measurable cost savings and productivity efficiencies.

Building a real spaceship

Until EMS providers can embrace forward-looking technology available today to enable them to manage business effectively and leverage real-time visibility to drive inefficiencies from the enterprise and free up cash, today’s EMS providers will continue to rely on the sales function convincing prospects margins in EMS are thin and OEM customers will continue to pay extra for lack of real risk decisioning by EMS management teams.

Habitual best describes the EMS executive mindset — feeling safe and content in their comfort zone while seeing the road to EMS greatness is littered with less capable EMS providers.

Business leaders view risk management as opportunity to place their organization ahead of the pack. The innovation leader in EMS will soon be emerging on the not too distant horizon.

* OnCore’s CEO was a capable sales person before leading OnCore. As CEO he quoted a large British program at a BOM multiple below EMS industry average. He won the trophy but OnCore was being consumed by runaway costs and he was unable to drive operational efficiencies to recover losses. The Neo Tech acquisition of OnCore saved the customer from sinking. Both EMS firms cited OnCore transfer of assets as a merger in their press releases.




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