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Top five mistakes OEMs make with EMS providers

ECONOMIC UNCERTAINTY in the current global environment is forcing OEMs to turn their current business models upside down just to survive, much less compete effectively. Companies new to the contract electronics manufacturing services (EMS) segment of global supply chains are being forced to consider outsourcing.

Meanwhile, veteran OEM outsourcers are re-evaluating their current supply chains and either carving out larger portions of their supply chains, or changing where their products are manufactured. (Read: A competitive supply chain is more than just lowering operations cost and inventories)

Making EMS sourcing decisions should not to be taken lightly. They’re more important and complex than many executives think and if made incorrectly, the OEM-EMS disengagement process is a minefield best avoided. (Read: 15 Lessons from a global sourcing manager and 10 Reasons why OEM relationships fail with EMS providers)

Below are a few things decision makers should think about to help them avoid making bad choices.

Poor problem definition
Selecting an EMS provider is a problem solving exercise. If you don’t identify, structure and sequence your questions properly, you won’t get the right answers. Simple? Defining the problem correctly requires a balanced cross section of input from across your organization’s functional groups.

You’ll notice I didn’t say ‘from a cross functional team’. Sure, you need a team, but the bottom line is you need input. There’s a difference. (Read: When outsourcing is not the answer and How to decide whether or not to outsource)

What key manufacturing technologies and test capabilities does the EMS provider need to effectively manufacture your product? What kind of engineering staff-support will be needed when problems show up?

SEE ALSO
How to drive cost out of your manufacturing product portfolio
Best practices for EMS manufacturing RFQ quotes
EMS Manufacturer internal cost vs OEM quoted fees vs OEM target price

Where do you need the provider(s) to be [located], and how do your requirements vary by region? How will they each fit into your total supply chain?

The perfect supplier fit will bring strengths to match your weaknesses or things you plan to de-emphasize, or eliminate internally.

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Poor EMS provider due diligence
In the post recession world, fewer people are left to handle the same (sometimes more) work. I see EMS provider due diligence, and following topic, becoming more, and more, neglected. Short cuts in finding the ‘right provider’ that matches your needs will derail your entire process.

See, also:
Due diligence and EMS key operating indicators
Supply chain liability indicators
59 Questions OEMs should ask ODM and design vendors

 

EMS factory floor.

 

How are you building your list of EMS candidates? Just using lists of companies close to you or where you want to be is a bad start. If you don’t have someone who has experience in outsourcing projects like yours, find someone who does.

Starting with a short list of solid candidates to choose from is the best place to move forward to the next stage. (Search EMS Resources Directory)

Once you have your short list, visit them.

Every potential EMS provider has a strong Power Point deck. But, nothing can replace face-to-face discussions and looking people in the eye when asking questions about how they’ve responded in the past to challenges you’ve seen or expect to happen as your project progresses.

Also, remember who you are sending to these meetings to represent you says as much to the provider as who they send. Is top management involved? Just purchasing? Is engineering or operations involved?

The ideal relationship will result in a match in terms of capabilities and chemistry function to function between your company and theirs. (Read: How do I qualify EMS providers?)

This reminds me of another key point. Don’t ‘out kick your coverage’. It’s Super Bowl week as I write this, so I couldn’t resist a football analogy. Look for EMS providers in the right tier.

If you are a tier-3 or -4 customer, don’t bother calling on tier-1 or -2 providers. This is difficult for OEMs to manage.

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Top tier players might respond to your concerns and calls for a short time, but when push comes to shove and you need a mountain moved to solve a problem, being a top 10 customer for the EMS provider is the only way you can count on that happening. (See: Tier-1 Top 10 EMS / ODM rankings)

Selecting the wrong project / program or migration path
No wine before its time. New and unproven products can introduce new variables (i.e., problems) into your manufacturing process that are best avoided whenever possible. Don’t select a sample of product items across numerous product lines, each with different requirements, to outsource.

Tackle one set of problems at a time and this usually means selecting one product line – as a whole – to outsource with your chosen provider. Be careful with ‘trial’ projects. Providers aren’t interested unless they are time-bound and the product growth plan or roadmap is well understood.

See also:
OEMs can avoid mistakes during NPI
New product introduction (NPI) quoting and the OEM
Contract manufacturing strategy for tech startups

 

Poor program management
Usually, if you’ve stayed on this path up ‘til now, program management can fall into place as a result of adequately developing the OEM-EMS relationship.

However, the OEM-EMS relationship can go wrong if there are too many chefs in the kitchen.
Provided you’ve selected and thus developed a strong match between your two companies, having too much of a good thing can be bad.

Even informal outsourcing relationships should progress to at least a memo of understanding with terms and conditions or preferably a full blown contract. (Read: Sample OEM-EMS manufacturing agreements)

Single-point program or account managers on both sides with written responsibilities are best. Program managers should talk and meet one another often and supplement these exchanges with regularly scheduled (quarterly or semi-annual) business reviews, rotating locations between OEM and provider locations. (Read: Program management responsibilities and Drive manufacturing quality in your OEM-EMS relationship)

Chasing price / purchase price variance (PPV)
Are you looking at all the costs that may or will change as a result of the sourcing decision? If you are sourcing between regions, are you including the extra inventory you need or an occasional FedEX P1 charge? Are you including the overhead needed to monitor suppliers that are not close by? How about the organizational wear and tear of wee hour conference calls?

See, also:
Outsourcing Calculator for OEMs
EMS Global pricing drivers methodology
OEM cost (spend) and EMS pricing models
OEM strategies to reduce EMS pricing and costs

 

If a price is too good to be true, it probably is. Times are tough which is leading some providers to take business at ‘loss leader’ margins to keep the lights on. In these situations three things will likely occur:

  1. Either your provider will go under,
  2. Better business comes along and you face a price increase, and / or
  3. You have to move your business to somewhere else

 

Expand your provider choices

Even though times are tough for both OEMs and EMS providers, the best providers will stick to their guns and not take loss leader business.

Remember, if you are looking for a top-tier partner, you are also competing for their business. Although the price they quote you may be based on looking at their cost, their final price to you is determined by how attractive your business is to them.

 

This article was written by Wally Johnson.




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