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https://www.ventureoutsource.com/contract-manufacturing/trends-observations/2009/the-wrong-message-ems-value-proposition-still-rooted-in-cost-reduction

Electronics manufacturing services value is not cost reductions

By Michael Palma

Recently, I mentioned several critical issues facing the EMS sector. This discussion with VentureOutsource.com culminated as the result of various other conversations I have been holding with IDC clients about the outlook for the contract electronics manufacturing services (EMS) industry, which we all know is not great, despite bright spots including increased outsourcing in the medical and industrial segments.

For the most part, these conversations have focused on coming pressure on EMS firms that is only going to increase in the following areas:

  • greater inventory risks
  • evaporating demand
  • changing forecasts from OEMs
  • increasing pressure on lead times
  • the shift underway in manufacturing footprints, and
  • the continual pressure on costs

Aware of VentureOutsource.com’s online industry influence, I want to take the time and leverage this platform to further flush out ideas from these previous discussions in a series of articles for VentureOutsource.com readers, beginning with this piece.

The result of all of these forces, as well as other issues, may be too much for the industry to bear, especially for some firms on the bubble. But, it’s my thinking that none of these issues are the real problem facing EMS and ODM firms. That in fact, these problems are just symptoms of a more fundamental problem with the industry.

The fundamental, real problem with the EMS industry is its inability to effectively communicate its value proposition.

The pressure on EMS firms relates to the mistaken belief the core value proposition of outsourced manufacturing is cost reduction for OEMs.

This mistaken belief is partly due to the ongoing sales messaging by EMS providers combined with the EMS partner evaluation and selection process by OEMs where OEM processes often take a short-sighted, commodity purchasing view, where individual buying managers and procurement units are evaluated based on cost reductions in their narrow purview.

Few OEMs evaluate the total cost to design and deliver products to customers.

This cost reduction ‘message’ also is a result of the historical foundation of the EMS industry.

Component suppliers initially won business on their ability to take on non-core manufacturing processes for OEMs.

Now, OEMs have allowed EMS firms to take over all manufacturing operations.

 

Cost reduction is still the primary benefit OEMs see from engaging with EMS firms. This mindset is becoming an ever greater threat to the long-term survival of the EMS industry.

 

Finally, when OEMs in a product sector initially turn to outsourced manufacturing, there is usually some cost savings, but once the low-hanging fruit have been harvested (e.g., inefficient processes are re-engineered; logistics and purchasing processes are improved, and access to larger purchasing pools is obtained), cost savings become more difficult. Yet, future expectations by OEMs for further cost reductions remain.

But, cost reduction has long been a fundamental misconception of the value of outsourcing.

The true value, in my opinion, is the transference of risk.

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Let’s take a moment to look at outsourcing and the state of the EMS industry. There are several dimensions across which we can define outsourcing relationships, all tied to the level of risk transferred from the OEM to the EMS provider:

  • EMS management of complexity within and across outsourced business processes, on behalf of the OEM
  • Management responsibility of the outsourced processes
  • EMS performance’s impact on the OEM’s business

 

If we look at the range of relationships possible across these dimensions, we see four types or generations of outsourced manufacturing (Figure 1) which can be perceived as an Outsourcing Maturity Model. These outsourced manufacturing generations include:

  • Contract Manufacturing – Non-core OEM activities are outsourced to EMS partners (component manufacturing or SMT, for example) or, to access extra capacity
  • First Generation Manufacturing Outsourcing – OEM begins to release responsibility for the manufacture of components and / or complete systems to an EMS partner. System or sub-system manufacturing is still the core process being outsourced but other services may be provided. EMS partner is executing decisions made by the OEM.
  • Second Generation Manufacturing Outsourcing – EMS firm provides more services, taking on greater responsibility for the performance of each outsourced process. EMS partners have greater responsibility for decision-making, not merely executing OEM decisions.
  • Third Generation Manufacturing Outsourcing – The OEM completely transfers risk to the EMS partner. OEMs will still manage the relationship, but fundamental business / operational responsibilities for the performance of the outsourced processes lie with the EMS partner.

 

Fig. 1

Electronics Outsourcing Maturity Model - IDC, VentureOutsource.com

 

Currently, I contend that most Tier 1 and Tier 2 EMS providers are operating in a hybrid of the first and second generations of manufacturing outsourcing. EMS providers are providing more services and taking on moderately high levels of risk and complexity management on behalf of their OEM clients. Yet, pricing relationships remain less mature and OEMs still retain a high level of decision-making.

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