Buyers involved in outsourcing decisions must match their companies’ design, supply chain and manufacturing needs with the capabilities of EMS providers
Most electronics OEMs have an outsourcing strategy to help them reduce cost, improve time-to-market and reduce risk in their supply chains.
Some outsource a relatively small amount of manufacturing to EMS providers such as cable and board assembly. Others may rely on EMS providers for manufacturing the entire system and for testing and fulfillment. Some OEMs involve their EMS providers in new product development efforts and depend on them to design boards and other subsystems
Many electronics companies turn to EMS providers to handle strategic sourcing for many of the components on a bill of materials and to help them manage risk in the supply chain. Often, EMS providers also must handle aftermarket services including reverse logistics, repair and refurbishment and recycling and disposal of old equipment.
The decision on which EMS provider to use can be challenging because EMS providers offer different manufacturing, design and supply chain services. Electronics purchasers are often involved in such decisions. Some OEM buyers help evaluate the capabilities of contract manufacturers and recommend which ones best meet the needs of the OEMs.
Services among EMS providers can vary based on the size of the contract manufacturer. “The larger guys are doing soup to nuts,” said Virginia Howard, supply chain research for market research firm Gartner Inc. “That’s where they make their money. They don’t make it on board assembly because the profit on board assembly is very low,” she said
Besides printed circuit board assembly and box build, large global EMS providers provide other manufacturing services including plastic injection and molding, mechanical and electromechanical assembly, tooling, molding. However, even smaller EMS providers have expanded their capabilities. One example is Knight Electronics, a Dallas-based EMS provider with $25 million in annual sales. Knight does small to medium-volume production for customers in the food equipment, aircraft, rail, bus and truck and automotive industries. Manufacturing facilities in Dallas, Taiwan and China.
“We do short run stuff in Texas, and then when we go to medium volume, we prefer to move production to our facilities in Asia,” said John Knight, president of the company.
Besides board assembly and box build, the EMS provider has injection molded plastics, stamping and diecasting and extrusion capabilities, said Knight.
Howard said with EMS providers—whether they are big or small—“not everyone necessarily does the same thing,” she said. Some have invested in power supply technology and can design and manufacture a power supply. Others have invested in sensor technology and can build sensor subsystem solutions for customers, said Howard.
She said with the growth of Internet of Things, such capabilities are “attracting customers from outside the high-tech industry who may want to put sensors on wristbands or on detergent bottles,” she said. “EMS providers have purposely invested in expanding the value that they bring” to new and old customers, said Howard.
The wide range of services that suppliers offer is important to many companies, especially startups. Startups may have a great idea for a product but have little design expertise and need EMS providers to help them develop the product concept, build prototypes and source components for the product before volume production begins.
With established OEMs that have in-house manufacturing,
the plethora of EMS services gives OEMs options. The companies can decide how much they want to outsource to external manufacturing partners and how much they want to retain in-house.
“It’s all about what the OEM considers to be its core competencies,” said Howard. Often established OEMs consider design and marketing as core competencies and look to EMS providers to handle all the manufacturing and a lot of the management of the supply chain. Many OEMs also turned over strategic sourcing of lower value commodity components to EMS providers. Contract manufacturers typically combine the volumes of multiple OEM customers and negotiate a lower price for the parts.
However, it’s a different story for higher value, higher technology components such as microprocessors, memory and storage devices that are vital to the OEM’s products. Most OEMs consider strategic sourcing of process DRAM, NAND and storage devices as key to the success of the company and keep control of those critical components. Those components often represent 80 per cent of the bill of materials value and most OEMs “don’t want to give that away” to an EMS provider, said Howard.
“The primary reason is that OEMs need the relationships with the Intels, the AMDs and the Samsung’s of the world,” she said. OEMs need to establish and maintain close relationships with such suppliers to get access to the latest and greatest technology and to get world-class pricing for those parts from the suppliers. In addition, having strong relationships with major chipmakers usually means the OEM will get allocation of parts when there are shortages and production lines can keep running.
Sourcing popcorn parts
It’s a different case for low value “popcorn parts”, said Howard. OEMs often let EMS providers handle sourcing of passives, discrete semiconductors and connectors. Many of the parts are commodity items that cost less than a penny and there are often multiple suppliers for the components.
However, during shortages, OEMs will get more involved in strategic sourcing of passives to make sure the OEM gets its fair share of parts. In fact, that’s what’s happening now because of allocations of multilayer ceramic capacitors (MLCCs), resistors and some discrete semiconductors.
Over the years, most EMS providers have added to their menu of services that they provide. However, one EMS provider that has offered a wide range of services since it was founded 40 years is Plexus Corp. based in Neenah, Wisc. The company specialises in low to mid-volume, higher complex products for OEMs in the healthcare/ life sciences, industrial, commercial, aerospace and defense and communications industries. It provides board assembly and box build at its manufacturing facilities in North America, Europe and Asia.
“We are global and probably 70 per cent of our facilities are outside of the U.S. but all of them have really advanced technical capability,” said Todd Kelsey, Plexus CEO.
Besides manufacturing, Plexus also offers a wide range of design and supply chain services.
“We’ve offered services across the whole product realisation value stream over the last 40 years,” said Kelsey. Plexus was started with product development and product conceptualisation engineering as part of its core competency, he said. The EMS provider can help an OEM design a new product, develop prototypes and make small production runs in addition to handling strategic sourcing of components and volume production. It also provides aftermarket services such as repair and refurbishment.
Design services are integral to Plexus’s business model. With it engineering capabilities, Plexus can take an idea for a product and “write the spec and potentially do a full turnkey design,” said Kelsey. “It’s could be highly complex products where there could be teams of 30 to 50 engineers developing an idea into a new product, said Kelsey. He said a third of Plexus manufacturing originates from the design work that Plexus does for customers. Other times, Plexus will “co-engineer” with the customer and handle design of part of the new product.
Sometimes a customer’s product idea may be “very advanced, while other times the customer may have a rudimentary idea for a product and “we help them turn that idea into a product,” said Kelsey.
Sourcing for customers
While design capabilities have been offered by Plexus to customers for 40 years, so have procurement services. “The whole idea of sourcing and procuring for our customers was there from day one,” he said. Today it’s even more so. It’s a big focus of ours,” said Kelsey.
Once a product is designed, Plexus can strategically source all the components on a bill of material if necessary.
He said that for products that it designs for customers, Plexus sources the entire bill of materials (BOM). For other customers, it sources 30-50 per cent of the BOM with its own preferred suppliers, “particularly if it’s a localisation effort where for example a US designed product is manufactured in Malaysia,” said Kelsey.
“We set up a big focus on providing alternate suppliers and localising the supply chain, using our sourcing capability to drive a better overall total cost for customers,” he said.
Of course, Plexus isn’t the only EMS provider that sources on behalf of OEM customers. Sanmina, based in San Jose, Calif., provides comprehensive strategic sourcing services for OEMs. The level of services varies from customer to customer, said Sushil Dhiman, Sanmina’s executive vice president NA Gateway IMS Operations, U.S., Canada & Brazil.
“When a customer asks us to do a turnkey design of a system, we may select all of the suppliers,” he said.
“When we engage in joint designs or provide access to technology, we partner
with customers to select component manufacturers,” said Dhiman.
He added that even if an
OEM handles a complete product design, the OEM can “benefit from using Sanmina’s supplier network, supply chain design and component engineering services to introduce multiple suppliers for each component, reduce lead-times and increase flexibility.” Such services “not only enhance Sanmina’s value proposition, but can solve some significant customer problems,” he said.
For example, Sanmina helped a tier-one industrial controls OEM enter new markets and meet existing demand with a shorter lead-time. “We did so by re-designing a supply chain with 1,200 components, 130 suppliers and a cumulative lead-time of 34 weeks,” said Dhiman. The result was a build-to-order industrial control system that consistently delivered within a 10-day lead-time. The new supply chain design included demand flexibility of 20 per cent, he said.
While EMS providers have always offered a wide range of procurement, supply chain and design services to customers, those services have expanded over the years to include helping OEM customers navigate the maze of government regulations.
Kelsey notes that the number of regulations concerning conflict minerals, hazardous substances and recycling and regulations in industries such as life sciences and defense and aerospace have increased over the years. With more regulations there are more risks.
Regulated industries, including the medical, automotive and aerospace markets, require that design and manufacturing risks are identified and mitigated in advance, according to Dhiman. He said Sanmina uses a “failure mode effect analysis” (FMEA) to identify, rate and mitigate risks. Risks are rated based on the level of potential impact if the risk materialised and the probability of the risk occurring.
“Multiplying the severity by the probability allows risks to be prioritised so that mitigation strategies are developed for the most serious risks first,” said Dhiman. Sanmina’s IT and quality systems have been developed over many decades to eliminate the possibility of many risks from happening. “For example, the forced routing feature in our 42Q MES system (a cloud-based manufacturing execution system) ensures that each product is built according to a defined protocol,” he said. Scanning and verification of components ensures that a mistake cannot be made by loading an incorrect component, said Dhiman.
Besides helping OEMS reduce risk, some EMS providers have expanded their role in providing aftermarket services. Aftermarket services typically involve repair and refurbishment of products that have been out in the field. However, in the medical segment, products have to be decontaminated before they can be refurbished because they come in contact with bodily fluids or diseases. “That’s relatively new. We’ve gone down the path of providing decontamination services,” said Kelsey.
In addition to aftermarket services, more customers are looking for assistance with obsolescence and shortage issues. OEM buyers want their EMS providers to make sure there is continuity of supply. They also want EMS partners to provide market intelligence that can give them a heads up if there are upcoming supply issues that could jeopardise continuity of supply.
Dhiman said part of Sanmina’s value proposition to OEMs is identifying supply issues of passives, discretes and other components through “our network of sources and recommend solutions to customers, said Dhiman.
Sanmina also reviews “A-Class parts” that are critical to a customer’s product every week. With the review, a product’s bill of materials and approved manufacturer lists are analysed to ensure that multiple sources are designed into the supply chain when possible, said Dhiman. In addition, Sanmina’s component engineering team identifies alternate components for shortage parts, he said.
“In the case of passives and discrete semiconductors, alternate components identified are usually electrically and mechanically, pin-to-pin compatible, with no design changes required,” said Dhiman. In cases where design changes are necessary, Sanmina’s component engineers work with the customer or Sanmina design engineers to make and validate the changes, he said.
Knight said his company has “feet on the street” in Asia and Europe to monitor the electronics market. “We get a lot of good market intelligence that’s not generally available to the press or online,” he said. By talking with component and raw material suppliers, “we can actually get a pretty good gauge what’s up and what we need to plan for. Recently we have definitely beefed up our inventory” because of supply conditions for MLCCs and other passives and discretes, said Knight.
Kelsey said with the current constrained supply of passives and discretes, Plexus works with customers to find alternate suppliers when necessary. Plexus also is working with the key passive suppliers to make sure it gets the supply of capacitors and resistors it needs for its customers’ products.