Enhancing relationships with key suppliers and consolidating production spend with preferred suppliers are important initiatives for buyers at Flex
The continuous need to reduce materials cost, finding multiple sources for semiconductors and other components despite a shrinking supply base, and managing supply chain risks are some of the challenges that purchasers at electronics manufacturing services company Flex must manage.
The Singapore-based Flex, with $24 billion in sales in its 2017 fiscal year, buys billions of dollars of semiconductors, passives, connectors and other production materials for its 100+ production facilities around the globe. The EMS provider services dozens of OEM customers in a wide range of industries including medical, automotive, industrial, home appliances, capital equipment, energy, telecom, networking, enterprise computing among others. In fact, Flex servers 12 industries which generate over $1 billion of revenue each for the EMS provider.
For many of those OEM customers, Flex handles purchasing and helps to manage customers’ supply chain. OEM customers expect Flex to reduce costs, improve savings and manage supply chain risk. In recent years that has become more challenging because of consolidation within the electronics supply base, said Daniel Koh, vice president, global commodity management and sourcing for Flex.
Koh said that managing Flex’s supply chains is a “very broad and complex task” and purchasers are faced with different issues and challenges daily. For instance, he noted that recent supply base consolidation coupled with the strong recovery of global economies resulted in demand for electronics components rising to an all-time high. “Our buyers and procurement teams are busy with mitigating material shortages due to extended component lead times based on the strong economy,” said Koh. “Making sure to secure supplies is key for Flex, so we can prevent any production line downtime.”
Koh added Flex’s procurement team each year has to find ways to reduce costs, improve payment and shipping terms. “This becomes more challenging as the supplier base for electronics components shrinks,” he said. Consolidation makes it harder to multi-source parts with different suppliers and “this increases supply chain risk if a sole-source supplier decides to stop production of legacy components,” said Koh.
While consolidation may make it difficult to have multiple sources for some components, it sometimes makes it easier to consolidate more spend with fewer suppliers. “For example, when one of our strategic suppliers acquires a competitor, we can benefit from larger volume discounts by increasing our spend with that supplier,” said Koh.
In fact, leveraging Flex’s large spend with preferred suppliers and enhancing relationships with those suppliers is an initiative at the company. “This initiative will significantly improve our margin and cash flow, and help assure a reliable supply of materials,” said Koh.
Flex, like other EMS providers, often must use the suppliers on OEM customers’ approved vendor lists. As a result, the company has about 14,000 suppliers. While it is difficult for Flex to reduce its number of suppliers, it can focus more of its production spend with fewer of them. As with many electronics companies, Flex’s goal is to have 80 per cent of its spend with 20 per cent of its suppliers.
Managing thousands of suppliers for a diverse customer needs is a challenge, but it also may give Flex an advantage because it gives the EMS provider insight into supply chain issues that OEM customers and their component manufacturers face. In addition, over the years Flex purchasers have gained experience buying a wide variety of products across many industries, according to Tom Linton, chief procurement and supply chain officer for Flex.
“One thing that’s a little different here is the fact that Flex does more than a billion dollars in revenue in each one of more than a dozen very different industries, from consumer to industrial to automotive,” he said. “Purchasers have learned how different components fit best into new products,” Linton said.
He noted that almost all products are becoming smart and connected. “But a kitchen appliance company may not have worked with wireless features in the past,” he said. With the range of experience at Flex, the company’s procurement teams can source a wireless package that’s small and heat resistant for the appliance. “Maybe this wireless module was originally designed for a cell phone, but it’s also perfect for say, a toaster oven which needs a small, heat resistant solution that can reliably connect to the cloud,” said Linton.
By bringing this cross-industry expertise together, Flex can help OEM customers quickly create smart products that would have been much more challenging to design in-house, according to Linton.
Such expertise and experience can help Flex attract new customers from traditional non-electronics industries that have a need to add some electronics to their products.
Buyers face more risk
Flex purchasers’ experience with customers and suppliers is also useful in helping the company manage risk. Managing and mitigating risk in the supply chain has always been part of the job for strategic buyers. However, over the past three years as the supply base for semiconductors and other components has shrunk, supply chain risks have increased and the need to identify those risks and find ways to avoid or mitigate them to avoid disruption of the supply chain has increased. “These risks include price increases, component quality, legal and geopolitical risks,” said Koh.
Flex, like other large EMS providers and OEMs, has developed mitigation plans to manage supply chain risks. Plans vary depending on the type of risk (natural disaster, pandemic, port closures, labor unrest etc.). “There is no one set of rules that can manage all risks equally,” said Koh. It depends on the component, the technology, the number of suppliers and the needs of the OEM customer.
“Sometimes our objective is to buy up as much of limited supply as possible, if we have a customer with a large volume of time-sensitive products,” said Koh. Other times Flex buyers may look for alternative components, or other ways to accomplish the customer’s goals while balancing price, velocity and business requirements. For instance, during the last major earthquake in Japan in 2016, Flex buyers learned within 24 hours that one of the company’s supplier’s factories was badly damaged in Kyushu.
“Flex immediately dispatched our procurement staff to the supplier’s headquarters in Tokyo to help secure our product allocation and secure additional components from the distribution channel,” said Koh. Those actions helped prevent Flex’s production lines from potentially going down for an extended time.
While quality is often considered a given in the electronics industry, it can pose a risk if a key supplier or second tier supplier has a production or material problem that results in a product with substandard quality. Flex purchasers monitor quality of components and other production materials produced by suppliers. Koh said that the quality of components and other materials produced by tier one and two suppliers has improved over the years with a few exceptions. “But because of those exceptions, it’s something we still monitor regularly,” he said.
Flex’s suppliers are rated for quality using Flex internal metrics, and the results are shared with suppliers on a quarterly or bi-annual basis using through the EMS provider’s supplier scorecard, said Koh. If a supplier’s quality rating risks falling below a pre-established threshold, a Flex quality team will provide guidelines to the supplier to help improve their quality assurance process.
EMS industry bounces back
While the rate of electronics outsourcing by OEMs has slowed in recent years, worldwide electronics manufacturing services (EMS) revenue grew 11.4 per cent in 2017 to $473 billion and will post an annual growth rate of 7.4 per cent through 2022, according to New Venture Research (NVR).
Prior to 2017, the worldwide EMS industry experienced flat growth for several years, but last year “growth took off,” according to Randall Sherman, founder and president of New Venture Research (NVR), based in, Nevada City, Calif. “A lot of growth for EMS was driven by smart phones and that has been a really strong segment, although the margins are very low in that business, but not as bad as they used to be,” he said.
In the past, OEMs “would pound down contract manufacturers with a razor-thin margins,” said Sherman. But OEMs realized “that was not healthy for their suppliers.” They want their EMS providers to be financially healthy and want them to have the latest technology, he said. “So, they let up a little bit on “on the brutality of the industry” in terms of pricing and EMS companies have been making money.
“The industry is quite healthy now,” said Sherman.
Sharon Starr, director of market research for the Association Connecting Electronics Industries (IPC),
said the North American EMS market is also doing well. “In 2017 sales of North American EMS companies were up 10.5 per cent over the prior year,” said Starr. Prior to 2017, EMS revenue in North America was flat in 2014, but increased 1.9 per cent in 2015 and then 4.9 per cent in 2016, she said.
Much of the revenue growth has been with the top 10 EMS providers, which account for 90 per cent of EMS revenue, said Sherman. Foxconn remains the largest EMS company. Its sales revenue grew 15 per cent to $155 billion in 2017, according to NVR. “The growth has been largely due to Apple’s growth, but they also supply other companies in the communications sector. Foxconn builds many Apple products including, iPhones, iPods and iPads. Pegatron, the second largest EMS provider, grew 9.3 per cent to $39.3 billion in 2017, said NVR.
Sherman said electronics contract manufacturers account for 40 per cent of all electronics assembly. “Sixty per cent is still done by OEMs, often for products that are not outsourceable,” said Sherman.
The EMS industry will continue to grow through 2022 when revenue will total $664 billion, the researcher said. One reason for continued growth will be the communications industry.
“There is reason to believe that the communications sector will stay strong because we have replacement of 4G networks with fifth-generation networks, which will be deployed in the next few years,” said Sherman. The transition will require new switches, routers and other communications gear.
The industrial sector, including process controls, robotics test and measurement, will also help drive EMS revenue over the next five years. Automotive is also a growth segment for EMS. “There’s a lot going on there with safety systems in addition to entertainment systems, diagnostics, and instrumentation,” in vehicles, said Sherman.
While large companies dominate the EMS market in terms of revenue, smaller EMS providers are also growing, said Sherman. EMS companies such as Plexus, SMT, MC Assembly, Creation Technologies and others are “in the so-called sweet spot” of the EMS industry, he said. “They are able to maintain better margins because they are doing medium-volume and high-complexity products in industrial, medical, aerospace sectors. They’ve become kind of specialists in certain segments,” he said.
OEM customers often “get a lot more attention from the smaller EMS guys,” than bigger contract manufacturers said, Sherman. Often big EMS companies can’t take any projects that are less than $50 million. But such programs “for a small and medium size EMS company is a nice program,” he said.
One contributing factor for the return of growth to the EMS industry could be that EMS providers are providing OEMs with higher-level services than in the past. Some EMS providers have become supply chain partners to OEMs supporting OEMs in design, prototypes, logistics, managing the supply chain, reverse logistics and repair.
In the past, many OEMS would outsource to reduce fixed labor costs. But now “it’s not just about labor anymore,” said Virginia Howard, supply chain research director for researcher Gartner Inc. There is a greater focus by OEMs to expand working with external manufacturing partners on more than just contract manufacturing, she said. EMS providers are making investments in design capabilities and handling “orchestration of the end-to-end supply chain in outsourcing on behalf of customers,” said Howard.
She noted that some of the larger EMS companies have innovation centers “that focus on design, prototyping to support startups and other established OEMs. “The value of the contract manufacturers now is about providing solutions. It’s not just about cost and capacity,” said Howard.