Electronics Production | April 06, 2010

Does that XXXL shirt really fit?

OEMs looking for an EMS-provider typically define ‘goodness’ by the number of features and benefits a supplier can bring to the table – which usually means a Tier 1 EMS company wins out.
Who wouldn’t prefer a Tier 1? They are the biggest (by definition) so conventional wisdom tells us they would be the best. But what happens when we start to unpack that conventional wisdom?

First of all, by industry consensus, Tier 1s are defined as the top 10 EMS ranked by their annual revenues - an impressive group of companies each shipping many billions of dollars per year.

Given this scale what are their strengths?
- Purchasing power. By leveraging economies of scale, the Tier 1 can negotiate aggressively with component suppliers, passing along these savings to its OEM customers.

- Global footprint. Having manufacturing facilities in every conceivable low labor cost region, the Tier 1 can manufacture products cheaply and, again, pass along these savings to its OEM customers.

- Engineering capability. Because Tier 1 companies typically employ thousands of skilled engineers, they can bring considerable talent to a technical issue.

- Manufacturing capacity. Tier 1 companies have so many factories they should (statistically speaking) never have trouble meeting production deadlines.

All strong selling points, but there is one big caveat. The Tier 1 business model is inherently inflexible. The sheer size of these organizations requires that their facilities be kept constantly full, as to do less would mean they would experience huge unabsorbed costs and considerable financial risk.

So, the best marketing solution for companies this size is to have a very few, very large account relationships. That is why they target customers who are/will be Fortune 500 electronic OEMs – what the Tier 1 industry refers to as ‘strategic accounts’.

Then why would a Tier 1 pursue a customer relationship with a company that doesn’t meet this criterion?
Primarily because there is substantial excess capacity in the EMS industry at all levels, but primarily at the Tier 1. Years of geographic migration to lower labor cost regions have left countless factories idle in regions around the world. In this imperfect system, Tier 1s have little choice but to pursue every viable piece of business in an attempt to fill these factories; and this is particularly true during recessionary times.

So what happens when you engage with a Tier 1 when you are not one of these 'strategic customers' and then business rebounds? Does it seem likely that smaller accounts in these very big ponds will receive less attention? Wouldn’t it be reasonable to assume that 'strategic accounts' will be given first priority during times of material allocation and shortage?

In our EMS Pro Workshop we call this ‘customer relegation’ and while we do not blame Tier 1s for taking these types of actions (they are for-profit enterprises, after all), we know it causes major disruptions for many of the OEMs with whom they do business.

Fortunately, there are alternatives. One of the best is a relationship with a leading regional EMS provider who offers comparable capabilities on a scale-appropriate basis.

These companies can be found in every region, including North America, Western Europe, Australia and the Middle East. And while a thorough benefits analysis will reveal that choosing such an EMS company (instead of a Tier 1) would mean losing some top-end scalability, there will also be a substantial net gain in responsiveness, flexibility and long-term commitment (as you will be one of their strategic accounts).

The bottom-line is clear: sometimes that XXXL shirt just doesn’t fit!

Author: Charlie Barnhart, Charlie Barnhart & Associates
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