© coffee_b / Electronics Production | January 27, 2012

Couples Therapy 101 for OEMs

The OEM-EMS relationship is often characterized as dysfunctional, inequitable, or broken, plus a few other choice terms that cannot be put in print.
These characterizations might make for colorful discussions over drinks at an industry conference, but they do not tell us much about what is actually going wrong in the relationship. Fixing a relationship first requires a better understanding of the actual behaviors/dynamics that are causing the problem.

We therefore asked EMS companies a simple, but potentially revealing question: What are the most irritating behaviors exhibited by your OEM customers during either the sales/quoting process or the actual engagement?

Several dozen brave individuals responded after receiving guarantees of confidentiality and promises of retraining and entry into the Witness Protection Program if they were discovered by their OEM customers as having participated. Their responses proved very illuminating yet difficult to categorize due to the varied nature of the responses. Let’s therefore look at the data in the two general phases that were asked about: quoting and the actual engagement.

NOTE: These survey results are not intended to represent all problematic issues in the OEM-EMS relationship, just those reported by our respondents. I am sure others exist.

The Quoting Phase:

The main issues mentioned as occurring during the quoting phase centered on:

-The vetting process
-OEM gamesmanship

DATA: In order to produce a quote an EMS actually requires data. This data sits in two related buckets: data about the actual build being requested by the OEM, and data about the business engagement with the specific OEM.

Surprisingly, (or maybe not) the lack of complete information needed to quote was the most frequently mentioned issue in the entire survey (38% of respondents). Respondents reported that incomplete, outdated, poor quality, and/or inaccurate data is often provided by OEM customers… yet the OEM still expects an accurate quote. This is akin to asking someone to quote a price for building you a new home without providing number of bedrooms, style or square footage…and expecting a good price with a perfect outcome. Not gonna happen!

Regarding the actual terms of engagement that the OEM is asking the EMS to enter into with them, 13% of our respondents reported that OEMs often fail to share strategic data such as forecasts or their Terms & Conditions (T’s & C’s) that would allow the EMS to assess whether they even wish to engage with the particular OEM. This consideration is important for the EMS and definitely influences the mark-up they would choose to apply in their quote.

MONEY: Whether you call it cost, pricing, or fee for service, money is always an issue in both the quoting and engagement phases. 29% of respondents reported concerns with OEMs that were most interested in “nickel and diming” them up front, and then insisting on continued “cost downs” or free services throughout the engagement.

THE VETTING PROCESS: Many respondents (33%) cited issues with the engagement process that OEMs force upon EMS. To begin, the vetting process is considered too long, involving multiple and sometimes repeated quoting exercises when the OEM is often only trying to get a benchmark so they can squeeze their existing supplier. Several respondents also reported that after a lengthy vetting process the OEM had actually disqualified them for not having a facility in a low cost region, a fact that was apparent at the outset of the process. Many respondents also reported irritation at the “hurry up and wait” attitude wherein OEMs expect quick responses from the EMS while the OEM themselves are slow to respond to the EMS requests for further data and needed clarifications.

OEM GAMESMANSHIP: Business is all about winning and gaining advantage, but a fair number of respondents (21%) cited OEM behaviors that they found especially irritating. These included:

- Overstating the size of the opportunity or using unrealistic forecasts to get a lower price.
- Expecting certain services (e.g., testing), but leaving them out of the RFQ.
- Quoting only for benchmarking purposes.
- Requesting repeated quotes on the same BOM.

EMS companies have limited resources and would prefer to engage in quoting activities only if they have a real chance of winning the business and being allowed to earn a decent return.

The Engagement Phase:

The main issues mentioned as occurring during the engagement phase centered on:

- Materials
- Changes
- OEM manufacturing support

MATERIALS: As in any for-profit enterprise, the EMS industry achieves its gross-margin by applying a mark-up to the underlying elements of Cost of Goods Sold which includes Labor, Overhead and Materials. OEMs try to save money and defer liability to their EMS partners in this area. So it is not surprising that this would be a sensitive area for our EMS respondents.

A large proportion of our respondents (28%) cited concerns with OEMs in this area. The main issues were: disagreement over component liability, disagreement over lead times, and receiving insufficient and/or bad parts when the OEM is kitting material to the EMS. These issues result in the EMS having to devote more time trying to negotiate and resolve the challenges. And time, as they say, is money.

CHANGES: Electronics manufacturing is often portrayed as a perfectly rational, linear process, but in reality it is always changing based primarily on OEM actions. 15% of respondents cited OEM actions such as: changing their requirements between the quoting and engagement phases; changing or cancelling orders with little notice and with an “oblivious attitude to the impact of the changes on the EMS”; and shortening their delivery expectations once the engagement begins.

OEM MANUFACTURING SUPPORT: 18% of respondents cited issues with the oversight provided by OEMs during the engagement that caused them problems. The majority of these related to the perceived lack of manufacturing knowledge that their OEM customers possess. The other respondents commented on issues of OEM internal disconnects that made satisfying their requirements more challenging. This included different objectives between manufacturing and quality, and between purchasing and engineering especially in regards to changes in specifications.

What Does It Mean?

Based on these results, some OEMs do not need a manufacturing partner…they need a magician.

Good relationships require two basic ingredients: good communications and honesty. Consistency in these areas allows trust to develop. If an OEM is interested in having their EMS perform optimally, then they must acknowledge and address the behaviors that are hindering performance.

After decades of over-capacity in the contract manufacturing services industry, and companies like Foxconn stealing market share through questionable business practices, it isn't surprising that OEMs have gotten used to a master-slave type relationship with their EMS.

However, the times are changing. With the continuing consolidation and shrinkage in the industry, and a substantial number of EMS and ODM companies exiting the services business model altogether, it might be worthwhile for OEMs to consider taking a closer look at this relationship. A good place to start might be asking your EMS suppliers the same question that we posed in our survey.

Author: Eric Miscoll
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