Beyond Outsourcing #4: Outsourcing Alternatives

Global capacity is shifting dramatically, and major upheavals in the mega-sized high volume OEM community ripple out into the broader midmarket electronics industry. Managers must truly start with a clean slate and look at the current situation, shaking off preconceptions and assumptions. Here are several innovative approaches that are being considered to seize advantage from current trends. Top Tier EMS Solution If you work for a large OEM outsourcing hundreds of millions if not billions of dollars per year, you are probably fully aware that the EMS industry’s top tier companies have been busily re-engineering many of their US, Canadian, and Western European based manufacturing sites to dedicated NPI and Support centers. You know that you are their target market and may already be utilizing this solution. If on the other hand, you work for an OEM whose brand is not yet a household name, read on—as this solution may offer an alternative to consider. Yes. You read that correctly. The top tier EMS’s local Support facilities intended for early and late life-cycle support maybe available to midmarket OEMs for production manufacturing, as these facilities are not currently fully utilized by the EMS’s larger customers, handing a potential advantage to a midmarket OEM given a top tier EMS’s sourcing and advanced manufacturing technology prowess. Simply put, given the flood of outsourcing work already in China—compounded by the re-emerging focus on Mexico—top tier EMS remain highly selective of incoming opportunities in these lower-cost regions (as many are reaching full capacity) but they may be willing to support lower-volume/higher mix production work from midmarket OEMs in their domestic support facilities as these are currently underutilized. Advantages:

• Access to world-class sourcing and engineering technology
• Well-staffed facilities, very experienced in lower-volume manufacturing
• Build in the region for the region (USA/Canada, Western Europe)
• Proximity and ease of solution management via world-class B to B networking

Disadvantages:

• Higher price than in lower-cost geographies (but potentially lower TCO)
• Potential capacity/mindshare issues if mega-OEM consumes bandwidth
• EMS could elect to closedown Support Facility or abandon this solution option
• EMS could elect to abandon the relationship if volumes drops-off

A Sequential Solution This alternative utilizes local early and late life-cycle resources and either near-shore or off-shore manufacturing, with a regional EMS who has established a relationship with a partner supplier in a lower-cost region or who is willing to work with the OEMs selected lower-cost region supplier —and there are many regional EMS companies now offering this service. The sequential aspect of this solution is that the regional EMS provides local Prototyping, NPI, and low volume manufacturing in the front-end of the life-cycle, then facilitates the transfer of the product to a lower-cost provider for volume manufacturing, and finally on the back-end of the life-cycle executes a reverse-transfer and re-integration of the product back into their regional facility for EOL and on-going support. Advantages:

• Volume expectations by lower-cost region providers are usually lower
• Better scale compatibility between enterprises and therefore symbiosis
• Reduced risk of EMS initiated disengagement if OEM volumes drop-off

Disadvantages:

• Higher cost in early/late life-cycle stages and potentially in production
• Risks with three-party verses two-party communications pathways
• Sometimes lesser technology and business systems than at a top tier EMS

Even given these disadvantages, the potential benefits to smaller or midmarket OEM seem compelling. Not the least of these benefits being there are more regional EMS supplier, in more areas, than there are top tier EMS NPI centers—and when working the up and down slope of the product life-cycle proximity is a major advantage. In-Sourcing the Front and Back End (or as much as possible!) While in-sourcing is currently out of favor as a preferred methodology for the majority of electronics manufacturing, performing early and late life-cycle tasks internally—rather than externally—remains an efficient and cost effective solution for many OEMs, both large and small. Unfortunately the reason the internal approach was abandoned had far more to do with the production stage of the life-cycle than the front or back-ends of the process. A historical analog… In 1857, Buena Vista, the first modern, vertically integrated winery in the Sonoma Valley of California was opened by an eccentric character named Count Agoston Harazthy. Prior to that time, northern California wines were bottled by city merchants who simply repackaged juice purchased from local farmers, who crushed and roughly fermented whatever grapes they could grow. Needless to say, this produced an unpredictable, poor quality product. So even though Buena Vista’s wine was more expensive, its superior quality was quickly recognized and it became a widely preferred brand. Unfortunately, the Count did not enjoy his success for very long as his financial backers accused him of “extravagance” in his handling of Buena Vista and ousted him from the company. And the moral of the story is? That manufacturing a high quality product on a consistent basis—especially when others are not—is a good idea even if prevailing opinion brands it an extravagance. So how does this situation applied to today’s electronics industry? In exactly the same way it did in the days of Count Harazthy. The financial community must not dictate the business requirements of an industry. Companies must start planning for the long term, not just next quarter. Furthermore, time has not changed the number of manufacturing strategies from which to choose; there are still only two: buy or build. In our next blog we’ll revisit the buy versus build calculation to identify the variables and refresh ourselves on how that calculation should be made. Stay tuned. ---- Source: Charlie Barnhart & Associates