The cycle has (for now) trended toward specialized service.

A trend I’ve observed during the past year is larger OEMs’ increased use of mid-tier and regional EMS providers for specialized services packages. This isn’t a new event so much as a milestone in a cycle driven by changes in end-market demand.

Looking back over the past 25 years, you will see alternating cycles of specialization and generalization in OEM outsourcing patterns. Typically what drives the cycle is demand predictability. During a recession, when demand is low and predictable, many OEMs look for the lowest unit price and try to cluster their outsourcing spend over as few contractors as possible, often in the lowest-cost countries. High-volume EMS providers will adopt business models that claim to be all things to all customers to fill excess capacity.

As variable demand increases, responsiveness becomes more important than lowest unit price, because lack of product to meet increased demand often translates to permanent loss of revenue as consumers buy available products. At the same time, economic recoveries also increase the amount of high-volume business in larger EMS providers. When capacity utilization is high, those providers tend to narrow their optimum business model focus to projects with minimal changeover requirements because that results in higher equipment utilization.

The result is the point in the cycle where we are today. Many larger OEMs are looking at specialized EMS providers to support niche portions of their outsourcing projects that require either higher levels of responsiveness or a specialized mix of technical support. This both favors established mid-tier EMS providers and OEMs that wish to enter the outsourcing market. What types of niche services are attracting larger OEMs? This month’s column will look at several mid-tier EMS providers’ solutions in this area.

Syncro Corp. (syncroems.com) is a regional EMS provider offering board-level, box build and repair depot services. Originally an OEM in the automotive aftermarket and small engine segments, the company transferred its product development and manufacturing expertise to EMS customers. In addition to its traditional EMS services, it has in-house plastics injection molding, metal stamping, potting, and encapsulation capabilities. It also offers thick film printing and hybrid assembly.

According to marketing manager Larry Fleming, customers are attracted by Syncro’s expertise in building products used in hostile environments. They also have RF product development and test development expertise. This combination is particularly attractive to OEMs developing RF products for high moisture or variable temperature environments. The other factor attractive to both this segment and other customers is their ability to provide complete lifecycle support (product development through repair depot) for low-to-medium volume projects.

EMS provider Fawn Electronics (fawn-ind.com/electronics), a subsidiary of Fawn Industries, performs harness assembly, board-level assembly and box-build at its North Carolina location. Its sister division, Fawn Plastics, has operations in North Carolina, Mexico and China.

Customers are attracted by both Fawn’s electronics expertise and the institutional knowledge conveyed as a result of being part of a larger vertically integrated company, says president Art Rutledge. Fawn has been producing RoHS-compliant assemblies since November 2004, and demand for RoHS conversion is growing. Equally important has been their ability to support product development with both electronics and enclosure expertise. Rutledge said that Fawn has seen increasing opportunities for the electronics and plastics (enclosures) combination in medical products, specialty industrial and upper-end consumer products. They have made recommendations in these areas that reduced cost in manufacturing and tooling, as well as improved product performance. 

Narragansett Technologies (narragansett-tech.com) is an OEM of digital imaging and medical device products that has expanded that expertise into EMS activities. Its EMS customer base is primarily divisions of Fortune 100 companies in U.S., Asia and Europe. Its traditional diagnostic medical imaging equipment business has evolved into end-to-end medical device manufacturing solutions. It performs system-level and subsystem-level assembly, while also providing engineering services and managing the board-level supply chain. The company is ISO 9001:2000, 13485:2003, 18001:1999 and 14001:2004 registered.

According to COO Bill Ulmschneider, customers are interested in medical device product lifecycle management expertise and responsiveness. He is seeing a high demand for RoHS conversion engineering support. Although the medical industry has an RoHS exemption, many customers fear failure to convert may impact component availability over time. 

EPIC Technologies (epictech.biz) has focused on production scheduling flexibility through implementation of a Lean manufacturing philosophy known as Syncronous Flow Manufacturing. SFM standardizes production equipment and processes, making it easier to run smaller lots and make frequent changeovers. Currently EPIC has facilities in the U.S. and Mexico; however, it will expand to Europe and Asia over time. The company has complemented the flexibility equation with focused medical and automotive expertise. All facilities are ISO 9001:2000 certified. The majority are also FDA-registered, ISO 13485 registered and ISO/TS 16949 registered.

According to Todd Baggett, vice president, business development, customers find value in the schedule flexibility SFM offers. Under SFM, demand swings of up to 50% can be addressed within three days of a customer pull signal. The window for firm orders is one to two days with raw material coverage of four to six weeks. Customer and supply base commitment to Lean principles is a key part of achieving this level of flexibility as raw material availability is driven by supply base kanbans. Longer-term customers can see reductions in working capital, but this usually occurs as processes are optimized over time.

Genesis Electronics Manufacturing (genesismfg.com) offers EMS services and dedicated repair depot support. It purchased Jabil’s Tampa repair depot operations in 2003 and is focused on providing a cluster of specialized services to projects with mid-range volumes. Business development manager Ed Grimes says OEMs with longer life products often require component-level repair depot support because their product life outlasts that of the off-the-shelf components used. One example of its services' focus is LCD repair. LCD life is often driven by high-volume consumer applications with short lifecycles. An increasing number of mid-volume products in medical and instrumentation applications incorporate LCDs, and as the unit specified for the application goes obsolete, OEMs must choose between redesign or an end-of-life spares stocking strategy. Component-level repair can make economic sense because lower cost parts such as lamps, polarizers and anti-reflecting films typically drive field failures in LCD panels rather than the actual TAB assembly. The repair process may only need to replace the failed parts, clean the existing TAB assembly and replace the conductive adhesive interconnect between the TAB assembly and the glass.

In each case, these companies are winning business from customers who are also sourcing offshore and to Tier 1 EMS providers. What seems to be driving their “wins” and subsequent account retention is flexibility, the willingness to absorb complex projects with mid-range volumes, and adapt their business models to customer requirements.

Susan Mucha is president of Powell-Mucha Consulting Inc. (powell-muchaconsulting.com), a consulting firm providing strategic planning, training and market positioning support to companies in the EMS industry; smucha@powell-muchaconsulting.com. Her column appears bimonthly.