The choice is important, so do your homework!

Original equipment manufacturers (OEMs) are outsourcing value chain services to electronics manufacturing services (EMS) companies at an increasingly high rate. Despite declining sales among EMS providers today, especially in telecom and networking segments, global EMS revenue is expected to at least double from 2001 to 2005, ultimately reaching over $250 billion, according to Technology Forecasters, Inc (Alameda, CA).

Choosing the best EMS provider is a long-term commitment for an OEM. This choice is a change in the supply chain strategy of getting goods to the marketplace, and many things must be considered before making the outsourcing decision and, subsequently, selecting a contract manufacturer.

Why Outsource?

As a result of today's rapidly changing economy, the increasingly competitive business environment, cost pressures and decreasing product life cycles have forced many OEMs to focus on what they do best. OEMs are concentrating on core competencies, such as product preparation concepts, marketing, distribution channel buildup and customer care. What is left includes everything from product value chain design to after-marketing services. The level of competition among EMS companies benefits OEMs by resulting in availability of quality value chain services.

Working with an EMS partner lowers cost elements, such as that of materials, by leveraging volume buying power and increased flexibility. By amortizing the capital equipment over the increase in volumes coming from various customers, an EMS company can reduce cost and increase value for individual OEMs.

Strategic Partner vs. Transactional Relationship

The decision to outsource is a strategic step for any OEM. It does not mean giving up control of the value chain but, rather, trusting your partner to execute either the entire product value chain or a part of it on an OEM's behalf. Ultimately, this practice resembles the designation of your work to members of your team. Therefore, an EMS provider has to be integrated into an OEM's operating model as both a strategic partner and as a team member. Only a commitment to a very close, long-term cooperation from both sides will yield real outsourcing benefits. In an investment by both sides, time will cause the EMS company and the OEM to gradually work closer together.

One of the main purposes for both is to increase flexibility—to increase action and reaction speed in the marketplace. Flexibility is gained through better visibility, and the latter improves through communication. Therefore, the EMS provider increases information technology (IT) infrastructure connections with key component suppliers and with customers, which is part of the co-evolution among suppliers, EMS companies and OEMs. A transactional relationship does not bring the same long-term benefits to an OEM as does a strategic partnership.

What to Outsource?

A startup company is in a different situation than an already established, vertically integrated original equipment manufacturer. The traditional OEMs first started to buy more manufacturing capacity for peak demands. Over time EMS providers gained more responsibility as part of OEM's daily manufacturing output, which improved total flexibility and customer satisfaction.

But manufacturing is only one part of the whole value chain. Today, all major EMS companies in the world offer product design, pre-manufacturing or new product introduction (NPI), supply chain (including component sourcing and procurement as well as logistics) and, finally, after marketing services. OEMs have gradually begun to take advantage of each of these offerings.

A startup company's operating model today is typically such that, after basic product design, all parts of the value chain are outsourced. Even in the product design phase, an EMS company can add a lot of value due to its technical know-how and sourcing capabilities. An OEM should use these EMS capabilities because a significant part of product cost is determined in the product design phase.

What Should an OEM Expect?

Forming a partnership with an EMS company is an important decision and should be made for a long-term commitment, partly because changing EMS partners is an expensive endeavor. Below, some of the most important elements an OEM company should expect from a viable EMS partner are listed. Use this rubric when selecting the EMS partner that is right for your company:

• clear understanding of the OEM's business and its drivers
• proven track record in the same market segment
• capability to offer whole value chain services
• established competence in required manufacturing technology
• proven supply chain capabilities
• full commitment and focus based on the business volume planned to be allocated to them
• global consistency in operating systems, business processes and manufacturing technology
• global product ramp-ups and seamless product transfers from one location to another
• a uniform, quality system in all locations
• continuous improvement in all locations due to a six sigma initiative in all value chain services
• IT solutions to interface with suppliers and OEMs (online, if appropriate)
• improving visibility and flexibility
• customer-focused operating model
• reduction of operation's total cost
• geographical coverage that fulfills your current and future demands
• services found in locations that offer you sustainable total cost advantages.

Remember, this choice is important, so do your homework!

Relationship Management and Performance Measurement

Once you have selected your EMS partner, a vital next step is to reach an agreement on how the operating model will interface between both of your companies—how will you divide and organize the workflow? The OEM managing the partnership requires dedicated human resources. Both parties must assign one person who is responsible for the overall partnership. To avoid bottlenecks of information flow, ensure that people acting in the same capacity maintain direct access to each other.

The comparison between expectations and actual performance should be continuously measured. An OEM can use several key performance indicators to improve results on an ongoing basis. They are related to operational performance such as production yields, inventory management, outgoing product quality, on-time shipments and cost reductions. The OEM should require regular customer satisfaction surveys from the EMS company, which will outline the relationship's development. To see the monthly operational trend, an EMS provider should perform meaningful customer satisfaction surveys at least three to four times a year. Hold quarterly top management-level meetings to review key performance indicators (KPIs) and discuss the longer term requirements in services, technology and new markets.

Conclusion

The outsourcing of product value chain services is increasing rapidly and has become an integral part of almost every company's operating model. Although many EMS companies exist now, the industry is rapidly consolidating. When choosing a partner, look for one(s) who will be able to fulfill your present and future needs. Consider a company's track record in the areas that are important to you. Allocate resources internally to manage the relationship. Finally, measure performance and require continuous improvement across the board.

Ilkka Pouttu is director, business development Americas, Elcoteq Americas, Irving, TX; e-mail: ilkka.pouttu@elcoteq.com; www.elcoteq.com.