Getting a grip on the many moving parts.

Much of my time this decade has been spent supporting private equity (PE) firms considering an investment in the EMS space, with no prior EMS experience on their staff. Those of us who have spent years in this space know there are vast amounts of "moving parts" involved with running a solid EMS business.

I've been told that my audits and SWOT writeups proved to be very valuable, provided accurate insight into a business the potential investors knew very little about and reduced previously unknown risks that would have crept into the deals.

Many similarities exist among the audits I've conducted over the past few years. Many of these findings would not surprise EMS industry veterans. But these situations may not be self-evident to an investor who hasn't previously worked in this complex service industry. I have also seen many of these elements of risk at my direct EMS clients managed to different degrees of efficiency.

Some questions/topics to consider before making any investment decision include:

Know the “whys” behind each clause in the manufacturing agreement.

Partnership is one of the most hackneyed terms in the electronics manufacturing services (EMS) industry. It often gets used to describe business relationships that are anything but partnerships. At the same time, the best EMS relationships actually are partnerships where parties have a symbiotic relationship beneficial for both companies. What drives these different relationships in the same business model? Often the answer is the program manager.

Back when outsourcing was a new concept, the most experienced employees at an original equipment manufacturer (OEM) were assigned the responsibility for the relationship. In many cases, those executives had manufacturing as well as purchasing experience. When demand or allocation surprises occurred, these experienced teams worked together for a good resolution in most cases. Today, contract manufacturing is just one more thing that most OEM purchasing departments source and manage. Buyers may or may not have ample experience managing EMS suppliers, particularly given the volume of turnover in these roles. Less experience translates to a focus on unit price, less ability to understand the impact of errors in forecasting, and difficulty in understanding issues that excess material creates.

Options for fixing your revenue stream.

What are you doing differently this year?

Is your topline growing? Is your slow-moving inventory number shrinking? Are you attracting new clients while defending good existing ones? Is your cash position improving? Or are you stuck in an EMS/OEM mud pit?

Will 2024 be business as usual? Where will you get your inspiration to improve your business, from the inside team you’ve assembled or from an outside third party?

Sometimes inspiration comes from the most unexpected sources. I lack an engineering degree, but am part of a patent. Years ago, I solved a design issue as our time to prove a concept entered the final hours of our quest. The inspiration came from simply looking at my wife’s tiny rock jewelry box and how the lid interfaced with the body of the box. Our engineers were blown away that the head of sales and marketing helped solve this difficult engineering design problem. (For what it’s worth, so was I.)

Don't be afraid to drop bad fit customers.

Since tax season is upon us, I recently had a chat with my CPA. She is co-owner of one of the largest accounting firms in my area and I've done business with her for over two decades, so we discuss business strategy in addition to going over the numbers. This year, she mentioned they were planning to rationalize their customer base, eliminating those who tended to provide incomplete records right before critical deadlines. She saw these clients as problematic to her business for two reasons: they overloaded resources and their behavior increased the probability her team would make a mistake.

There is a parallel in the electronics manufacturing services (EMS) industry. Ask any longtime industry CEO and they will say 80% of their issues come from 20% of their customer base. Why do EMS companies keep bad fit customers? There are a number of reasons: