Issues that make or break an outsourcing relationship.

There is no shortage of discussions and trends in outsourcing these days. Is nearshoring a trend or just ripple in sourcing strategy? Is Mexico the new China? Will manufacturing re-shore to the US? Is Southeast Asia growing in popularity as China’s costs increase? Are India and Brazil gaining more widespread popularity?

In talking with OEMs and electronics manufacturing services companies over the past year, I’ve come to the conclusion that while nearshoring
is happening, the bigger trend is a more calculated rationalization of the supply chain with a greater focus on total cost. This is good, because for years many companies were fixated on moving projects to the lowest cost labor market, whether it made sense or not. This month, I visit some of the softer issues that make or break an outsourcing relationship.

Some teams are very good at evaluating total cost and best supply base options. But a number of teams I’ve seen don’t really evaluate what they need in a contractor before they start looking for one. Some key questions to consider are:

• What issues in the current program do we want to correct?
• How predictable is the forecast?
• What percentage of cost is labor content?
• Where is the majority of the end market?
• Are there regulatory issues that make it cost-effective to manufacture in a specific country?
• Do project volumes create issues in material sourcing in some markets?
• How mature is the product?
• Strategically, what support will we need over the next three to five years?

Another issue I see is excessive fixation on what the right contractor looks like from a size perspective. While picking a Tier One contractor simply because of their size is not a universally wrong choice, it is also not a universally right choice. Bigger may be better for larger-scale programs, but being the smallest project in a large factory is often not the way to ensure the best service. Instead, it is better to map out the services and manufacturing locations needed and then select potential options based on their ability to address those needs.

What capabilities should you evaluate most closely? Here are five areas in addition to any cost analysis that should be carefully evaluated:

Team compatibility. Even the best managed outsourcing effort has unanticipated problems. The less mature or the more complex the product, the more important good working relationships with a competent contractor project team become. If you weren’t impressed with team members you met on the site audit or during the final quoting process, the relationship won’t get better over time. Do the contractor’s program team members seem proactive or reactive? Do they have experience with programs of similar complexity? Do they understand your project-related goals and concerns immediately, or do you have to explain things several times?

Distance between teams, differences in cultural perspectives and/or language issues can impact working relationships. One advantage of nearshoring can be the elimination of cross-cultural disconnect or at least the elimination of long travel distances and multiple time zones. That said, team quality is often more dependent on the contractor’s ability to attract, train and retain the right people, than driven by any specific geography. Consequently, it is important to evaluate team competencies in an unbiased fashion.

NPI/PLM support. Good contractors build quality product. Great contractors help design quality into your product and give as much warning as possible when obsolescence risk looms. Great contractors also tend to have very disciplined processes for analyzing manufacturability and testability, and doing product lifecycle management analysis both upfront and over time.

Consider your project’s requirements in evaluating supplier capabilities. During the site visit, ask questions likely to help you get an idea of whether or not the contractor is focused on efficiency in this area or has a very loose process. Is there a project launch plan? Does the contractor have engineering resources to support any challenges in project transfer and startup? Is the transfer process automated, and will your systems and documentation format work with the contractor’s systems? What is the process for analyzing manufacturability and testability? Are there automatic costreduction reviews, or is this something your team will need to drive? How is obsolescence risk assessed? Does the contractor have component engineers who can recommend alternate sourcing?

Schedule flexibility mechanisms. Achieving needed schedule flexibility is one of the biggest challenges in outsourced relationships. Contractors that are good at this typically have Lean manufacturing philosophies implemented in both their supply chains and production areas. Finished goods kanban is usually also part of the mix. Ask their team to describe their methodology for ensuring the level of schedule flexibility your project is likely to require. Are there frozen production windows? How is configure-to-order handled? Have them discuss what they’ve done on projects with similar requirements. Are metrics on on-time delivery to customer requests kept? If so, do the data align with their schedule flexibility success stories?

Materials expertise. This typically isn’t an issue with larger contractors, but can be in smaller EMS companies. In addition to a distribution utilization strategy, look for the ability to source both locally and globally. If subassemblies or box build is involved, does the contractor have the expertise to source the custom mechanical parts? How do materials support cost-reduction efforts? How is material integrity ensured? Are parts properly documented and tested to ensure compliance with regulatory requirements such as RoHS? Is there an overall supply-chain management strategy that can be clearly discussed in terms of the way it will support your program?

Availability of needed systems. Even small EMS providers are becoming quite automated, so never assume that smaller automatically translates to less sophisticated systems. Key areas to evaluate include the ability to view project status remotely, levels of traceability, systems for ensuring good documentation control and line-based inspection systems.

The bottom line is that you can find excellent and mediocre contractors in any size or geography. By taking time to understand what type of working relationship you want and then auditing suppliers in the most convenient geographies for both visible capabilities and softer indicators of whether they really walk the talk, you will be far more likely to end up with the right contractor.

Susan Mucha is president of Powell-Mucha Consulting Inc. (powellmuchaconsulting.com), and author of Find It. Book It. Grow It. A Robust Process for Account Acquisition in Electronics Manufacturing Services; smucha@powellmuchaconsulting.com.

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