Expanding Business Models of Contract Manufacturers Improve OEM Profitability

When people think of contract manufacturers (CMs), many think of them as companies who simply build products as specified by the OEM. The reality is contract manufacturing companies have significantly evolved in the past decade, developing advanced technology and managing global supply chains for some of the most respected Fortune 500 companies. OEMs are increasingly turning to integrated manufacturing solutions (IMS) partners to design, manufacture, ship, and repair virtually all products they market.

There are a number of factors driving this shift. First, because some IMS companies have specialized in the production of certain types of equipment for many years, they have developed substantial design and technology expertise. And second, the global footprints and supply chains of IMS companies are often more extensive than those of OEM's.

In addition, the shift towards end-to-end outsourcing is also enabling OEMs to improve profitability by changing traditional business models. Rather than investing in facilities, capital equipment, core technology development and business processes such as supply chain management, companies collaborate with IMS providers to manage these aspects of their business so they can focus resources on the development of unique products, IP and services that are the core of their business model.

Here are four examples of the business benefits of collaborating with an IMS partner.

Technology development

Years ago, electronics companies developed most of their core technology. This was costly, timing consuming and often resulted in elements of their technology being uncompetitive. Fast-forward to today and OEMs can partner with a number of companies including some IMS providers who can develop, test and manufacture complex technology. For example, a company with innovative software as a service (SAS) intellectual property (IP) engaged Sanmina to design and develop core technology including high speed PCBs, enclosures and backplanes based on Sanmina's experience in providing these same technologies to other communications companies.  This allowed the company to focus and invest in their core SAS product development.  Leveraging this more or less turnkey design and technology solution eliminated substantial design and development time and investment.

Supply chain management  

In an increasingly global economy, companies need to reach new customers in emerging markets and scale up as demand grows. Because of duty and tariff differences in each region and the need for efficient logistics, more manufacturing is becoming regional. However, investing in facilities, capital equipment and related infrastructure requires significant capital investment and dedicated expertise in product localization and fulfillment.

Products may need to be redesigned to meet the functional, price point and other requirements for a particular country. This process requires a tailored supply chain to meet product specifications and cost realities of each market. An IMS with a global footprint can take over this aspect of the business and significantly reduce total landed costs. 

By way of example, Sanmina provided a low cost supply chain for a family of 20 high-speed cash sorters/counters for a global ATM and cash sorting systems OEM. Advanced technology components, supply chain localization and custom configuration of language packs and currency were developed and deployed for this family of products. By working with a partner who has worldwide manufacturing facilities, local design teams, inventory hubbing, repair, and logistics, companies don't have to manage this complicated process, which frees up capital and resources for other strategic initiatives.

Redesigning products due to component obsolescence

Component obsolescence is a fact of life in the electronics industry. There is an enormous installed base of electronics products used in everything from automobiles to airplanes that are still in service but need to be upgraded and supported in the field.

The challenge for OEMs is that they need to continually broaden their product and services but their engineers have less bandwidth to handle obsolescence challenges. Consider a portfolio of electronic subassemblies for a commercial aircraft. This aircraft may be in production for 20 years. Components will become obsolete and these subassemblies need to be redesigned and validated to AS9100 standards.

In the past, OEMs used to do this work themselves, but today that work can be successfully outsourced to a qualified contract electronics manufacturer.  Sanmina recently leveraged a robust product transfer methodology refined over many years to help a leading avionics system supplier reduce inventory by more than $5 million and convert $10 million of fixed cost to variable cost.  Furthermore, the transfer of production to Sanmina created an additional 1,500 square meters of facility space at the OEM's location for system integration and test of new products.

Changing landscapes of data centers

Major Internet companies architect and design their own data center equipment, developing custom networking and software solutions specific to their needs. Other companies use a different approach, leveraging semicustom storage hardware. As demand accelerates for storage and bandwidth, these “hyperscale” data centers are at the forefront of adopting very different business models for how they grow. These changes include working with IMS companies in non- traditional ways in order to meet the complex management and logistics of upgrading their large-scale rack based systems.

A recent engagement involved upgrading a company's data center capacity, which required the seamless installation of hundreds of large-scale rack systems within a two-week timeframe every quarter. To manage the short timeframe for assembly, test and delivery, a completely custom manufacturing and supply chain solution was implemented. Sanmina developed new hardware and software for testing 72 racked systems in parallel. The test facility included a system for revision control of firmware and software to efficiently manage hardware and software updates along with customized software image generation for each racked system. As the IT industry matures and evolves, this model may prove effective for other high growth datacenters and cloud computing deployments.

These are just a few examples of how OEMs can leverage relationships with IMS providers to implement new business models that reduce costs and free up capital and engineering resources in order to focus resources on their core business.

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