Inventory Tug of War Breaks Out Between EMS & OEM Firms

Amid rising economic and market uncertainty, the electronics supply chain is moving in divergent directions when it comes to inventory, with contract manufacturers attempting to attain the leanest possible stockpiles and original equipment manufacturers (OEMs) laboring to ensure they have sufficient supplies on hand to rapidly respond to any rise in demand.

The two forces seem like polar opposites. For their part, electronics manufacturing services (EMS) providers want to accelerate the speed of inventory moving through their asset base, which means reducing aggregate dollars to the leanest level possible. On the other hand, OEMs wish to ensure that they have sufficient supply to respond to any unforeseen upside in demand at a moment's notice. This desire has become even more critical in light of the recent supply disruption wrought by the catastrophic flood in Thailand, which followed less than a year after the major disruption caused by the earthquake in Japan.

With the daily headlines sending murky signals on the economic outlook and order books showing increased volatility, a simple solution exists to this inventory tug of war: EMS companies need to ask their OEM customers to pay the tab for the additional stockpiles.

Already, inventory in many cases makes up the largest asset on the balance sheets of global EMS providers. The latest results from several of the largest global EMS providers show, in fact, that nearly one third of their tangible asset base is tied up in inventory, higher than the 25 percent level in 2007.

A similar ratio is apparent — although the levels are not perfectly uniform — in a survey across the EMS industry. Thus, as OEMs push for more flexibility for upside given the uncertain demand patterns, it appears that, in aggregate, EMS companies have made a rather large investment in inventory relative to their capital base.

For this reason, when OEMs push for even higher levels of secured inventory stock to prepare for demand volatility, EMS providers that already have devoted a material portion of the balance sheet to inventory simply need to tell them, “Fine, but it's on your dime.”

In the future, IHS believes this will become much more the norm in the industry as EMS providers look to improve their asset velocity in the face of highly uncertain demand. Otherwise, the industry is looking at another period of delayed shipments and of capital being tied up in less productive assets.

6 comments on “Inventory Tug of War Breaks Out Between EMS & OEM Firms

  1. Nemos
    November 13, 2011

    If I get it correctly the OEMs wants to have a big and sufficient stock to serve their consumers but from the other side, the EMSs doesn't want to have a stockpile, and they ask from the OEMs to pay for it.

  2. Taimoor Zubar
    November 14, 2011

    I think when OEMs are pushing contract manufacturers to hold more inventory, it makes sense that OEMs pay for the additional cost of storage as well as for the opportunity cost of the capital tied up in stocks. It would be unfair on the part of EMS if OEMs do not take care of these costs, unless this has been agreed in some contract.

  3. Jay_Bond
    November 14, 2011

    I think the only way this could work out and benefit both EMS and OEM firms, is to have an across the board change. For the EMS to ask the OEM to pay the extra money for increased inventory, all EMS companies need to do so to prevent OEM's from shopping around and leaving a few companies high and dry. If the EMS firms can't stand together, some will lose serious business while their current customers flock to another EMS.

  4. saranyatil
    November 15, 2011

    Every one is playing safe at this moment and no one is ready to compromise as you mentioned EMS companies should team up and enforce some rules such that OEM's dont incur loss to EMS companies.

    Suppose if thet indent for high quantity and are not buying the stock OEM's need to bare a hig premium for the inventory.

    If some rules as such are set in then it would be good for both OEM's and EMS where they will not mess with the inventory budgeting and numbers.

  5. Barbara Jorgensen
    November 16, 2011

    Great post about a classic situation. Are there other markets in which inventory ownership basically pits suppliers against their customers in a potentially ugly battle? I'm going to think about this–there must be–but it doesn't seem like a great system. Readers?

    Then again, I'm not sure I can come up with a better one either.

  6. Westlake Widget
    November 16, 2011

    In my job I serve several industries and this is a common problem which has grown worse over the years as demand drops and companies try to keep the doors open. The most successful companies have adopted lean manufacturing from head to toe – not just lip service! These are the companies that build to ship, not build to shelf and pray for an order to ship.

    I'm not a lean consultant, but it is an interest of mine. Most manufacturers I know say, “It won't work with our kind of product.” I just smile because I'm often selling to their lean competitor. When I probe about their production process they lack even fundamental knowledge of how long it takes to produce their product or the set-up time on a machine. “We make 20 widgets a shift is not the answer to how long to produce.” It just tells me what you are accepting.

    This lack of knowledge is solved by MRP – carry enough inventory and enough work-in-progress and enough finished goods and you will always be prepared. It's like an overweight marathon runner carrying all they energy they need for the race around their gut!  In the mean time, the lean mean runner replenishes on the go.

    MRP drives the buying, stocking craziness most companies are fighting.  For those companies that manufacturer for a living (a rare breed in the US ),  put your money into understanding and streamlining your process and your inventory situation will greatly improve.  Yea, I know.  You tried lean and it doesn’t work with your product mix/company/situation/customer base/whatever.


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