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Needed: Tighter OEM-EMS Bonds

The aftermath of the March earthquake and tsunami in Japan has underscored the need for original equipment manufacturers (OEMs) to engage in extensive oversight of their contract manufacturing partners in order to maintain maximum efficiency during periods when supply chains are under stress, according to {complink 7427|iSuppli Corp.} analysis.

Following the disaster in Japan, OEMs have become more aware that they cannot completely surrender responsibility for the manufacturing of a product when production is outsourced to a contract manufacturer. Even if the global electronics manufacturing services (EMS) business appeared to have had little direct exposure to the situation in Japan, contract manufacturers nonetheless were expected to be hurt by constrictions in the availability of electronic components and raw materials.

As a result, the availability issues have put new strains on the relationship between these two groups of companies, especially as OEMs employ EMS providers to improve the performance of their supply chains. Still, relations between OEMs and EMS providers are more tightly linked than ever.

In fact, Japan represents only the latest in a series of events over the past several years that have tested these relationships. Recent years also have brought the credit crisis, other natural disasters, rising materials costs, and production shortages — to name just a few of the bigger issues that have pressured supply chains.

For their part, OEMs have spent the better part of the past two decades trying to make their supply chains, not only more responsive and resilient, but also less costly. To do so, OEMs have increased the use of outsourced manufacturing, reduced the number of suppliers they use, and shifted production to lower-cost geographies. And, despite the daily ebb-and-flow of production, cost-down commitments, and on-time delivery metrics, OEMs look to EMS providers for faster and stronger solutions to put supply chains on firmer footing and allow quick response to an increasingly volatile demand environment.

What this means for EMS providers and how they build their organizations to best capitalize on these trends depends on the starting point. For some EMS providers, this is more about moving two steps ahead of their customers in terms of technology and production capacity. For others this may involve rethinking exactly what their customer base is and where their core strategic differentiation lies, which may entail a complete rework of existing strategy.

OEMs increasingly are looking for their EMS partners to shoulder more responsibility, and the industry must rise to the challenge. The potential for OEMs to move production back in-house is lower now than it was even just a few years back, as more OEMs embrace outsourcing. However, OEMs are becoming increasingly aware that just because outsourcing is undertaken, that does not mean that the outsourced partner is handled any differently compared to current or former internal factories.

And here lies the opportunity, IHS iSuppli believes, for the global EMS industry to finally demonstrate whether the oft-discussed end-to-end supply chain solutions will result in a better, faster, and cheaper supply chain that the industry’s OEM partners have come to expect.

— Thomas Dinges is the EMS and ODM analyst at market research firm IHS iSuppli in El Segundo, Calif. For more information on the contract manufacturing market, see Dinges’ new report, “Solid Revenue Momentum, but Profit Trends Still Challenging.” For media inquiries on this report, contact Jonathan Cassell, editorial director and manager of public relations, at jonathan.casell@ihs.com. For non-media inquiries, please contact .

4 comments on “Needed: Tighter OEM-EMS Bonds

  1. FLYINGSCOT
    June 14, 2011

    I read your article with interest.  I work in the semiconductor design and manufacturing business.  Here we use outside suppliers predominantly because their technology is lot more advanced than our own and as such it is really a necessity to outsource to stay functionally competitive and financially effective.  However in many other areas of EMS we greatly prefer the service we get from our internal foundries.  When everything is going well it is great to outsource.  When the proverbial hits the fan it is better to have control in house.  The choice of in/out depends so much on the type of product and the customer base.

  2. Robert T
    June 14, 2011

    The requirement for tighter bonds between OEM and EMS supplier has been evident for a long time. We made a number of strategic changes here at Axiom Electronics in the past five years and we continue the change process daily. Truly partnering with OEMs is key to the transition, as an EMS company we need to be viewed as more than a simple supplier, but we also need to deliver higher level services.

    We implemented Lean in our manufacturing processes. We maintain extremely high certifications and are regularly re-certified to ensure the highest quality product for our customers. We also add new processes when the conditions arise, such as our anti-counterfeit parts process we started when counterfeit parts became a major problem.

    This is more than simply “moving two steps ahead of” our customers, this involves building and adjusting a service that is an integral part of our customers business. We regularly update our customers about these adjustments and upgrades in our quarterly newsletter, in regular review meetings, and in published articles and blogs on our website.

    Our business grows as part of our OEM customers' success.

    Robert

  3. FLYINGSCOT
    June 15, 2011

    Nice to hear from an EMS company.  Question I am interested in is how does EMS ensure the exact same quality of service to the smaller companies as it gives to the multi billion OEMs.  In my experience it sometimes feels like the small fries are an afterthought with no clout to resolve issues like the bigger OEMs do.

  4. Robert T
    June 16, 2011

    For us, we have to make sure that all accounts are a strategic fit. When an account is a strategic fit, whether it is large or small, the proper level of service is provided. A tight relationship between the OEM and EMS, as described in the original blog entry, establishes the service level.  The devil is in the details of “Strategic”.

    Robert

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