What is the best way to assess and compare electronic manufacturing services (EMS) companies?
The industry has always defined the tiering or segmentation of the EMS industry in a convenient way: by revenue. From this perspective there have generally been considered to be four tiers of EMS: over $1 billion, $500 million to $1 billion, $100 million to $500 million, and under $100 million.
In recent years some people have even created a special tier of those EMS firms over $10 billion. While this segmentation method allows for analysis of the industry and creation of many possible micro-tiers for further analysis, it is limited in its insights and excludes those private companies for whom revenue figures are not available.
While providing essentially the same basic services (e.g., PCBA), there are important distinctions among the tiers, beyond financial size and performance, that should influence an OEM’s selection criteria.
Charlie Barnhart & Associates has always preached that a critical element to the success of an outsourced manufacturing relationship is proper FIT (Flexibility, Integration, and Timing) between the OEM and its outsourced manufacturing partner. This FIT must consider, not only revenues, but also scope of manufacturing capabilities and the presence of manufacturing facilities in the proper geographic location(s) to serve the OEM.
This FIT varies based upon the type of services and capabilities required. FIT also has as much to do with an OEM's self-awareness of its own internal costs and capabilities as those of the EMS provider.
Thinking of the EMS industry as different types of monkeys, real and theatrical, can be a useful, and irreverent, way to consider the industry.
From this perspective there are only three sizes that matter — large, medium, and small. This is a sufficiently sophisticated segmentation methodology for OEMs looking for an EMS partner that will be a good FIT for their needs. Let’s identify and consider three types of monkeys and the ecosystems in which they live:
- King Kongs control their own environments but can create havoc.
- Gorillas are intelligent creatures that carefully manage their groups, but tend to get preyed upon by poachers.
- Chimpanzees are active, engaging, and resourceful, but are highly dependent on the food available to them in the jungle in which they live.
Let’s now assess the EMS industry using the monkey analogy.
- Revenues greater than $1 billion
- Manufacturing footprint that spans several continents with many facilities
- Mostly serve high-volume customers whose products are sold globally
- Generally build commoditized products in traditional sectors (i.e., computer, communications, and consumer) but with some focus on emerging sectors (e.g., medical, alternative energy) and especially large customers in those sectors
- Exert dominance in the supply chain
- Have voracious sales appetites and are constantly competing for business with other liked-sized EMS and ODMs. They pursue large deals, although they have been known to take on smaller contracts during hard times
- Have ability to ramp programs quickly and can throw many people at your project
- If you are not a large customer you probably do not get the attention and mind share you deserve
- Revenues between $100 million and $1 billion
- Good-sized manufacturing footprint with facilities on several continents, or focused in Asia
- Generally medium- to high-volume manufacturing with medium to low mix
- Serve a variety of customers from multiple industry sectors. Finding one that builds in your product sector is advantageous from a supply chain perspective
- Powerful in the supply chain with good technical capabilities
- Can ramp quickly, but do so more cautiously due to commitment of resources required
- Good customer service capabilities and processes, with greater flexibility than the King Kongs
- Revenues less than $100M
- Limited manufacturing footprint; generally on one continent with one to five facilities
- Generally low volume, high mix
- Differentiate by focusing on certain industry sectors (e.g., medical, mil/aero, industrial, instrumentation) or specialized service (e.g., prototyping, high complex boards)
- Least powerful in the supply chain, with heavy dependence on distributors
- Cannot put too much into them too fast due to limited resources (human and physical)
- Stickier customer relationships due to flexibility in servicing inconsistent manufacturing needs of customers
Understanding the differences and benefits among these monkeys and then choosing the right-sized one for your business can be a challenge. Many OEMs find the size and perceived benefits of King Kong appealing even if it makes no business sense.
Remember that FIT is all about the OEM: Have a Flexible approach (don't decide before you shop); Integrate your capabilities with those of the supplier (don't throw the requirements over the wall); and Time your solution/implementation rationally (don’t make hasty decisions and then expect perfect execution tomorrow).
The failed cases we see in the industry occur when the FIT is bad and the manufacturing solution and/or relationship fail, causing the OEM to switch to a, hopefully, more appropriate solution. Each monkey requires different handling, so be sure that you have selected the appropriate one for your needs and capabilities.
Like monkeys, EMS providers are not easy creatures to handle, and just as in the monkey house at the zoo, things can get loud and contentious, and sometimes the feces do get flung about.