Managing the OEM/EMS relationship: EMS companies must be dedicated to the fundamental traits originally attracting OEMs to the outsourcing business model.

The trend toward outsourcing as a strategic business model for original equipment manufacturers (OEMs) has become widely accepted recently as numerous economic factors have accelerated the need to drive cost performance. Regardless of the economy's fluctuating state, OEMs are requiring their electronics manufacturing services (EMS) partners to achieve greater cost performance, while enhancing efficiency and meeting changes in end-market demand.

A variety of catalysts have shaped the evolution of the EMS sector into the cost-effective manufacturing solution that it is today. As EMS providers continue to expand their services from traditional printed circuit board assembly (PCBA) to value-added offerings such as design, test and repair, OEMs are placing increased confidence in their outsourcing relationships, with trust and transparency serving as the key drivers of these partnerships.

Like most time-tested relationships, partnerships between OEMs and their EMS providers have endured periods of prosperity and uncertainty including the electronics boom that marked 2000 and the economic slowdown that overshadowed 2001. Upon examination, each situation contributed greatly to the strengthening of outsourcing partnerships. EMS providers received greater insight into the nature of their customers' unique business requirements, while OEMs learned how to reap maximum value from their outsourcing relationships.

During both strong and weak economic cycles, OEMs must manage rapid capital adjustments. Turning to EMS partners during turbulent economic periods enables OEMs to have more of their cost of goods sold (COGS) as 100 percent variable, while simultaneously production can be shifted to lower-cost locations to further decrease costs. Such benefits have made OEMs aware of the real cost advantages of outsourcing to an EMS provider in any economic environment.

During the downturn in 2001, the need for more specificity and clarity surrounding OEM and EMS providers' roles also became apparent, as contractual responsibility for components ordered needed to be defined to keep inventory in check. By clearly assigning distinct roles and responsibilities, OEMs and their EMS partners can work more efficiently together to meet market demand while controlling the level of components in the supply chain, thus increasing supply chain visibility and avoiding inventory challenges.

In addition to the continued advancement of technologies, the manner in which OEM/EMS relationships evolve in the future will depend heavily on changing OEM requirements and expanding EMS capabilities, as outsourcing relationships become long-term partnerships to reap maximum benefits. However, the consistent success factor will continue to be the effective management of the outsourcing relationship, a driving force behind strategic EMS solutions in the electronics industry.

Relationship Stages

Once established, each OEM/EMS relationship typically endures three specific stages of development. The first stage involves the transitioning of straight manufacturing to the EMS provider. The second stage involves value-added services such as design and repair. The third stage entails OEMs taking full advantage of non-PCBA services such as global order fulfillment and after-sales support.

During the first stage, the OEM develops a broad understanding of the value of its new EMS partnership. Manufacturing lines are streamlined, duplicate production processes are eliminated and reaction to end-market demand becomes more efficient. The OEM can also control the variable costs associated with manufacturing by leveraging its EMS partner's manufacturing equipment and knowledge.

As the outsourcing relationship begins to prove its worth, the EMS provider may become more of an advisor, assisting its OEM partner in making strategic choices regarding new product introductions. The EMS provider's industry experience allows for the efficient production of top-quality, cost-effective products. Successful outsourcing experiences may even lead the OEM to consider reducing or eliminating investments in its production facilities by divesting, transitioning or leasing its equipment and infrastructure to its EMS partner. This cost-savings strategy will have an immediate impact on the OEM's bottom line.

During the second stage of the relationship, the OEM begins to fully benefit from the EMS' value chain. Services that were traditionally managed by OEMs are outsourced to their EMS partners.

Mirroring the OEMs' growing needs, EMS providers have developed extended capabilities such as design engineering, prototyping and test, and repair services. These offerings are tightly integrated to ensure high-volume quality manufacturing; reducing product cycle times and lowering overall costs. At this stage, OEMs can benefit from the EMS providers' engineering expertise that supports the Web-based selection of quality components. Their EMS partners leverage a preferred supplier base and obtain the necessary components at the best available price.

In the final stage of the relationship, the EMS partner is integrated as a key component of the OEM's overall business strategy, allowing the OEM to reap the maximum value of the OEM/EMS relationship. At this stage, EMS providers offer non-PCBA services to their OEM partners, including final system assembly and test, order entry, in-bound logistics, global fulfillment, installation and after-sales support services. During this stage, EMS providers become what has been recently referred to as "virtual manufacturers." They are partners working in a fully integrated manner with their OEM customers to manage responsibilities that were previously handled by OEMs.

At this point in the relationship, EMS partners are selected for their ability to manage the entire OEM production cycle. In addition to value-added services such as design and test, the EMS provider executes seamless global supply chain management and leverages a sophisticated manufacturing network for its customers, providing services from advanced planning, to system assembly and order fulfillment. By outsourcing the more in-depth aspects of its business to a trusted EMS partner, the OEM arms itself with the purchasing power and inventory management skills that result in reductions in cost and time-to-market.

For OEMs, an important aspect of this stage of the outsourcing relationship is the mitigation of inventory risk. After stocking up on components during the constrained period of 2000, many OEMs suddenly found themselves burdened by inventory issues when demand slowed substantially in mid-2001. By relying on an EMS partner, OEMs gain the benefits of world-class demand forecasting, advanced planning and broader supply chain management expertise, thus reducing inventory risks.

Recent market conditions have also encouraged OEMs to maximize their partnerships by expanding the level of EMS contribution. In a tough economic environment, OEM customers must assess their capital investments to determine those that benefit the company, while maximizing proven tools and processes. OEMs are more apt to rely on trusted outsourcing partners during difficult economic times and leverage those partnerships to remain competitive and efficient while meeting changing end-markets and lowering costs.

This level of partnership and interdependence is made possible through the high level of trust built between OEMs and their EMS providers. EMS partners can provide the transparency and communication needed to enable the timely transfer of data through the supply chain, thereby allowing OEMs to make decisions surrounding the supply chain in a rapidly changing environment. In addition, OEMs who engage in outsourcing continually have a set of checks and balances in place, as their EMS partners provide a second set of eyes on purchasing decisions.

At this stage, the OEM is also able to fully leverage its EMS provider's global footprint in key locations. This factor is especially beneficial when considering the complexity of global services such as final test and total supply chain management. An EMS provider can operate as a gateway between its customer and the OEM's end-markets around the world, providing services such as direct fulfillment and delivery. OEMs can reach desired end-markets without owning any fixed capital in these regions and can maintain their cost of goods sold (COGS) as 100 percent variable. As the industry moves toward this final stage of outsourcing, OEMs will reap the maximum long-term benefits from EMS providers who have capabilities in both lower and higher-cost locations, as a need exists for both skill sets and access to end-markets in numerous regions.

EMS Responsibilities

To enable OEMs to reap maximum value from the outsourcing partnership, EMS providers must continually build on their technology capabilities, drive best practices and invest in the robust information technology (IT) tools that enhance the OEMs' ability to compete in the marketplace. Communication among the parties involved in manufacturing and supply chain management is also key to successfully managing the OEM/EMS relationship.

With the large number of new product introductions (NPIs) and engineering changes managed by EMS providers in any given month, successful management of OEM requirements depends on the steady flow of IT-enabled communication among EMS engineers, customers and suppliers. Best-of-breed tools and processes allow EMS providers to execute with precision, enabling effective inventory management in any environment. Implementing common enterprise resource planning (ERP) systems and business processes to support the supply chain and manufacturing enables the EMS provider to effectively manage inventory for its OEM customers on a global scale.

In essence, EMS providers are now managing a global manufacturing network spread over key locations, with various tax points, price points and currencies. This capability enables them to shift production easily when political, logistical or skill-set challenges arise. Items such as currency have become a non-event in this manufacturing environment.

One question remains: Are OEMs ready for this level of outsourcing? The answer depends on both customer and location. For example, the concept of outsourcing to EMS providers is just beginning to take hold in Japan. In contrast, many North American OEMs have already deepened their existing outsourcing relationships. Currently, much future opportunity exists, both for the growth of the EMS industry and for OEMs to realize significant cost savings.

Conclusion

OEMs will emerge from the recently troubled economic environment with the incentive to build business models that withstand market fluctuations. Although their requirements differ during boom and bust economies, the successful management of evolving OEM/EMS relationships will require EMS companies' continual dedication to the fundamental traits that originally attracted OEMs to the outsourcing model. These traits include flexibility, responsiveness, quality, cost efficiency, velocity and world-class customer service.

In the meantime, increasing the level of trust in a challenging environment will remain a significant differentiator for truly successful OEM/EMS relationships. Key elements such as the establishment of clear roles, trust, transparency and the increased flexibility of variable costs of goods sold (COGS) will continue to accelerate the trend toward outsourcing as a means of maximizing cost performance. These elements, in conjunction with a strong global infrastructure and advanced technology capabilities, will enable EMS providers to continually meet and exceed the requirements of their OEM customers, supporting their technology and quality leadership and helping them to achieve their long-term business goals.

Marvin MaGee is president and chief operating officer of Celestica, Toronto, Canada; Address questions to [e-mail].