OEMs to reclaim procurement from EMS firms
by DAN HAWTOF
Aug 15, 2005
iSuppli workshop examines the future of contract manufacturing
After outsourcing a significant portion of their procurement activities to Electronics Manufacturing Services (EMS) providers over the past few years, some OEMs now plan to bring these critical tasks back in house, according to participants at a recent iSuppli Corp. workshop.
iSuppli recently hosted an event that gathered together representatives of leading system OEMs to discuss best practices when outsourcing to EMS providers. Issues discussed included EMS roles and responsibilities, partner selection, OEM outsourcing organizations, outsourcing profitability, price masking, cost models, EMS supplier scorecards, performance incentives and the future of the EMS industry.
Based on their extensive experience in outsourcing to contract manufacturers, the OEM participants had varied opinions regarding the future of the EMS industry and its supply-chain relationship with the OEMs.
One prediction from participants was that previously outsourced procurement activities will migrate from the EMS providers back to major OEMs.
The EMS providers have done an outstanding job transforming outsourced electronics manufacturing into a successful business model. However, OEMs have not been as successful transitioning strategic procurement activities - such as commodity and supplier-relationship management - to the EMS providers. OEMs often have expressed frustration that the EMS providers have been less effective than expected in holding down component costs.
Because of this, the OEMs have had to continue to perform many of the same strategic procurement activities they ostensibly had outsourced. At the iSuppli workshop, OEM participants said in the future they will take back formal control of these procurement activities. Evidence of this trend already can be seen in OEMs' increasing interest in and implementation of price masking.
Another view expressed at the workshop was that several EMS providers will successfully transition to the Original Design Manufacturing (ODM) business model. Flextronics Corp. has stated its intent to do so, but several other EMS providers are moving down the same path more quietly by continuing to invest in Intellectual Property (IP), design engineers and by developing successful ODM business models.
Participants noted that being an excellent manufacturing company requires different skills than being an outstanding design firm. Risk taking, creativity and detailed market knowledge all are critical to achieving success in design. The EMS providers that will be successful all are making the necessary investments and are committed to staying the course for a period long enough to change their cultures.
Participants opined that the EMS industry will split primarily into two models: ODM and manufacturing. The EMS providers that move toward the ODM model will possess their own IP and will be willing to take on market risk.
Those that pick the manufacturing model will focus on supply-chain execution - but will conduct less procurement management than they do now. As described above, procurement management responsibility will return to the OEMs.
The OEM representatives also agreed that domestic Chinese EMS providers will grow larger and will win a significant portion of the business.
The domestic Chinese EMS providers are improving their skill sets. While they are now less capable of handling production of high-volume, complex products than their overseas competitors are, the Chinese EMS players continue to move quickly down the learning curve. Their low overhead and aggressiveness will continue to win them market share in the consumer, wireless and communications markets.
To stay in the lead, the North American EMS providers will need to shed their expensive overhead and focus again on attaining a high level of customer responsiveness.
Dan Hawtof is vice president, business intelligence for iSuppli Corp. Contact him at email@example.com