The Top 10 Reason Why OEM/EMS Relationships Fail - Part 1

The EMS industry has undergone numerous evolutions and transformations in its more than three decade history. From its roots as an outsourced labor and shared capital equipment model, the industry has undergone various changes. But the real and predictable maturation of the industry truly began with the explosive growth and rampant consolidation of the industry that occurred in the mid 1990s. 

With the recent financial crisis and the worst manufacturing contraction the world has seen in 26 years fully upon us, the rate of consolidation in the EMS industry will accelerate into a final stage, with the resultant trifurcation providing OEMs with a set of choices that look and behave very differently.

Today OEMs can select their EMS partner from just a handful of clear Tier 1 players, differentiated by their revenue and purchasing power in the billions, a global footprint, and complete range of supply chain services. OEMs can also choose from a much longer but rapidly shrinking list of Tier 2 regional players characterized by solid capabilities, but without the scale and lacking the scope of a complete suite of supply chain offerings that characterize the Tier 1 providers. Lastly, OEMs can select one of the hundreds of small and generally un-scalable niche players operating in the various innovation centers and manufacturing centers around the world.

It has been the steady acceleration of outsourcing, and the adoption of manufacturing outsourcing in most product industries, that has fueled the EMS growth and the industry's maturation. Most OEMs and Brand Owning Enterprises have long since recognized the need to focus their human and physical capital on what they do best - product and market development. OEMs know what it is that differentiates them in their chosen markets, and they embrace the benefits of working with EMS partners to create the right supply chain solutions to support their business model. So it stands to reason one could assume that; (i) OEM/EMS relationships now fully understand their engagement models; (ii) their partnerships are optimized and fine tuned to the specific demands of the OEM's business model; and (iii) the parties execute together in the most efficacious manner. Today in the world of a mature EMS industry, OEMs and EMS providers fully leverage each others' business models, and each takes full advantage of all the tremendous benefits a symbiotic outsource relationship can deliver.... or do they?

Are any of the foregoing assumptions broadly true? If the OEM/EMS partnership is now a model fully understood and leveraged for mutual benefit, then why do the parties so often express dissatisfaction with one another, whether in public or behind closed doors? Why do relationships that once looked so promising either operate in the doldrums or dissolve completely in the very expensive equivalent of a supply chain divorce? What role does the EMS provider play in this dissatisfaction? How might the OEM be contributing to the relationship breakdown? What other factors intervene to make what seems like a perfect model of synergies and tightly defined core competencies perform below the expectations of both parties, and cause considerable overhead inefficiencies, organizational stress, and finger pointing?

The issues are as varied and complex as the industries, companies, and individuals involved in the myriad of OEM/EMS relations. While no single issue in isolation is likely to poison an otherwise healthy supply relationship, a combination of seemingly small straws can weigh heavily on the back of a camel that is rarely as healthy as it seems.

In working with my partners and colleagues at Riverwood Solutions, discussing outsourcing with a number of our OEM clients and their EMS providers, I have compiled a top ten list of the sort of issues that can, and often do sour an EMS supply relationship. 

Top 10 OEM/EMS Relationship Issues


#10. Micro-Management and Replicating the In-Sourced Model.
Many OEMs and many operating executives at OEMs come from a heritage of a captive, in-sourced manufacturing model. And although the process of running a good factory is basically the same regardless of whose factory it is, running the highly efficient shared resources model at the heart of the EMS business is in fact quite different from running a dedicated, captive operation. 

All too often OEMs choose to outsource production, but then micro-manage the EMS provider and work very diligently towards having the EMS provider replicate exactly the processes, systems, infrastructure, metrics, and methodologies previously used by the OEM. Modifying the EMS provider's existing operating procedures too dramatically causes inefficiencies within the system as it reduces the economies of scale that accrue to the EMS provider by doing the same types of activities the same way a million times a day. And while the EMS provider makes procedural accommodations on some issues, the OEM team managing the supplier often becomes frustrated because they do not understand why the EMS provider will not just "do it our way."

The decision to outsource is no longer just about cheap labor and trading fixed costs for shared variable costs - it is about a way of doing business and not just "doing it our way". As EMS providers become the predominant manufacturers of the world, OEMs must loosen the reigns a bit and allow the suppliers to do their job - which is to aggregate various types of activity volume across a huge number of transactions and customers in order to take cost out of the system for all participants. The default position of the OEM's outsourcing team needs to be one of process standardization with the EMS provider's processes whenever practicable. There will always be exceptions, but it is important to understand when data and process requests are driven by comfort and convenience, and when they are driven by true and immovable requirements.

Some potential solutions for the issues of micro management include:

-- The parties must work together diligently and early to understand and document the truly idiosyncratic issues of the specific OEM product.
-- The EMS provider and OEM's senior management need to communicate and educate the OEM team on the broad benefits of outsourcing, and how these benefits can be eroded by undue process and procedural customization.
-- All of the involved parties must actively seek to understand the difference between conveniences and preferences, and hard fast requirements based on real needs.

#9. The Oversell and Scramble.
As a general rule, industries characterized by 2% margins are typically not deep in excess resources - and the EMS industry is no exception. When low margin industries seek to serve customers with high service expectation, some conflict is bound to arise. For years the EMS industry has been somewhat characterized by an "oversell the capability" and "scramble to execute" mentality. This is in part driven by the razor thin margins in the industry that prevent companies from maintaining excess resources within the organization. But this issue is also driven by EMS players' desire to expand their service offerings, expand their market reach into different segments, or expand their geographic footprints. Every new EMS initiative requires a first customer, and being the first customer in a new technology, geography, or service offering is not necessarily a bad thing - unless of course you were led to believe you were the 20th customer.

When considering placing a piece of business with an EMS provider, make sure that your investigation involves more than just slide-ware and speeches. Get out into the organization, meet the team, and spend a little time on the factory floor. Ask for a few customer references and talk to your peers at other companies. If your program is going to be a guinea pig for a new EMS initiative, its important to know that upfront, understand the potential ramifications and manage to the desired outcome.

#8 Deal Confusion.
This is a problem that is incredibly prevalent. The OEM's General and Financial management do not get into the details of the deal or contract struck with the EMS provider. They assume that the deal they struck to outsource their unique products is a utopian business model, one that provides no supply chain liability while having infinite schedule flexibility and near zero lead times. When unexpected upside demand occurs, but is not shipped in the same week, or unexpected cancellations occur and an E & O bill arrives from the supplier - emotions start to run high.

This is a problem that we see all too often, and one that can be addressed with simple solutions:

-- The OEM and EMS provider must see the supply contract as more than a legal formality and view it as an outline of the key operating parameters of the relationship.
-- OEMs need to spend less time, and less money "selecting" an EMS provider, and more time and management attention on the process of engaging their EMS provider.
-- Both parties need to work together to develop a comprehensive set of Rules of Engagement that define in great detail the data flow, performance expectations, timetables, responses, and escalation paths to be followed in executing the business.

#7. Metric Misalignment.
The EMS provider drives its team according to key performance metrics A, B & C, while the OEM is driving its team that manages that EMS to maximize metrics X, Y & Z.

With ultra-low operating margins, EMS providers require a fairly high asset velocity in order to make the business model attractive enough to investors to bring in new capital. So the key operating metrics that drive most EMS providers focus on issues surrounding the return earned on assets, invested capital and equity, and on the components of cash conversion such as inventory turns and A/R. These metrics are often times seemingly at odds with some of the key operating metrics that most OEMs tend to focus on, namely product lead times and on-time delivery.

So the EMS focuses on metrics A, B, and C, measuring and reporting them in twenty different ways, and providing incentives throughout their organization consistent with optimizing these metrics. The OEM does exactly the same, but with different and seemingly conflicting metrics X, Y and Z. This misalignment between the two teams on what's important drives many a fruitless conversation at all the various interface points between the two companies, creating the perception of an inevitable win-lose situation.

Although the nature of the EMS model is such that perfect goal alignment between the OEM and EMS provider will always remain out of reach, there has to be some metric commonality developed at the operational core that allows the two teams to focus as one. It is critically important to openly discuss and truly understand what is important to both parties and agree upon a core metric set for the combined team. Understand that what gets measured gets done and what gets bonused gets prioritized.

Stay tuned for Part 2.


About Matthew Ryan
CEO and Founder of Riverwood Solutions

Matthew Ryan brings a wealth of international operating experience to RS, having spent more than 18 years in the highly competitive world of global electronics manufacturing. He has earned a reputation for establishing and running World Class, Global Operations and has had full operating responsibility for operations in more than 20 countries on four continents. Matt has consistently delivered exceptional operating results for more than a decade in one of the most competitive industries on earth.

Prior to founding Riverwood Solutions, Matt served as Executive Vice President of WW Operations, Logistics and Services for Flextronics International. During his 13 years tenure he was one of the key Operational executives who lead the company's growth from a Silicon Valley start up to a $30B Multi-national enterprise and the recognized leader in the EMS (Electronic Manufacturing Services) industry today.

Matthew received his post-secondary education at the University of Limerick, Ireland.

http://www.rwsops.com