What’s the SCOOP – Eight EMS Thoughts
While guesting for Jennifer as editor of EMSNOW a few weeks ago I shared some thoughts for EMS executives to consider. These musing were written over eight days and a few people have asked where they can read the whole series in one spot, so here it is.
What’s the SCOOP – Thought #1 of 8 – Disruptive DNA
After years of constant disruption I believe the winners in the coming EMS race will be those with disruption in their DNA. Not those that tolerate disruption, not those that have survived disruption, but those that embrace disruption, those that thrive on disruption, and those that actually like to disrupt themselves.
The twenties was born in a trade war, grew up in a pandemic, and is coming of age in the most challenging supply chain environment anyone has seen. What is more, we are most likely about to head into another disruption. This time an almighty economic disruption as we try to tackle inflation, rising interest rates, and potential stagnation, all while trying to redesign supply chains to be more secure, more agile, more robust and less China-centric.
Some companies are looking at these disruptions as temporary. Something to survive, stormy waters to sail through before hitting calmer, more familiar currents. These are the companies I fear for most over the remainder of the 2020s.
Other companies have accepted disruption as a way of life, some were even forged in the fire of disruption, and some are born of disruptive business models. These are the companies with disruption in their DNA. And these are the companies that will thrive in the coming months and years.
Those with disruptive DNA have learned how to design for disruption, and I don’t just mean designing products to meet the challenges of a disrupted work environment, supply chain or economy. I mean those that have redesigned their business model, their workflow, their digital transformation model, their planning systems, and their partnerships with both customers and suppliers.
I believe those in this disruptive ecosystem will move ahead of the peloton substantially in the coming years, and unlike on the Tour de France, they won’t be so easy to catch. This breakaway group will be full of EMS players that think differently and act differently. Companies that are well funded and attract the attention of brands, of investors and, importantly of talent. They will earn the type of loyalty we normally only associate with OEMs and they will become the brands of choice in the EMS industry.
If you’re just tolerating the current disruptions it’s time to accept them, and even to embrace them. Build disruption into your company’s DNA. Be the disruptor, not the disrupted. Build a business that thrives on disruptions and sees each bump in the road as a way to show your customers just how valuable a partner you can be in a crisis. They’ll remember what you did and they’ll value it.
What’s the SCOOP – Thought for the C-Suite #2 of 8 – Partnership Prevail
Relationships can be hard, especially when there are external pressures. The relationship between OEM and EMS has been more under pressure than ever recently. Any relationship which consists of one party continuously telling the other that they are unable to meet their obligations is going to have challenges and will ultimately end up under stress.
In the last twelve months or so, many EMS companies have been on the phone regularly to their customers with bad news, mostly as a result of shortages in the supply chain. Many of the conversations related to delivery have been around one or two key missing components which means that the EMS cannot deliver on the scheduled date. What is more, the date they are now expecting those parts is less reliable than it has been, so even that is precarious.
Conversations around extended component lead times that are pushing schedules out by many months are becoming more commonplace. As are conversations around additional component costs due to the need to purchase those key components through other sources.
The temptation for the brand or OEM is to say this is not our problem, we contracted with you to provide a complete product and the parts of the bill of materials are your responsibility. But the truth is this isn’t a failure on the part of the EMS, it’s a failure of the supply chain, caused by the massive disruption of the pandemic, increased demand, supply chain uncertainty and logistics issues.
The right solution is to look at the relationship as a partnership and for both parties to work together to find the best solution. That solution might be a redesign with parts that are available. It might be an adjustment in build schedule to bring forward products that are build-ready and schedule out those that are missing parts. The right solution, as in any relationship, is also open, honest and prompt communications. All in all, it is those OEM and EMS companies that view their relationship as a partnership, and not in an adversarial manner, that will achieve the best outcome.
To my mind this is just the tip of the partnership iceberg, the part that is fixing the current problem. The truth is that a relationship where one party constantly tries to get the lowest price from the other without consideration of their business model makes little to no sense, and is certainly not sustainable. Sustainable relationships come when the brand or OEM sees that EMS as a real partner who is taking responsibility for their manufacturing and their supply chain.
These partnerships are deeply embedded in both parties’ business models and benefit hugely from their complementary skills. OEMs focus on product ideation and sales and marketing of their solutions. Meanwhile their manufacturing partner concentrates on building the right manufacturing and supply chain footprint, making sure the product is designed for manufacturability, ensuring the product meets the demands of the consumer, and even caring for the reverse logistics and end of the products life.
These are integrated partners, deriving value through their own skill sets, both relying on each other. They are matched culturally, sharing the same goals in terms of the environmental and social impact as well as supply chain security. As partners they reflect well upon each other and tell a consistent story, protecting and promoting each other’s brands!
These are the partnerships of the future that are agile and robust enough for the next disruption, whatever that might be. These are the partnerships that prevail, that thrive, that last for decades through the ups and down and are fit for the future of the outsourced manufacturing industry.
What’s the SCOOP – Thought #3 of 8 – Transformative Transformation
There’s been a lot of talk about digital transformation for most of the last decade. I’ve talked about it numerous times and often implied it is the solution to most problems, but is it, and when is digital transformation actually transformative to a business?
Like many, I’ve suggested just getting started on the digital transformation journey, but now I think it’s time to be more considered and to ensure the digital strategy and the business strategy are fully aligned.
As an industry, we’ve developed numerous digital tools that supposedly help us do our jobs better. We’ve developed connectivity standards that make the generation and aggregation of data easier. We’ve developed adaptable automation systems that could make us more efficient, improve our quality and perhaps even resolve or mitigate some of the growing skill or talent shortages. And we’ve developed some amazing inspection and traceability solutions that detect issues earlier, increase yield, minimize waste, improve quality and ensure any recalls have as little impact as possible.
But the question that remains is “have we created a better manufacturing and supply chain ecosystem that is truly fit for the future?”. And if not, how can that be achieved? And what is needed from those developing transformation solutions to develop transformative solutions? We’ve had almost a decade to transform the industry under the guise of the fourth industrial revolution and I think we failed to go fast enough and as a result we didn’t have the tools we should have had to manage and mitigate the most recent disruptions, such as the COVID pandemic or the current supply chain issues.
Right now everyone is preoccupied with parts shortages and the supply chain. Many are also concerned about the realities of consumer demand and the data supporting growing manufacturing order books. A good friend and EMS executive recently asked me, “After years of not believing our customers’ forecasts, why are we suddenly believing their orders?” Like many this executive is concerned that the high level of orders are giving a false impression and we might be in for a correction, cancellations, or volumes being pushed out when the supply side finally catches up. This is just one side of the supply chain, the demand side.
On the supply side, transparency, accountability, predictability and visibility are all top of wish lists. They want to know when parts will arrive and they want to know that they can track shipments and rely on the data they get.
Where previously some wanted a glass factory to see where each project was and how it was performing throughout the manufacturing process, now they want a glass pipeline, with visibility on the location and expected arrival time of every part. Component manufacturers and distributors are going to have to work with EMS companies and the brands they serve to ensure this kind of transformation becomes a reality and some level of harmony is returned to the supply chain.
This is but one example of transformative transformation that seeks to solve a real world problem, creates value for all stakeholders, and reflects the strategic needs of the entire industry. This can only happen when we fully align strategy and transformation.
What’s the SCOOP – Thought #4 of 8 – Connected Cultures
Aligning culture was mentioned earlier in this series when I talked about the importance and development of a new kind of partnership between EMS companies and the brands they serve. In that blog, entitled “Partnerships Prevail”, I talked about the importance of the brand behind the brand, and how I expect consumers to become as concerned about who has made their products as they are about who designed them and put a logo on them.
What I really expect is two connected cultures that reflect each other’s principles and ideals as well as those of their mutual consumer. In a world where sustainability is important, I expect to see sustainable products designed by sustainable brands and manufactured by sustainable manufacturing companies. Ideals around diversity and inclusion are equally likely to form cornerstones of these product and supply chain partnerships.
So, what is the culture of a manufacturing company and how can it reflect and connect to the culture of the brands that it serves?
Many business leaders told me that their company, or team, culture was one of the key factors that saw them through the challenging times of the pandemic. The importance of focussing on culture before strategy and well ahead of the tactical detail came up time after time. A culture of caring for each other, of tenacity in the face of adversity, of innovation and creativity to solve seemingly unsolvable problems, all helped companies survive, and even thrive, through tough times.
I think as consumers we’ve long shared a cultural connection with the brands we’ve bought products and services from, feeling connected to those companies that reflect our own values. Many have admired and coveted brands that promote themselves as the kind of people you’d like to buy from, or the kind of people you’d trust to deliver an innovative or sustainable product, even the kind of people you’d like to work for, or with. But, truth be told, few consumers have shown anything like that cultural connection or loyalty to the company or the people making that product. You could even argue that the brands themselves have ignored cultural fit in favor of a focus on lower cost, choosing to ignore cultural differences, even when they are a little uncomfortable.
In the future I suspect this will change. As consumers we’ll want transparency to see that the brand we buy from is a good cultural fit, and the company behind the brand, manufacturing and fulfilling the product, is also culturally compatible and meets the standards and virtues we expect and even demand.
What’s the SCOOP – Thought #5 of 8 – Sustainable Solutions
It seems the issue of sustainability ebbs and flows in the manufacturing space, sometimes other disruptions or crises seem to take priority and other times it’s among the most important issues in the boardroom. But the fact of the matter is that the environment and our impact upon it may be the most existential crisis facing our industry and indeed our lives.
Sustainability isn’t just about the environment. For a business to be sustainable it must have a sustainable business model. One that can survive through disruption and one that does not rely on the short term exploitation of the planet or its people. Sustainable businesses are in it for the long term and provide a solid value proposition for their customers, their team and their shareholders. One might say the rise of stakeholder value as a priority is a much more sustainable model than the constant drive to hit quarterly earnings targets.
Examples of unsustainable business models, or even unsustainable industrial models, could be constantly chasing low cost labor around the world. This has proved to be damaging to the industry and damaging to the relationship between OEM and EMS, where price, rather than service, had become the overriding factor in vendor selection. With respect to the short, medium and long term impact on those lower cost regions, it is clear an influx of manufacturing can help develop undeveloped economies, but at what cost to the local environment?
Supply chains too need to become more sustainable, and some trends are driving towards shorter more sustainable supply chain solutions. Recent disruptions to manufacturing in China have combined with logistical challenges to encourage people to rethink their supply chains and in particular their supply chain geography. Component shortages are encouraging chip makers to diversify their geographical footprint, sometimes helped by substantial government incentives. While geopolitical pressure is pushing supply chain managers to take a more risk-averse approach and consider investing in manufacturing closer to design and closer to the consumer. Regional pressure around supply chain security is certainly encouraging a more regional manufacturing model.
In my last blog I mentioned connected cultures, underlining the importance of having a culture that starts at the consumer and connects through the brand and into the supply chain. Well, a large part of that is the culture and ideology around sustainability and environmental impact. Sustainable products design and manufactured sustainable is an admirable goal and the manufacturing industry will need to play its part in delivering on the sustainability pledges of the brands they serve. Many brands are making sustainability a bigger part of vendor selection and developments like the German Supply Chain act can only accelerate this trend.
Perhaps more sustainable supply chains can be shorter, more regionalized and more robust. Perhaps they can deliver more sustainable, well paid, and rewarding jobs in developed and developing countries. Perhaps they can create more sustainable products, more sustainable businesses and a more sustainable industry.
What is certain is that sustainable manufacturing solutions and sustainable supply chains are an essential part of the future for our industry and for the entire planet.
What’s the SCOOP – Thought #6 of 8 – Brand on Brand
For decades the EMS industry has boasted about being the biggest brand that you’ve never heard of, the brand behind the brand, the company that you almost certainly have products manufactured by, none of which have their name on them, but things are changing.
Consumers want a more connected experience and the brand behind the brand, or the brand managing the supply chain has a role to play in delivering the brand promise and identity of the OEM. A simple example is the way products are delivered. Consumers expect a fulfillment experience that reflects the brand they bought from. They want good tracking data, reliable delivery scheduling and a service level that reflects the money that they have spent and the brand they have trusted. It isn’t enough to have a great product anymore, you need to have that product made by a good manufacturing partner and delivered by a fulfillment company that upholds the image of the brand.
And rest assured this idea of ‘brand on brand’, or ‘the brand behind the brand’ is very real. If you rely on a manufacturing partner to make your product and fulfill that product globally, they better reflect your brand identity, and, as mentioned a couple of days ago in “thought #4”, your culture.
The brand you have chosen to manufacture a product for you can have all kinds of implications for how you are perceived by your consumers. Choose the cheapest while ignoring worker rights, inclusion of environmental issues, and you risk being seen as a company that puts profit and shareholders before the stakeholders in your business and the environment so valued by your consumer. Choose a regional manufacturing brand and you could be seen as patriotic and supportive of the national interests, but remember this might not play well in your overseas markets. Choose a global manufacturer with factories in some of the more geopolitical risky regions and you might be seen to be supporting unpopular regimes or, again, putting profit ahead of morals. Yes, it’s a minefield, and you never know where the next explosion will occur.
EMS companies will need to look long and hard at their brands in the coming years. What does their brand promise look like and how are they measuring their performance and delivering on that promise?
Those more complete manufacturing brands are likely to have a strategy for their brand and that strategy is likely to include many of the elements discussed in this series. They’ll have a sustainability strategy that aligns with their customers and with their stakeholders ideals. They’ll have a strategy around digital transformation and how that impacts their business and that of their customers. And they’ll have a view to culture and how that might match with certain customers, consumers or industries.
The manufacturing brands of the future will want to provide great value to their customers while reflecting their ideals, culture and most definitely their brand and cultural identity.
What’s the SCOOP – Thought #7 of 8 – Scale & Scalability
Scale is important, but that’s not to say big is always beautiful. But let’s just say there’s a critical scale at which an EMS can exert influence on the supply chain and can also get the attention of the global brands they want to partner with. There are plenty of smaller EMS companies with big voices when it comes to negotiating deals with their supplier, but it’s really spending power that has the biggest impact.
Part of the scale issue is, of course, right-sizing. OEMs or brands should select their EMS partners with a view to their own size, spend and expectation. There’s little to no point in being with an EMS provider that has hundreds of companies that dwarf you in terms of spend. When times are tough, the big spenders will get the most attention. Some EMS companies tend to fish in smaller pools when business is tight, only to throw their catch back when the climate improves and their regular, larger accounts are ramping up their spend. Bad news for the OEMs or customers that get ‘fired’ and bad news reputational for the EMS. Conversely, an OEM needs an EMS that can grow with them and fulfill their products in the volumes they need as well as in the markets they expect to penetrate.
Recently many EMS companies have been chasing scale and the M&A market has been hot, but it feels like it may be cooling as some nervousness enters the market and cash gets diverted to working capital and inventory to cope with the component shortages. I suspect further acquisition this year will be more thoughtful in the main, although some might be opportunist as smaller less well funded companies find things more difficult.
In a MADE IN podcast last December I predicted that there could be three European EMS companies with revenues over one Billion dollars by the end of 2022. The recent merger of GPV and Enics has added a second, but who will be the third? Will it come as a result of a merger of through more organic growth from those players close to that mark? We’ll have to wait and see, but I am sticking to my prediction.
In terms of the trends within the medium to larger brands or OEMs, they are certainly looking to the EMS industry to reflect their geographical needs. Many are giving their contract manufacturers notice of more regionalized supply chains. Some OEMs are telling their partners that they plan to meet their Americas product demand from the Americas, their European demand from Europe and their Asian demand from Asia. This could make scale, in terms of footprint, even more important and could encourage some thoughtful developments as market leaders in one region invest in another.
Scaling globally is one challenge, scaling in terms of technology, or offering, is another. The winners in the EMS race in the coming decade will likely have scale, a global footprint and a broad and vertically integrated technology and service offering. Scale for scale’s sake rarely makes sense, but scaling to a critical mass, or scaling to meet the demands of the market does.
What’s the SCOOP – Thought #8 of 8 – Citizen EMS
There are many definitions of ‘citizenship’, but the one I like for its simplicity is “a participatory member of a community.” This is where I am going with the idea of Citizen EMS, an EMS that takes their citizenship seriously, and hence participation, in the community, or communities, in which they operate.
Many of the largest EMS companies are citizens of numerous communities, having upwards of 100 facilities in numerous countries. Those that do citizenship well have managed to navigate the complexities of politics to ensure they are doing the right thing wherever possible in each of the communities they participate in. It is not enough to just arrive in a country with a view to making the most of specific advantages, such as low cost labor, or minimal regulation, without putting something back.
It is also essential to recognize what it means to be a global citizen in the context of an EMS that exists on the global, or at least international, stage. Sometimes, that might mean withdrawing from a particular state when things are not as they should be. Several global brands were quick to distance themselves from Russia, following their invasion of the Ukraine, many of them at huge cost as they closed facilities and withdrew from a lucrative market. This is not the only geopolitical act to impact where goods are manufactured and it won’t be in the future. EMS geographies are often and increasingly subject to geopolitical activity.
Citizenship also means understanding the political and cultural changes occuring in the communities operated in. I know I’ve talked at length about sustainability and the environmental impact of manufacturing, but the mood of consumers (aka citizens) in many countries is reflecting major concern over climate change and real desire to make changes. As a corporate citizen it is important to reflect this. First and foremost, because it is the right thing to do, but also because it makes commercial sense to reflect the mood of those that will eventually decide who wins the manufacturing business. As previously mentioned in my “brand on brand” and “sustainable solutions” blogs, I believe consumers will hold sway in not only the brands that they buy from, but also the brands in the supply chains that fulfill their products.
The EMS industry is not, and never should be, about exploitation, be that of lower labor rates, tax breaks, or different regulatory environments. The EMS industry is about providing brands with partners that can manage a supply chain that reflects their own goals, cultures and ideals, as well as those of their customers.
Good citizens are respectful, honest, loyal and have a strong sense of community. They are part of the fabric of the society in which they exist. EMS companies are as much citizens as the citizens they employ, and it is essential they act as such.