EMS provider leverages distributors
James Carbone -- Purchasing, 2/16/2006 2:00:00 AM
It's no secret that high-volume electronics manufacturing has transitioned from North America to China and other low-cost countries. As a result, many midtier electronics manufacturing services (EMS) providers find that they are competing with large EMS providers for mid-volume business in the U.S.
To service those smaller OEMs, mid-tier EMS companies say they must be flexible and build and ship product with as little lead time as possible. At the same time, they must be as competitive as possible since large EMS providers have huge purchasing volumes and can leverage their buys. Midtier EMS providers don't have that luxury and must find creative ways to operate more efficiently. That's why many midtier companies leverage distributor supply chain, design and component information services to reduce cost and boost flexibility.
Case in Point: Flash Electronics, a Fremont, Calif.-based EMS provider which had $275 million in revenue in 2005. The EMS provider builds telecommunications, computer, automation and control equipment. It spends about 42% of its annual purchases with distributors, including Arrow, Avnet, TTI and Future Electronics, says Latchman Venkatesh, senior vice president of supply chain management at Flash.
"We have to rely on distribution to give our customers the flexibility that they need," Venkatesh says. Flexibility is a competitive weapon for Flash. It means that Flash can start work on fulfilling a new order for a customer with little leadtime or boost production quickly if the customer gets new orders for its equipment.
"We have a growing customer base," says Venkatesh. "Last quarter we added nine customers and we hadn't approached them. They heard about us. We are well known in Silicon Valley for services flexibility. When customers say 'jump,' we say 'how high?' That's how we win business," he says.
Just as its OEM customers expect flexibility from Flash, Flash in turn needs flexibility from its suppliers. Venkatesh says distributors provide flexibility because they have inventory.
"If I buy directly from a component manufacturer, they'll ship the part when I schedule it. But if my customer changes his schedule, I don't have the same flexibility with the component manufacturer that I have with distribution," says Venkatesh.
He says Flash has consigned inventory programs with distributors that provide flexibility. "What I do with distribution is I bring material into our stock. It remains as consigned. We don't pay for it until we use it. That's the flexibility I'm talking about," says Venkatesh.
He says he could get a better price by buying direct, but even with higher distribution pricing, the flexibility he gets is worth it.
He says he sends distributors his material resource planning (MRP) reports and distributors ship parts based on the forecast. "We have their reps sitting in our facilities."
Venkatesh says distributors support Flash's three facilities in the U.S. and two in China.
"We have low-cost manufacturing in China. With business in the U.S., if there is enough volume, we send it to China where labor is about 50% cheaper. We call this a hybrid account," he says. "We have five hybrid customers where we do small runs for them in the U.S. and the high runs in China." High runs are about 500 boards per week.
Glenn Bassett, vice president of strategic business development for Avnet Electronics Marketing group, says Flash and other midtier EMS providers have needs that are similar to large EMS companies.
"Midtier and big contract manufacturers look a lot alike sometimes," Bassett says. "Midtier manufacturers quote us almost as much as the big guys do sometimes, certainly with the same frequency if not the same volume. Big guys may ask for a quote for 40,000 parts, while for a small guy it may be 10,000," says Bassett.
He says many smaller midtier EMS companies take advantage of distributors' supply chain programs such as consigned and bonded inventory, in-plant stores and auto replenishment.
Many of those programs used to be offered to just large EMS providers, he says.
"The services that we used to think about doing with a Solectron or Flextronics are being done on a broad basis in our EMS community," says Bassett. He says a customer has to have a certain level of spend to qualify for many services, but it is "less than you may think."
For instance, with an in-plant store, "a few million dollar spend can get a store conversation going," he says.
Many of the programs reduce risk for the EMS provider, says Jim Rosenberg, president of Arrow Electronics Alliance group. For instance, distributors will review a midtier EMS provider's bill of materials to determine if there are standard parts that can be placed in a vendor managed inventory (VMI) or in-plant store program, which boosts flexibility and reduces risk for the smaller EMS providers.
"They won't have any risk because if they don't need the parts, we can move them out because we have lot of customers using those components," says Rosenberg.
He says distributors can also look at the EMS provider's forecast and work with the OEM customer to determine if the OEM plans to change parts or move to a new design. That also helps reduce risk for the EMS provider.
Many mid-sized companies are also using distributors for information-based programs. For instance, many are looking to distributors for help in dealing with the Restriction on the Use of Hazardous Substances (RoHS) law.
Through its Premiere business, Avnet provides information about which parts and suppliers are RoHS-compliant and which ones aren't.
"It gives them a head start on evaluating boards and figuring out what parts are going to be a problem," says Bassett. Other distributors have similar RoHS programs.
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