More consumer OEMs consider outsourcing electronics manufacturing
Less than 15% of consumer electronics equipment is built by contract manufacturers, but that will change as consumer electronics companies look to reduce cost.
By James Carbone -- Purchasing, 12/11/2008 2:00:00 AM
Buyers involved in outsourcing decisions at consumer electronics OEMs may be busy next year evaluating and qualifying electronics manufacturing services (EMS) providers because of the global economic slowdown. Such a downturn often results in companies reviewing their value proposition and whether it makes sense to manufacture internally or to outsource.
"In a downturn, OEMs will either decide to tighten up their manufacturing or cut back capacity to clear their balance sheet and focus on core competencies," says Adam Pick, EMS/ODM analyst for researcher iSuppli in El Segundo, Calif. That's what happened in 2001 during the last big electronics industry downturn. Many communications OEMs decided to reduce or eliminate internal manufacturing and sell their facilities to EMS providers and then use them for manufacturing.
So far consumer electronics companies have been slow to outsource in this downturn, but that may change. If they do it will be for the same reason other OEMs outsource.
"Cost, cost, cost," says Pick. "It doesn't matter if you are doing consumer electronics or industrial controls, EMS providers are going to try to get the best cost for their client."
However, while EMS providers such as Foxconn build name-brand consumer products, most consumer electronics manufacturing is done by the OEM. Electronics contract manufacturing has penetrated about 14.5% of the consumer electronics market, according to iSuppli, and that is low compared to other industries. For instance, about 65% of wired communications and 40% of wireless communications equipment is outsourced.
Eight years ago consumer was not a big chunk of what EMS providers were doing, says Pick. "It was mostly datacom, telecom and enterprise. But then there was the tech wreck and at that time a lot of EMS firms decided to diversify."
He says some EMS providers expanded facilities or started consumer business units, while others acquired facilities of other consumer-focused companies. However, choosing an appropriate EMS provider is no easy task for a buyer at a consumer electronics OEM.
"One of the fundamental challenges for a consumer OEM is EMS supplier selection," says Pick. "There is no one criteria in choosing. You need to get into the weeds and determine where the fit is."
Foxconn is the leading consumer electronics EMS provider, which means they can be more choosey about the business they take on, Pick says. "A consumer OEM may find out Foxconn won't even talk to them, not because Foxconn doesn't want the business, but because it may not be good match."
Some EMS providers like Foxconn, Flextronics, Jabil and Celestica have a strong and growing consumer business. Other providers may not be able to handle the large volume requirements of consumer electronics or don't have the purchasing and supply chain capabilities that consumer electronics companies require.
There is no magical formula for determining a good match. Rather, careful analysis by OEM buyers involved in outsourcing decisions is needed. Charlie Barnhart, co-founder of Barnhart and Associates in Maui, Hawaii, says OEM buyers should use the following criteria to determine the appropriate EMS supplier match.
Scale: An OEM should choose an EMS provider that is similar in size to the OEM.
Capabilities: Different EMS providers have different skills, experience and industry knowledge and technology know-how. Those capabilities need to match the needs of the consumer electronics OEM.
Commitment: Is the EMS provider committed to the consumer electronics segment? And is it dedicating resources to it or does it dabble in the sector?
Total cost: Is the EMS provider competitively priced on a total cost of ownership basis and not just on lowest manufacturing cost?
Scope: The EMS provider should have the appropriate global footprint to support the OEM in markets in which it sells its equipment. It also needs to have the manufacturing technology and the supply chain in place that the OEM needs.
Evaluating supply chain
A good EMS provider should be able to evaluate the supply chain needs of an OEM in the consumer market and take on supply chain and purchasing responsibility for the OEM. For instance, with large assemblies such as a set top boxes or video game consoles, Jabil Circuit, performs a supply chain network analysis for an OEM customer, says Mike Ward, vice president of supply chain management for the St. Petersburg, Fla.-based EMS provider. About 33% of Jabil's business is with consumer electronics OEMs and that percentage is growing, says Ward.
"The idea of the supply chain network analysis is to determine the lowest landed cost solution for the OEM that factors in location, logistics, labor and inventory holding costs," he says. "The analysis includes determination of all elements of the cost build up from weighted average cost of capital (WACC) to logistics, bill of materials (BOM) to labor cost and all elements in-between, namely fixed and variable cost structures."
Supply chain and purchasing capability is important because EMS providers often take on responsibility for sourcing certain production items and managing supplier relationships for an OEM. Ward says Jabil's supply chain management teams often take on a significant amount of responsibility for an OEM customer's commodity teams to manage supplier relationships and handle purchasing.
"Many OEMs face resource issues on the commodity management side, so Jabil provides support to the OEM in such areas as sourcing new suppliers and collaboratively assessing and auditing to add these suppliers to the approved vendor lists," says Ward.
In some cases Jabil has had to add suppliers to its roster as its business with the consumer segment has grown. It added custom mechanical and electromechanical suppliers to its roster, according to Ward.
Jabil also helps consumer electronics OEMs decide where the optimum location is to manufacture equipment. Ward says smaller assemblies and components are manufactured in Asia. Larger assemblies may be manufactured close to the market where the where they are sold.
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