CMs offer more services to OEMs
By James Carbone -- Purchasing, 5/21/1998
Renowned bank thief Willie Sutton was once asked by a reporter why he robbed banks. "Because that's where the money is," he replied.That pithy response also answers the question why electronics contract manufacturers (CMs) are offering more manufacturing, design, and logistics services to original equipment manufacturers (OEMs). As OEMs become more comfortable outsourcing, they are looking to CMs to do more than just build a printed circuit board (PCB) or a cable harness.
Increasingly, OEMs want CMs to help design boards and systems and many are adding engineers to their staff. CMs also are being called on not only to build boards, but subsystems and, in more cases, entire systems for the OEM. As a result some CMs are adding plastic injection molding and metal fabrication capabilities. Once a product is built, OEMs are looking for the CM to test the finished product and then ship it to their customers.
It's not just large CMs like SCI and Solectron who are offering this soup-to-nuts service. Example: k*tec, $250-million/yr contract manufacturing division of Kent Electronics. Like many CMs, k*tec has evolved. It started as a cable assembly house and as the market grew, it added services.
"Now we are the only North American contract manufacturer that is 100% vertically integrated," says Larry Olson, k*tec president. k*tec builds cable assemblies and printed circuit boards and has sheet metal, plastic injection molding, and powder paint capabilities. It also does battery-pack assembly, final integration, testing, and logistics services.
k*tec's strategy is to provide the OEM with one-stop shopping. "Vertical integration gives us the ability to offer quicker time-to-market for the customers," says Olson. It's also more economical for the customer because all the margin stacking is removed since there are fewer suppliers."
Olson sees growing demand for engineering expertise and logistics support. "We are investing more in infrastructure in engineering technology to help customers with new product releases," he says.
While k*tec is vertically integrated, it also uses distributors. The Kent Components division services most of k*tec's passive, interconnect, and electromechanical needs which account for about 70% of the part numbers on a bill of materials, but only 15%-20% of the value. k*tec also has established strategic relationships with broadline distributors for semiconductors.
"Our strategy is to use the source that provides the best solution," says Olson. "We have a multi-faceted strategy for materials that is designed to use the most efficient way to service the needs of the customer." Translation: Sometimes k*tec buys from a distributor to use material management programs like auto replenishment and consigned inventory. Sometimes it buys direct to leverage its purchases.
While OEMs are demanding more services, different customers use different services, says Rodolfo Archbold, chief technology officer of Manufacturers Services, a CM based in Concord, Mass. Computer and peripheral companies tend to need high-volume printed-circuit-board production services. Networking-equipment customers want box-build capabilities.
Many high-tech startups just have design and marketing expertise but have no infrastructure to turn a concept into a physical item. They need CMs to develop the product, build it in volume, test it, and ship it to customers.
Established OEMs also are looking for such services. Many CMs offer a variety of services with the idea that the OEM may use one service and gradually turn to the CM to handle more design, manufacturing, and materials management support.
"We can help turn a concept into a physical design and do the board layout for you," says Archbold. "We can stop there, but we would prefer to use our new-product introduction skills to bring the design in and ramp it up to volume production.
Many CMs have plants around the world and offer different services in different parts of the world. For instance, in parts of Asia a contract manufacturer may just do high-volume, low-cost production for OEMs. "But in San Jose, we need to provide an OEM with one-stop shopping," says David Otterness, director of supplier management for contract manufacturer Flextronics. "You need to provide engineering services for cost reduction and product improvement, but also design creation. A customer comes in with a concept and you should be able to design a circuit around it," he says.
Some CMs offer a variety of services but specialize in a particular type of manufacturing. Example: eftc is a contract manufacturer that specializes in high-mix electronics services, says Brian Tracy, vice president of sales and marketing. "Our vision is to become the undisputed leader in high-mix electronics manufacturing services," he says. That means building prototypes, doing quick turns, and shipping to customers quickly. The company is moving toward build-to-order and also is getting into warranty and repair services.
"We are trying to avoid high-volume, low-cost manufacturing," says Tracy. "Our expertise is going to be building it in lot sizes of one. The order comes in from the computer manufacturer and the customer wants it configured in a certain way, and we can deliver it the next day."
One challenge with high-mix products is that OEMs have a hard time forecasting demand. Those OEMs need the CM to be able to handle changes in schedules. Communication between eftc, its customers, and its distributors is critical.
"We provide distributors a 52-week forecast for all of our commodity parts. We give them forecasts once a week to provide them with maximum visibility," says Tracy. OEM customers are good at annual forecasts, but not so good on a monthly basis.
"By giving distributors as much data as we get from customers, eftc can have the material in the pipeline," he says.
Besides forecasting, another issue in a high-mix model is obsolescence. "We have engineers at our corporate center whose sole purpose is to view our customers' bill of materials and take a proactive approach in trying to predict when we think certain components might become obsolete. Example: An OEM may be using a Texas Instrument part, but National and Motorola just obsoleted these parts. Let's make the bet that this is going to happen to our part soon and take the action now."
Not all CMs offer soup-to-nuts services. Some offer a niche strategy. Case in point: Gregory and Associates. The Calif., San Jose-based contract manufacturer specializes in building semiconductor production equipment, says Milt Gregory, president and founder of the company. It helps in semiconductor equipment manufacture--including design, product development, and building and testing it. It also gets involved in boards. It buys the components for the boards, kits them, and sends them to a board house. The finished boards are then sent back to Gregory where they are used in subsystems of chip production equipment.
Gregory Associates has found success serving this niche because there are few competitors and the equipment it makes costs up to $500,000 and is used in larger equipment that costs several millions of dollars. It's a lucrative business, and it's a lot less risky than robbing banks.
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