More services equal more value to the buyer
By James Carbone -- Purchasing, 11/19/1998
Contract manufacturing in electronics will grow 25% per year for the next several years and become a $140-billion industry in the year 2000, according to industry forecasts. To achieve that growth, contract manufacturers will offer more manufacturing and logistics services and will continue to strive to create more value for original equipment manufacturers (OEMs).The trend will be toward more so-called "box build," and contract manufacturers will try to offer OEMs as many services as possible as they try to become a "one-stop shop." That's good news for buyers who have to evaluate the capabilities of contract manufacturers and select which external manufacturers their companies use. Buyers say contract manufacturing (CM) in electronics currently is a fragmented industry with widely varying levels of capability.
For instance, some CMs are very capable at prototype builds but can't handle volume production, says George Koslosky, director of materials for Mercury Computer Systems in Chelmsford, Mass. Other CMs excel at building with the latest and greatest high-tech parts.
"If I have someone who is doing a great job prototyping, and I try to drop a production order on him and he messes it up, it isn't his fault because production isn't his thing," says Koslosky. "He isn't going to do it as well as somebody who does it all the time."
Mercury, which outsources almost all of its manufacturing, has to use three different types of CMs: One for prototypes, one for more mature assemblies, and another for new products that have the latest technology.
Chris McComb, director, commodity management for Bay Networks, San Jose, Calif., says flexibility for a contract manufacturer is key. He says some CMs do a great job of producing high volumes of PC boards at a good cost, but can't handle product mix changes. "The manufacturers we deal with have to be able to switch direction very quickly," he says. Manufacturers also need to be able to develop test programs and to have established relationships with key semiconductor suppliers.
CMs recognize that OEM buyers expect more from them. They say in addition to handling manufacturing, they also are handling more purchasing, engineering, and logistics. To satisfy those requirements some manufacturers are trying to be more vertically integrated. Case in point: K*Tec, the contract manufacturing division of Kent Electronics.
"We are 100% vertically integrated," says Larry Olson, K*Tec's 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.
The advantage of vertical integration is that K*Tec can offer customers quicker time to market and reduced cost because there are fewer suppliers involved, according to Olson.
"A lot of our competitors are dependent on outside sources," says Olson. "They have to go outside for the sheet metal or powder paint. We have all those capabilities in-house. We are not dependent on outside suppliers, and that gives us the ability to offer quicker time to market for customers. Rather than dealing with five customers, they are dealing with just one," says Olson. He adds there is also a cost advantage because margin stacking by individual suppliers is eliminated.
Olson says CMs also are being asked to handle logistics. "Customers want us to not only build and test their product, but also ship it to their end customer and just give them an invoice." K*Tec has a distribution center that can handle 7,000 shipments per day.
K*Tec also can handle some of the OEM's purchasing and engineering functions through focused customer teams. Each of K*Tec's 50-plus customers is assigned a team that includes a program manager, buyer, material planner, customer-service expert, process engineers, and manufacturing engineers.
"The advantage is that the team is focused on the needs of the customer," says Liz Landers, director of materials and logistics for K*Tec. "The team knows the bills of materials, has weekly reviews with the customer, and can identify trends in the supply base." The team also can identify any manufacturing or design problems that may arise.
Focus teams often mean that customers can have fewer people in-house because purchasing and, in some cases, engineering are being outsourced to K*Tec. Buyers on the team handle day-to-day buying for the customer. While 80% of the dollars on the bill of materials is covered under negotiated contracts, 80% of the part numbers are not.
"The team buyers are negotiating 80% of the part numbers," says Landers. "They are scheduling them out. They are making sure they are putting all their other parts on order with the right suppliers, cost, delivery, and quality," she says.
Whether vertical integration becomes the norm in contract manufacturing remains to be seen. But it's a good bet that buyers will choose those CMs that provide the highest amount of service and flexibility at the lowest total cost.
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