An OEM uses an electronic manufacturing service (EMS) company because the subcontractor can build a board or system for less. However, for the EMS firm to keep the OEM's outsourcing business over time, it must continue to reduce products' costs.

To accomplish this, many EMS providers employ value analysis techniques. A team of engineers and purchasers or purchasing engineers will study a board or a system and develop ways to reduce costs through design or manufacturing process changes, changes in components, and/or supplier changes. The savings can range from a couple of percentage points (for supplier or components changes) to 20-30% for major board or system redesigns and changes in the supply chain.

OEM buyers who have to recommend or choose EMS providers should know that when it comes to reducing costs, not all EMS companies are created equal. Some have small staffs that work on a number of customers and projects. Others have teams of engineers, purchasers, and purchasing engineers devoted to individual OEMs, depending on the level of business the OEM places with the EMS provider.

Eric Miscoll, chief operating officer for EMS industry researcher Technology Forecasters, says contract manufacturers typically reduce costs for their OEM customers through "design for X" processes, which include design for manufacturability, cost, supply chain quality.

"An EMS provider may suggest a design change or different components. The EMS company may say to the OEM, 'You specified this component, but another one costs less and we can get it more easily through this supplier,'" says Miscoll. "A lot of cost reduction effort occurs during the next generation of a product."

In many cases, OEMs are very demanding of their EMS partners, often including clauses in their contracts that state cost must be reduced by X percent each year, according to Miscoll. "OEMs tend to be harder on their EMS providers than they are on their own internal manufacturing operations, which forces EMS providers to be more efficient," he says. "They were more forgiving when it was internal because it was just another part of their company."

EMS companies agree, noting that in recent years, OEMs have become more aggressive in their demands to reduce product costs. "In the past, you put a product on the market and then, when the competition got fierce, you would go back and try to do a re-spin," says Vince DePalma, vice president of new product introduction and technology for Solectron Corp, the world largest contract manufacturer. "Now the re-spin is a continuous effort. We are constantly trying to march the cost down for the OEM."

DePalma says OEMs want Solectron to commit to quarterly price takedowns. "They have given us greater leverage in how we approach it in terms of design and alternate sourcing, so they have shifted quite a bit of burden over to us."

Wesley Chen, vice president of operations for Solectron says the quarterly price reductions are based on joint efforts between Solectron and its customers. The efforts usually center on improving manufacturing processes, modifying certain portions of a design, and perhaps using more standard components or different, lower cost suppliers.

Increasingly, the effort to reduce costs occurs right after an OEM has designed a new product.

"From a cost standpoint, we look at new assemblies with our standard tools," says DePalma. "We look to see if they have the correct cervical spacings. We check to see if tolerances match. We try to estimate what the yield is. We look at what the OEM has chosen in terms of the supply chain. We ask 'Are they cost competitive?' We also look at the function of the board itself to see how we might redesign from a cost prospective," he says.

Chen says the idea is to engage with the customer as early as possible to minimize potential engineering changes. "We provide design for manufacturability feedback to our customers so their products can be manufactured efficiently. When the product hits, volume production cost will be minimized, complexity will be lower and quality will be higher because manufacturing complexity drops," says Chen.

When an OEM designer is working on a new product, he or she is primarily concerned about function and space constraints, not necessarily costs, DePalma says. "The designer doesn't think about the manufacturing implications."

For instance, a design engineer may start a new product design using a three-chip chipset. "By the time the design is finished," DePalma says, "a two-chip chipset may be available that integrates many of the common parts." By doing a simple redesign, cost can be reduced because some of the parts in the original design can be eliminated.

In reducing costs for OEMs, EMS purchasing groups play a big role as well.

"We look at function, availability and cost," DePalma says. "Purchasers know about availability and pricing. They check the bills of materials (BOM) to make sure end-of-life parts aren't being designed in. They also look for alternative lower cost sources for parts."

Jim Sutherlin, director of supply management for contract manufacturer Sanmina SCI, says his company has component engineers who work on cost issues reporting to purchasing.

"These are people who have technical expertise but are also aware of commodities. They work with suppliers on roadmaps and try to bring these roadmaps in to line with customer requirements," he says.

He says purchasing works with design, but design activity is focused on cost. "We aren't doing design of boxes or cards, but we are participating with customers' design development teams to bring alternatives and suggestions to manage costs, flexibility, and focus on commonality of parts," says Sutherlin. Purchasers point out where standard parts can be used and when parts can be purchased at lower costs from Sanmina SCI's preferred suppliers for less than they can be bought from suppliers on a customer's approved supplier list.

"In our business there is an insistence on continuing to take prices down. You can't always do that by negotiation. You have to look at alternatives or substitute parts," says Sutherlin.

At Flextronics, purchasing also plays a very involved role in reducing costs for OEM customers. The company assigns strategic supply chain managers (SSCMS) to each customer, says Steve Martson, senior vice president and chief procurement officer.

"These are people who work directly with customers. They are dedicated 100% to customers and their mission is to support their customers on several fronts. One of them is cost," he says.

The SSCM reviews the customer's approved supplier list and assists the OEM in conducting a cost analysis of their bill of materials. Often by switching from an OEM supplier to one of Flextronics' 71 strategic suppliers, materials cost can be reduced because Flextronics can obtain better parts prices than the OEM.

Martson says Flextronics purchasers also do risk assessments of the OEM's supplier base. While this may be less important now because it is a buyers' market for parts, such assessments can help prevent customers from being caught short on parts when supply conditions change.

Jeff Lumetta, vice president of technology services for Jabil Circuits says there are several ways Jabil reduces cost for OEMs.

"We can take existing designs and work with the existing supply chain to reduce costs. We can also use different components or different terms and conditions with suppliers, or redesign the board to get cost out," he says.

"We talk to manufacturing and engineering folk and ask how we might make this thing run at a higher velocity on the line for instance," says Lumetta. "We ask 'How do we reconfigure the amount of components on the board? How do we make it easier to test because this typically hold ups a process? How does the OEM assemble its systems?'

"If there is a compelling reason not to use an approved supplier's component, for instance, the purchasing engineer can communicate that so a new supplier can be developed," he says. "We inherit a lot of suppliers we don't necessarily want to do business with."

He says it is not uncommon for Jabil to reduce costs 20-30% for a customer in a major cost redesign (see story on pg. 27 of this issue).