Many Original Electronics Manufacturers (OEMs) choose to outsource their manufacturing to an Electronics Manufacturing Services (EMS) provider. Some of the common reasons for outsourcing are to free up time to focus on their core competencies - like research, design, marketing and sales - and to reduce their capital expenditure.
But there’s more than one way to outsource your manufacturing to an EMS provider, as we explore in this blog post.
The typical outsourcing model
In a typical outsourcing model, an OEM hands over the manufacturing of its products to an EMS provider and in some cases product design too. The EMS provider, in turn, uses its own people, equipment, and processes to build the products and ship them to the customer. This involves a series of steps including buying materials, assembling printed circuit boards and higher-level units, testing finished products for quality, and packaging them for shipment.
This model is widely used and accounts for about 90% of the business in the EMS industry. But, it’s not the only way OEMs can outsource their manufacturing.
Alternative 1: Factory takeover by the EMS provider
One alternative is for the EMS provider to take over the OEMs existing factory, including its people, equipment and processes.
To give an example, an OEM in Eastern Europe decided to outsource its manufacturing as it was not a strategic part of its business. They chose to work with ESCATEC and we took over their operations, including the people, production equipment, test equipment, fixtures and all documentation. The previous production team came into work every day and production continued as usual, but under the management of a new company.
So, what are the advantages of this model for the OEM? And what risks do they need to consider?
- Continuity of production - The existing staff, who are already familiar with the product and processes, continue making the product, just under new management. This helps in retaining all the knowledge, documentation, and people, which are crucial for the product.
- Cost savings - The EMS provider takes over the lease of the building, the salaries of the employees, and potentially buys the equipment, which can provide an immediate boost of cash to the OEM.
- Preservation of jobs - The EMS provider retains the existing workforce of the factory, which can be beneficial for the local community.
- Reduced disruption - As existing people and documentation stays the same, it allows for a seamless transition with no risk to quality.
- Loss of control - The OEM has to be disciplined not to interfere with the manufacturing process after the handover. This can be challenging as the temptation to ‘drop in’ to the factory that they once owned might be high, especially if an issue arises.
- Limited value - The OEM may not get the best value initially compared to taking the traditional outsourcing route, as they continue to utilise their existing equipment and people. An EMS provider usually invests in the best equipment, more efficient processes, and has a team with a wide range of experiences and knowledge that the OEM can benefit from.
Alternative 2: Moving to an EMS provider’s factory
Another alternative is to move the OEMs people, processes, and equipment to one of the EMS provider's existing factories.
Here’s a real-life example. At ESCATEC, one OEM came to us looking to outsource its manufacturing so they could focus on their sales and service business. Manufacturing was a significant part of their business and they had many employees. By moving to one of our existing facilities, production could continue with the same people and equipment.
The pros of this alternative are much the same as if the EMS provider was to take over the OEMs factory:
- Continuity of production - The same people and documentation are still used to manufacture the product, just in a new location and under new management.
- Cost savings - There are immediate cost savings for the OEM as they no longer have a factory to lease and maintain. Equipment, tooling and inventory can all be sold to the EMS provider assuming the commercial agreements are made up front.
- Preservation of jobs - Again, there’s no need for redundancies as the workers are still employed.
In addition, loss of control poses less of an issue than if the EMS provider was to take over the OEMs site. As the factory is away from the OEMs other operations, it will be less tempting to ‘drop in’ and interfere with production.
- Potential for disruption - Moving people, processes and equipment over to a new site isn’t as easy as simply continuing production at the existing site.
- Disgruntled staff - There is the potential that some workers could be unhappy with the change of location and choose to leave. This will ultimately depend on how far the EMS provider's site is located from the OEMs existing site.
What’s in it for the EMS provider?
With both of these alternatives, the EMS provider takes on a lot of risks. First, they are taking over management of people they don’t know. Are they as skilled as they need them to be? Does the culture match theirs? They may also end up investing in equipment that isn’t as well maintained or as efficient as they would like.
It’s also important to keep in mind that if an EMS provider is taking over your site, they will eventually plan to grow it and bring in more of their own team. The first year it might just be you and your products. But over time, it will transform into a fully developed site operated by them, where they will also be manufacturing products for other OEMs - which could include your competitors.
While traditional outsourcing is widely used, there are alternatives that may be more suitable for certain OEMs.
The two alternatives discussed here involve either the EMS provider taking over the OEMs existing factory, or the OEMs people, processes, and equipment moving to one of the EMS provider's existing factories.
Both alternatives have their benefits, such as cost savings and continuity of supply and can provide the OEM with greater levels of flexibility. Of course there are considerations so it’s important for OEMs to carefully review these alternatives and choose the one that best fits their needs and strategic goals.