If you’ve decided manufacturing is no longer part of your core business and you’re actively considering outsourcing, how will you manage the disposal of your factory? Traditionally you’d likely close it down and move your indirect staff into a smaller building. But could an EMS provider simply ‘take it over’?
It’s no secret that OEMs (Original Equipment Manufacturers) in the UK and other Western countries are finding maintaining factory operations a challenge. The long term trend has been a steady trajectory of deindustrialisation as UK manufacturing output dropped by 50%, between 1990 and 2020.
Factories in the UK have struggled to remain profitable for many years now. Growth has been in the contract manufacturing sector instead, with savvy businesses opting to divest considerable staffing and operational costs by closing down their facilities and outsourcing production.
It’s understandable. Material and energy costs have risen inexorably. Global competitors are forcing prices downwards. Margins continue to erode. It’s been hard for some companies to invest in the Industry 4.0 and 5.0 innovations that are automating and digitising the factories of international contract manufacturers. The bulk buying power and sophisticated supply chain management available to established EMS businesses are increasingly harder for OEMs to replicate from scratch.
The lure of outsourcing and the fear of the unknown
For these reasons, the lure of outsourcing is strong.
However, the human impact and the potential hit to competitive advantage through the loss of knowledgeable workers may be too hard for some companies to bear.
Fierce loyalty to local production teams and the fear of disruption if production moves overseas may be staying the hand of companies conscious of local responsibilities, carbon footprint and supply chain disruption.
So, is there a different model you can look to?
A new manufacturing model
In the wake of global supply chain shocks, forward-thinking EMS companies are increasingly looking to regionalisation and distributed manufacturing strategies to control risk and supply their customers more efficiently. In some cases, they need factories in particular parts of the world that meet regulatory requirements for sterile manufacturing or have specific equipment and skilled labour already in place. They may need local factories close to other suppliers as well as ports or airports. They may be looking for a regional centre with the right digital connectivity to enable data transfer to power additive manufacturing solutions for part replacement.
Could factory takeovers be the answer?
EMS providers looking to acquire functioning factories in local territory may be perfect partners for OEMs now looking to outsource their manufacturing. These OEMs may want to divest themselves of their operational and financial responsibilities but still retain their local manufacturing hub, plus as many skilled workers as possible.
The benefits of factory takeovers for OEMs
In these cases, a factory takeover by an EMS provider may be a win-win scenario for all involved:
- Day-to-day management of the facility could be taken over by experts within the EMS company, as could the employment of direct labour currently making the product.
- The OEM might retain some of the costs associated with the building and indirect labour, but would begin to see the typical efficiencies in production that outsourcing manufacturing can bring. These could include reductions in raw material costs and an improvement in cash flow.
- Various agreements might secure further investment in the facilities and machinery; the factory may also expand and could be used by the EMS provider for other clients too. As a result, the OEM might start to see benefits of accessing new global supply chains and end markets.
- Overall, they would leverage economies of scale to which they would never previously have had access in perhaps a more controlled environment when compared to a complete closure.
Factory takeovers help EMS deliver on localisation strategies
Dramatic shifts in global trade winds and supply chains have thrown traditional manufacturing certainties up in the air. Many OEMs struggling with costs may want to outsource their production, freeing up resources to focus on redesigning products for new and more profitable markets. But they may be fearful of offshoring and the ethical dilemma.
Meanwhile, contract manufacturers are shifting their attention to localisation to prevent future supply chain disasters. And they need access to local factories and workforces to make this happen.
In a world where global JIT supply chains can be destroyed by a single ship blocking the Suez canal, this shift away from certain global dependencies is understandable.
The talk now is of micro-factories, regionalisation and servitisation, with globalised companies breaking manufacturing down into smaller blocks belonging to more localised economies. EMS companies are embracing a world of international collaboration; de-risking fragile supply chains by creating more local supply and production ecosystems.
But to deliver on these new priorities, EMS providers must rapidly acquire more local manufacturing ‘real estate’ and resources. And OEMs now looking to divest themselves of their existing factories may just be the perfect match.