With greater global competition, rising consumer expectations and increasingly complex patterns of customer demand, companies today face many business challenges.
We also operate in a world punctuated by man-made and natural disasters, all of which can place huge pressure on our supply chain operations and which make an emphasis on efficiency, excellence and transparency more important than ever.
Governments, consumers and companies take a keen interest in the provenance of their goods and they demand assurances from suppliers that the products they produce are manufactured safely, ethically and in an environmentally sustainable manner.
Fortunately, the principles behind good supply chain management apply across all industries, and if properly followed, can be used to address these challenges.
If you are considering outsourcing your manufacturing to an Electronics Manufacturing Services (EMS) partner then you will want the reassurance of knowing that your supply chain will be managed effectively.
After all, your EMS provider will be responsible for every aspect of producing your goods, so it makes sense to understand what constitutes good supply chain practice in the first place.
The decision to outsource manufacturing to a contract manufacturer comprises two basic choices.
You can either transfer management of your existing supply base to your assembly partner or let them use their own suppliers.
Most EMS providers are happy to work both ways however many Original Equipment Manufacturers (OEMs) end up allowing their contract manufacturer to choose its own suppliers.
Why? Because, from a cost perspective, it often just doesn’t make sense for an OEM to maintain its own procurement team alongside its EMS partner’s operation.
And if your assembly partner has already proven its reliability, then it makes sense to entrust it with greater responsibility.
In any case, it’s relatively easy for an OEM to determine whether an EMS provider has a reliable supplier base.
Reputable EMS’s will have long-standing relationships in place with their suppliers. They will have selected suppliers that can demonstrate an intimate understanding of the market, are capable of producing a wide range of products and can cope with the inevitable peaks and troughs in demand.
And a word of warning. If the EMS provider you are considering to move forward with needs to establish a significant proportion of the supply chain in order to accommodate your business, ask yourself how far their reach is.
An established EMS should already have a global supply chain in place. Of course, they may need to set up a handful of new suppliers when they first take over a project but the majority of the material needed to assemble your product should be able to be managed through their existing supply partners.
Most contract manufacturers will have processes in place to check the capabilities of prospective suppliers.
While their methods may vary, the most common methods will range from potential suppliers completing commercial and quality questionnaires to a detailed validation of quality standards through a formal audit visit. Non-disclosure agreements (NDAs) will be exchanged early on to ensure confidentiality is maintained.
Best practice should show an understanding of the supplier base. Potential suppliers must illustrate that they understand the right combination of methods that are appropriate to the end product and to the components being bought.
The best EMS providers will maintain capability charts for their existing supply partners. These charts allow the assembly partner to quickly assess where any potential gaps in their supply chain offering exist and also enables them to make informed decisions on who to award new business to.
For example, an EMS provider is likely to work with a small number of printed circuit board suppliers with each offering something slightly different. One may be set up for low volume/quick turnaround prototype builds whereas another may be more appropriate for when the volumes increase.
The key is to make sure the assembly provider you work with has in place sufficient options when it comes to managing varying levels of volume and complexity.
Confidence in your EMS partner’s supplier management capabilities will be helped if there is evidence that they measure their suppliers’ performance on a regular basis.
Supply Chain Excellence
Once a product has been outsourced, you may well have very little hands on involvement, so it’s vital that your EMS partner has the right supply chain in place.
Whether they are supplying on a ‘just in time’ basis from stock, or with a longer lead time, will depend upon the supply chain model agreed by both parties.
Once a service level to the OEM has been set, the efficiency of the supply chain should be examined.
The effectiveness of this arrangement will be influenced by the speed and accuracy of demand and information signals flowing down the supply chain from the OEM to the EMS provider and then onto their suppliers.
It will also be impacted by the speed and efficiency with which materials flow up the supply chain back to the end customer.
Buyers also need accurate forecasting information to do their jobs effectively.
Most EMS providers use some form of Materials Requirement Planning (MRP) system to break down the customers’ orders and forecasts into a requirements schedule.
The accuracy of the forecast can be vital in helping a contract manufacturer meet customer demand. A reliable forecast will also help to ensure they can confidently build flexibility into the manufacturing build schedule.
Standard assignments involving long term forecasts are much easier to manage. For the process to work effectively, however, the OEM needs to be clear on its timelines - and this information may not always be forthcoming.
If a client wants a product produced at short notice and components with long lead times are involved, it is good practice for a contract manufacturer to have either finished or component stock that it can pull on.
The service level agreement between the OEM and their assembly partner will largely determine the finished goods stocking policy.
To calculate this policy, many contract electronics manufacturers use a supply chain ratio called the P:D ratio (Production Cycle: Demand Requirement).
The P:D ratio allows for comparison between the demand or market lead time expectation for a particular product and the production lead time (including component material lead times).
So, if the OEM requires a lead time from its EMS partner that is less than the production lead time, then stock with material underwriting within the supply chain will probably be required.
If the ratio is reversed, where the demand lead time is higher than the production lead time, then it is possible to supply without stocks being held in the supply chain.
Many OEMs will be wary of committing to stock upfront given the capital expenditure involved.
A knowledgeable outsourcing partner will understand the critical parts, in terms of long lead times, and will work with the customer to ensure component stock is available at the right time.
By investing in these components, the partner will be able to meet its targets and reduce the OEM’s stock liability at the same time.
The best contract manufacturers apply intelligent stock profiling systems or methods to make these calculations.
Customer forecasts, lead times and market intelligence data are typical of the information that is considered in the stock holding calculation. This figure can then be used to determine inventory and ordering policies.
The inventory policy covers the amount of stock that the EMS provider is prepared to hold on site on behalf of all of its clients, and in turn feeds directly into the ordering policy.
If your EMS partner is smart it will order high value parts frequently, and will schedule them to arrive just in time to fulfil firm orders, so that it can avoid holding too much inventory. It will also order low value parts – such as fasteners – on a much less frequent basis.
Low value parts typically only account for a small percentage of a provider’s inventory, so it makes sense to order them in bulk only two or three times a year to avoid additional transactional costs.
It’s also good practice to continuously monitor inventory and ordering policies to improve data knowledge and supply chain operations and to reduce liability. Some assembly providers will adopt sophisticated statistical approaches to improve their policies. Where requirements are not consistent, for example, standard deviation of demand can be useful in helping to spot trends.
Most EMS partners will have some form of contract in place to ensure that schedules and performance from suppliers are met.
At a minimum, a simple but effective supply contract would include agreement on pricing, lead times, batch quantities and any stock commitments.
Understanding how an EMS provider buys its components can be a useful exercise in assessing buying efficiency.
Some assembly partners will create new component part identities for each customer or product. However this can result in the same physical component being bought under different part numbers, which can make it difficult or impossible to tell whether the same part has been bought more than once.
The decision to segment customers’ parts can also be very inefficient, as parts may not be bought from the same supplier, there may be differences in price and there can often be varying quality levels.
A more effective method is a commodity type approach that considers, and then groups, all parts of a similar nature, regardless of the customer or the product.
A significant number of EMS providers now employ buyers with commodity specialist skills that focus on particular commodities. For example, they may have a single person purchasing sheet metal for all of their clients.
There are many advantages to this commodity-based approach, including:
Having an expert buyer on board can also make a difference to purchasing specialist parts.
For example, if an OEM requests a particular type of fastener then the specialist buyer is more likely to be able to quickly identify a number of potential suppliers and draw up a shortlist of candidates.
The buyer may also be aware of alternatives that offer better cost and improved performance, however this may not always possible if purchasing decisions are made on a project or customer basis with generalist buyers.
Every contract electronics manufacturer will have its own chosen mechanism for sharing information electronically with suppliers.
It is becoming increasingly common for EMS providers to utilise Electronic Procurement processes to request quotes, place orders and even manage invoices with suppliers.
A complete electronic interface, from the customer through the assembly partner to the initial supplier, means the information flow can be quick and accurate.
EProcurement tools offer many advantages – they cut out unnecessary administration, they reduce errors and they speed up processing.
It’s now possible for an EMS provider to receive a forecast from a customer; raise a purchase order with a supplier; send the purchase order; and receive confirmation of the order in 24 hours using E-RFQ.
In the past, these processes would have required a considerable amount of administration and would have taken several days to complete – eating into the originally quoted lead time.
Supply Chain Risk
Unanticipated events such as military incidents and natural disasters can cause chaos for a supply chain.
Sharp rises in the price of essential commodities like oil and copper can also have an adverse effect on the price of components.
Even anticipated events such as Chinese New Year, Thanksgiving Day and Christmas can cause disruption to production schedules if contingency plans are not put in place at an early date.
It’s advisable for your EMS partner’s procurement team to have access to market intelligence to mitigate the effects of these events.
They should also be monitoring the robustness of the supplier base in terms of financial stability, changes of ownership and business strategies that might create uncertainty.
Reputable outsourcing partners will do everything in their power to keep customers abreast of the latest industry regulation. As well as regular changes to existing legislation, new rules and regulations are often not far away.
Production of electronic equipment in Europe is governed by two key European Union (EU) directives – the Restriction of Hazardous Substance Directive (RoHS) and Registration, Evaluation, Authorisation and Restriction of Chemicals (REACH) which is intended to protect people from the misuse of chemical substances.
RoHS is aimed at preventing the use of hazardous materials in the manufacture of various types of electrical equipment.
Along with many other companies, contract electronics manufacturers are required to abide by the Waste Electrical and Electronics Directive (WEEE Directive) which sets collection, recycling and recovery targets for electrical goods.
Your assembly partner should be cognisant of current and proposed legislation, for example, the latest conflict minerals legislation.
Since 2010, American companies have been required to audit their supply chains to ensure that they are not using conflict minerals – particularly coltan, gold, tin and tungsten – from the eastern provinces of the Democratic Republic of Congo (DRC) and surrounding areas.
The Organisation for Economic Co-operation and Development (OECD) has published guidance on the subject and the EU is currently drafting legislation that will cover the use of tin, tantalum, tungsten and gold from conflict zones.
These regulations are subject to constant change and revision. For example, every few months new chemicals are added to the list of prohibited substances covered by REACH.
A responsible EMS provider will keep track of regulations on an ongoing basis and will have processes in place to take action when needed.
It will scrutinise an OEM’s bill of materials before production to ensure that all of the parts are compliant with the latest regulations and will provide guidance if any items need to be modified or replaced.
If a regulatory change is about to be enacted, an EMS provider will also take appropriate measures to ensure that production continues unimpeded and the customer is kept well informed.
There is increasing pressure on companies to comply with ethical trading initiatives and to show a proactive approach to improving their impact on the environment.
It‘s crucial that your EMS partner has policies that mirror your needs and that they are able to demonstrate an awareness and commitment that will not undermine your own strategy.
Alongside monitoring industry regulations, you should also expect your assembly partner’s procurement team to keep you informed and updated on significant changes to relevant currency and commodity prices.
When it comes to the production of electrical or electronic equipment, assembly partners should pay particular attention to the price of copper, nickel, steel and tantalum and should always push their suppliers to reduce prices if a commodity comes down in price.
Conversely, if the price of the commodity increases, an EMS partner should take the appropriate steps to insulate its customers from the worst effects.
Manufacturers of components have an obligation to inform their customers of any parts they plan to withdraw from circulation.
Equally too, the onus is on the EMS provider need to actively monitor the market for parts which may become obsolete, to communicate this information to the OEM and to recommend suitable alternatives.
If an assembly partner is doing its job correctly then it will also take precautions to ensure that production continues unimpeded. It may encourage its customers to speed up the last time buy so that orders arrive in the factory way in advance of the part becoming obsolete.
Whatever action your EMS provider decides to take, it will have one objective in mind – to cause minimum disruption to the OEM.
As part of its partnership with the OEM, it should also be looking out for opportunities to make cost reductions.
It might notice that a part is available at a lower price from another supplier and suggest that a switch in supply is made.
Or it may come up with an agreed package of cost cutting measures with the OEM and look for ways in which those targets can be realised.
Reputable assembly partners will also keep a close watch on the financial health of their suppliers, watching out for any change of ownership or general changes in the business conditions of their suppliers which may impact on the supply chain.
New parts sourced from existing suppliers - and existing parts sourced from new suppliers - should be subject to two key verification processes to ensure that the part is produced to the correct requirements and that the supplier has the right capabilities to make the part.
Before a part is put into production, it should go through one final phase – inspection and verification.
Every reputable assembly partner will carry out some form of first article inspection when it receives a part from a supplier for the first time, to check the specifications of the part and ensure it meets the customer’s requirements.
It’s also good practice to carry out a second, more thorough, inspection once the assembly partner has received a batch of goods.
If certain parts of the batch appear suspect, they may wish to increase the level of inspection. For electronic components, spurious parts can enter the supply chain, most commonly through the grey market.
Sub-standard parts may look exactly like the genuine article. They may even pass a range of simple tests. However a smart EMS provider will not be satisfied until it has verified the authenticity of the part and pushed it to its highest tolerances using a variety of high magnification microscopes, electrical testing and state of the art X-ray machines.
No OEM wants to introduce products into the market with faulty parts. And the cost of replacing these items can be prohibitively high.
By working with an assembly partner that has advanced counterfeit avoidance techniques, the OEM can neutralise this risk before it becomes an issue.
There is one other threat that all contract electronics manufacturers need to take seriously - cybersecurity.
Hackers and cybercriminals are increasingly taking advantage of security loopholes to try and create financial gain from unsuspecting companies.
Every assembly provider would be wise to check their supplier correspondence on a regular basis and to be wary of any unusual activity or any changes that appear even slightly suspicious.
Good supply chain management in the electronics manufacturing industry isn’t a grand mystery. The best EMS providers all have the same things in common:
Choosing an assembly partner that can demonstrate all of these qualities will be a vital first step in ensuring the quality and consistency of your manufacturing supply chain.