Analyzing Total Cost Stays in Vogue

14 January 2008

Susan Mucha

The electronics manufacturing services (EMS) market is very cyclical. When demand drops and recession ensues there is a stampede to the lowest cost markets. But as demand increases or becomes less predictable, original equipment manufacturers (OEMs) analyze their EMS spend and rationalize their supply base either geographically or in terms of EMS business model. Many who do this exercise find one size doesn’t fit all.

To better illustrate this point, I’ve talked with three EMS providers: Fawn Electronics Company, MEC, The Milwaukee Electronics Companies, and Kimball Electronics Group. The reason I chose this particular cluster was because each represents a different business scale and includes some U.S. manufacturing. Fawn Electronics (www.fawnems.com) has one wholly-owned EMS facility in Nashville, NC and strategic relationships in China. MEC (www.meccompanies.com) operates full service EMS facilities in Milwaukee, Wisconsin; Canby, Oregon; and Tecate, Mexico, and has a sister division, Screaming Circuits, which provides rapid prototyping. Kimball Electronics Group (www.kegroup.com) has facilities in North America, Asia and Europe. In all cases, these companies see demand for low cost manufacturing options. However, in all cases, they are also seeing that customers choose to stay in the U.S. I asked each of the interviewees what factors tended to drive customer preferences in manufacturing location and here are their responses.

“The key issues that we see keeping products onshore are production volumes below what is considered attractive in low cost markets, stage of product maturity and schedule volatility. We’ve had situations where customers started moving product offshore and brought it back. Typically, the reason for the return is failure to calculate the costs associated with taking a project with high service needs offshore. The cost of transition and team travel to support a new product can be surprise factors for companies. In other cases, promised schedule flexibility or support in issues such as engineering change order (ECO) implementation doesn’t materialize. With lower volume products, failure to meet customer demand can cost more than any savings in unit cost,” said Art Rutledge, president, Fawn Electronics Company.

“Time and time again we find that some of the OEMs we want to partner with in the low-to-medium volume/medium to higher mix segment have at one point or another convinced themselves that they had to go to China for lowest cost acquisition. They make that move only to find that they really were not a good candidate for that supply chain model. Key reasons that can drive this mismatch include logistics complexity, communication issues, higher than anticipated total landed costs, lack of experienced program managers at the offshore EMS provider or cost of a long inventory pipeline,” said Hani Malek, MEC’s general manager and national sales and marketing manager.

“We have seen the trend reverse back to the US over the past couple of years when OEMs realize it is not working as they had hoped, and frankly the EMS providers overseas are feeling the pain as well when promised volumes and product stability are not realized. That is why companies like ours are not concerned that our market segment is drying up. OEMs see measurable value in high service and schedule flexibility in these types of complex projects," added Malek.

“Since Kimball Electronics has facilities in Asia, Europe and North America, we definitely have seen customers applying different decision criteria to different types of projects. While customers are always interested in reducing unit price, we also see strong focus on analyzing total cost. In the medical segment, we see customers choosing to keep product in our U.S. facilities either because of volume variances or product maturity stage. Some have an IP protection strategy that only allows for Asia build of older generation products. In Europe, we see some customers in the U.K. that prefer local facilities in close proximity to their operations, but we also have customers who see Eastern Europe as a good option to lower cost without loss of quality or logistics efficiency,” said Paul Plante, vp, Medical Industry Solutions, Kimball Electronics Group.

“The most interesting dynamic is that customers want choice. For industries with significant regulation, long product development cycles, complex support requirements and varying demand over the life of the product there isn’t a one size fits all solution. Experienced buyers of contract manufacturing want a menu of options that fit variations in their projects and they recognize that lack of flexibility can carry a high hidden cost. EMS providers that actually address that need retain customers and grow. Even buyers who five years ago were sending everything to Asia are realizing that isn’t the best solution for their total spend,“ Plante added.

While the company business models and scale are different, the theme is the same. A lot of factors go into determining the actual cost of a project. To me, the surprising element isn’t that companies who put bad fit projects into low cost regions eventually return to either the previous supplier or higher cost region. Instead, it’s that they continue to have cycles of migration and return every few years. To be fair there are clusters of good suppliers in low cost regions that handle complex projects well, but there are far more whose business models run counter to these types of projects. The key element in successful EMS provider selection really is fit between business models. One size will never fit all and, in most cases, a bad fit will be obvious when a thorough pre-selection audit is performed.


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