Assessing the total cost of outsourcing

24 June 2015

IoT, driver assistance systems, medical devices and the need for greater bandwidth and speed in communication technology are just some of the areas where innovative new products are constantly emerging.

Behind the innovation, OEMs must develop commercial business plans and decide whether to outsource manufacturing or produce the products internally.  

Making the decision to outsource can still be a very complex one for OEMs. There are a number of important factors to consider. While reducing costs and increasing margins is a driving force for every business, the total cost of manufacturing, supply chain, product distribution and field service extend far beyond the cost of labour. 

Consider the full product life cycle 

Many complex and mission critical products in industries remain in service for many years; longer product lifecycles require extended engineering support, availability of spares and maintenance. They also pose challenges for retention and management of product technical knowledge. These products need support throughout their life cycle from design, new product introduction, manufacturing, delivery, repair and end-of life.  

Component engineering is one example. Some electronic components have short lifecycles. Choosing an EMS partner with experience in developing solutions to the problem of electronic component obsolescence is of immense value to OEMs. They can pro-actively propose alternate components or design solutions so that the production and service can still be supported for many years. Outsourcing partners with comprehensive design and sustaining engineering services allow an OEM to leverage those capabilities and convert an internal fixed cost to a variable cost.  OEMs can leverage the partner to provide these services as needed rather than maintaining the overhead to support these capabilities themselves. 

Select a partner with experience 

Don’t assume everyone has the same level of supply chain expertise with different products. Ask to see products made by your EMS partner which have a similar supply chain as the device you want to produce. Having an established supply chain in a given segment allows the company to react more quickly to design or forecast changes. It also allows them to fully understand the technical aspects of the components. Some of the components in the more complex products require additional engineering and technical expertise. Access to this expertise helps to ensure the reliability of the supply chain and the development of alternate sources or supply chain localisation.

Another critical consideration is manufacturing and DFM expertise. Choosing a partner who has experience with products similar to your own can help improve the reliability and robustness of the design, as well as efficiency in manufacturing and test. 

Simplify the supply chain 

The Electronics Manufacturing Services business has evolved and some providers have moved away from a simple assembly model to offer fully integrated services.  They provide design and fabrication capability for key components and support full supply chain management of third party suppliers, product assembly, test and direct order fulfilment to end customers. Some OEMs now include an assessment of technology and component expertise in their selection process. In addition to streamlining the supply chain management and optimising cost, OEMs can access the advanced component technology capability that such partners can provide.

Consider a product that has a bill of materials of 1,000 components purchased from 600 suppliers. An OEM would need a team of buyers to interface with all the suppliers involved. These buyers in turn are supported by technical engineers and quality professionals with an additional management infrastructure. If the product fails, the OEM would have to debug the product, isolate the issues and work with suppliers to resolve the faults. When one company is chosen to provide the Integrated Manufacturing Services, the OEM only has one entity to manage and it is the responsibility of that partner to deliver the manufactured product. This reduces costs and simplifies supply chain management.

Flexibility for the future

Business requirements change over time, new products are released and new markets emerge. Choosing a manufacturing partner with a global footprint, single IT system and process infrastructure world-wide results in a more agile supply chain and the ability to quickly distribute the product in emerging markets. This may be critical for new markets, if products are developed specifically for certain geographies or to take advantage of lower cost locations, local duties or taxes. It is also a business continuity measure to protect against natural disasters and supply chain disruption when the product has reached significant volume. 

Moving the manufacture of a product and its supply chain or duplicating it in another part of the world can be challenging. The integration of comprehensive manufacturing IT systems for MRP, shop-floor control, quality management and traceability is essential. If the same IT systems are used in multiple sites it reduces time for transfer and will eliminate an aspect of risk from the project, streamlining that part of the transfer. Leveraging the same processes across the globe provides consistency and predictability of approach.  

Assessing outsourcing 

Outsourcing is a key strategy for OEMs. The overall commercial performance of a product throughout its lifecycle should be considered in the decision making process. Relevant experience with your product type, market area and supply chain is essential. A supplier who provides end to end services through the product life cycle with capability to offer fully integrated design and manufacturing services will maximise the potential for cost reduction and streamline the supply chain.  

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