Challenging times in the EMS world

23 March 2009

Susan Mucha

Electronics manufacturing services (EMS) providers often pat themselves on the back for not being at the bottom of the food chain in the electronics industry. But in a recession, the bottom can look far better than the EMS providers’ role in the middle of the food chain which carries more risk.

One of the downsides of a successful outsourcing strategy is that OEM teams don’t have to micromanage their suppliers, and as a result, their knowledge base can atrophy. In fact, part of the EMS value proposition is that customers can free up management time previously used to support production or sourcing activities because the EMS provider manages all the details. In a good economy this process works well. In a bad economy, everyone becomes reactive and well-organised systems can break down. In that spirit, I thought it might be valuable to focus a column on some key areas of risk mitigation.

The first area of risk management relates to customer-driven concessions. Often customers will attempt to change previously agreed upon terms when demand softens, sometimes by just acting according to their preferred terms. The correct response is to read your contract and either choose to make concessions or enforce terms until a formal renegotiation has been completed. Suppliers that do this tend to make fewer concessions than those who accept changes in terms as inevitable. This is particularly true in the payables realm. It is worth noting that if you haven’t negotiated a contract, it is very difficult to counter customer-driven concessions of this nature.

It is also important to carefully monitor cost drivers related to changes in project scope. Document any project changes in writing, particularly when inventory liability is involved. Ask the question, "if my customer contact lost his job tomorrow, would I have a paper trail authorising what I am about to do for him today." In a recession, every job is vulnerable.

Assess your customer base and develop account plans for key customers. Existing business can be grown faster than new business. Additionally, a formal account planning process helps identify areas of risk and vulnerability. Read Find It. Book It. Grow It. for a blueprint.

Map your contacts in customers and if you have less than two, start developing a larger network of relationships. You don't want to lose an account simply because your key contact leaves unexpectedly and you have no other strong relationships at that company.

Look for new opportunities to serve existing customers through ‘packaging services’ or supporting areas where they are having difficulty due to internal staff reductions or changing service needs. The upside of a recession is that challenges at your customer can give you the opportunity to become the indispensable supplier.

Understand your customer's hidden costs and how your services reduce them. That way when your customers are asking for pricing concessions, you can discuss cost drivers and mutually agreeable ways to improve efficiency and reduce cost without impacting margins. The more you understand your costs, the easier that negotiation becomes.

Recognise that times like these really do give you a chance to stand out as a leader and an invaluable member of your team. If that isn't motivating enough, remember that people in the EMS industry have really long memories. Careers are often launched or destroyed in recessions.

While the magnitude of this recession is significant, it isn’t the first to hit the electronics industry. If past downturns are any indicator, companies who are proactive in recognising likely risks and challenges will survive and ultimately thrive.

For more on this topic, register for PMCI’s tutorial titled Find It. Book It. Grow It. A Robust Process for EMS Account Acquisition, which is part of the IPC EMS Program Management Training and Certification program at the APEX Conference in Las Vegas. The tutorial is scheduled for 2 April from 08:00 - Midday. More information is available here.

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