Optimising Contract Manufacturing Strategies for NPI Demands
Author : Nick Russel, VP of Growth & Strategy, OSI Electronics
20 November 2023
Outsourced manufacturing is a well-established strategy in fast-paced industries like electronics. Many of today’s global brands - such as Apple, Sony and Dell - now outsource a significant part of their operations. This reduces the need for ongoing capital expenditure in production infrastructure, enabling businesses to retain cash to reinvest in growth through new product introduction (NPI) activity. The following article discusses its many nuances.
To support increasing popularity of the outsourcing strategy, the global contract electronics manufacturing (CEM) industry has grown significantly over the past few decades. It is now common practice for start-ups, not only based in the original Silicon Valley in California, but also the UK’s Silicon Fen (Cambridge), Silicon Spires (Oxford), Silicon Glen (Central Scotland) and Silicon Gorge (Bristol) to forego any significant investment in manufacturing capability and transition straight to an outsourced approach.
While high-volume electronics manufacturing has long since moved to low-cost regions, the UK electronics manufacturing services (EMS) industry is still in a robust position. Consequently, it is well placed to support the UK’s burgeoning start-up sector.
Important aspects of OEM/CEM relationship
For these partnerships to succeed, there are some key ingredients required. Among these will be:
• Good communication - Effective interaction between the original equipment manufacturer (OEM) and the electronics manufacturing partner is crucial for project success. A strong relationship built on transparency and mutual understanding can have a significant positive impact upon product quality, turnaround times and cost efficiency. Regular updates, clear technical documentation and open discussion channels are essential for a productive outsourcing partnership. Speaking the same language, literally and figuratively, is always an advantage.
• Engineering expertise - One of the consequences of outsourcing manufacturing is that many of the design for manufacture (DFM) and other DFx skills reside more with the CEMs than with the OEMs. Experienced engineers can contribute valuable insights, suggest design improvements and help clients navigate complex technical challenges. They can identify cost-saving opportunities during the design and manufacturing phases, as well as proposing alternative components, manufacturing methods, or design changes that maintain or improve product quality while reducing unit costs. The earlier an OEM engages with a CEM during the design process, the more opportunities for these improvements to be fed back into the design.
• Quick turnaround - In a world where innovation moves at lightning speed, a rapid NPI turnaround is a paramount. While there are a number of small, specialist CEMs in the UK offering this service, many of the more established players provide a quick turnaround capability as a parallel process to their medium-volume capabilities. Again, the key to success is early engagement. The more notice of an impending NPI the better - as this allows the CEM to provide feedback on component and PCB lead-times and identify or create spaces in production schedules.
• Quality - Quality should not really need mentioning in 2023, given the plethora of quality processes and certifications CEMs have adapted. However, as seasoned OEM supply chain professionals will know, not all ISO9001 (or other) certifications are equal. It is always worthwhile performing your own quality audit on a prospective CEM and if you don’t have the capability to do this in house, finding an experienced consultant who can audit potential suppliers for you is advisable.
Of course, the UK electronics industry is not all about start-ups, CEMs such as OSI Electronics are more than capable of delivering cost effective medium-volume manufacturing solutions to OEMs in addition to low-volume NPI projects. In fact, in recent years the demarcation between medium and high-volume has been gradually evolving - as (after decades of decline) UK industry has started to show signs of improved competitiveness in respect to low-cost regions.
Wage hikes and automation helping close the cost gap
Since the initial wave of offshoring in the 1990s, predominantly to Asia as well as Eastern Europe, the labour cost differential has started to narrow. For example, since 2013 the annual manufacturing wage growth in China has been around 9% per year. This is a national average, with wage growth in industrialised, coastal regions (such as Shenzhen) actually being markedly higher. Similarly, within Eastern Europe, countries once considered as having low manufacturing labour costs (like Poland and Hungary) have seen significant salary increases over the past 2 decades, with global CEMs looking further east to Romania for their latest acquisitions and investments. However, it is only a matter of time before labour costs within such EU countries start to creep up too.
The past 20 years have seen significant advances in automation to support the electronics industry, driving out labour costs from the assembly process. For example, OSI Electronics recently invested in an advanced automated selective soldering machine for its UK facility. This provides precise, consistent and high-speed soldering, minimising the chances of human error. Investments like this can significantly reduce labour expense within an assembly process.
De-risking supply chains
While the 2 factors just detailed are starting to contact the gap between the UK and Asia, OEMs are also becoming more mindful of the length of their supply chains, following COVID induced disruptions and the resulting semiconductor shortages. Some UK OEMs are de-risking their supply channels by bringing a portion of their manufacturing back here, where costs allow. This movement is further reinforced by the perceived geopolitical worries relating to China. While UK businesses are not suffering the same financial penalties as US companies having to pay the ‘Trump tariffs’, there are concerns related to increasing tensions with Taiwan, plus ongoing suspicions around IP leakage and counterfeit components. For many OEMs, moving manufacturing from China to the UK is not yet an option, however there are alternative elsewhere in Asia (such as Malaysia and Indonesia) which have lower political risks.
OSI Electronics’ strategy is to offer its UK/European customers complete flexibility when it comes to making the important but sometimes difficult choices of manufacturing locations and companies to partner with. OSI’s facility in Cambridgeshire is able to service high-tech start-ups from initial NPI activity through to medium-volume production in the UK and ultimately high-volume production in its factories in South East Asia if required. With facilities in Malaysia, Indonesia and India, OSI Electronics is also able to provide UK customers with options to move manufacturing out of China without significantly impacting cost, while providing account management and other support services from the UK.
Flexibility is the final key ingredient to success in the electronics manufacturing industry. Every OEM has slightly different requirements and constraints and needs a manufacturing partner who can adapt to individual requirements, through having a broad enough set of capabilities and a diverse geographic footprint. As we know only too well from the last few years, flexible organisations are also those most able to navigate the challenges thrown up by the external environment.
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