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Do you risk or gain when outsourcing production?

5 November 2021

Electronics production is becoming more and more complex, requiring more and more investment and constant competence development, besides being subject to an increasing number of legal regulations. As a result, the trend of electronics assembly outsourcing to specialized third parties is growing.   

Electronics manufacturing services (EMS) providers offer viable solutions to cost, performance, and quality issues for almost any manufacturing project. Historically, electronics contract manufacturing meant simply assembly of PCBA. Today, the EMS service portfolio can be extended to include design support, final assembly (box build), and even delivery of finished devices in individual packages directly to distributors or retailers. 

Companies that have decided to contract their electronics assembly to an external partner benefit in areas that are universal for outsourcing, such as:

  • concentration solely on core competencies and creating value for clients;
  • no need to invest capital in machinery and inventory;
  • no fixed personnel costs for securing production capacities;

Probably the most important benefit of outsourcing production in today’s rapidly changing and uncertain times is that it provides maximum flexibility.

  1. Is outsourcing always advisable?

Outsourcing undoubtedly carries certain risks. Each time, it is necessary to analyze the business situation, the perspective for further development of projects, to define key advantages, and even to rethink the marketing strategy.

Not until then can you assess whether outsourcing production can be effective, whether the benefits will compensate for the effort required to transfer the delivery programme.

However, there are business situations where cooperation with a well-chosen EMS partner becomes the key to success. Wherever the business involves a high degree of risk, in markets with rapidly changing and unstable product life cycles, such as innovations seeking their place in the market, and where, at the same time, access to state-of-the-art technology, quality assurance, and repeatability are essential for success, the use of an EMS partner’s resources is highly advisable.

Very often, large-scale production allows you to benefit from working with an EMS partner. Their specialization, high utilization of production assets, and economies of scale make it possible, through wise cooperation, to achieve lower unit costs and, in particular, to eliminate many fixed costs and reduce the working capital demand.

2. How wide can the scope of cooperation be?

Undoubtedly, outsourcing of the entire work is a multi-stage, complex process, burdened with a bit more effort at the beginning. On the other hand, once the process is outsourced, the organization gets rid of the hassle of purchasing materials, delivery coordination, and maintaining production resources. 

A careful evaluation of the entire production project will allow an assessment to be made in which areas there are the greatest benefits from outsourcing.

Depending on the adopted scenario of cooperation, semi-finished products may be delivered by the EMS partner, with final assembly taking place at the brand owner’s premises, but more and more often finished appliances manufacturing is outsourced. The final product, assembled by the EMS partner, is then delivered to the contracting party’s warehouse or directly to the market.

Cooperation with the EMS partner can also extend to a device design and the building of prototypes.

The greater the share of outsourcing, the more important it is to select an EMS partner with the right experience, competence, processes, resources, and contacts to relevant material suppliers.

3. What risks are there in outsourcing electronics manufacturing?

The risks associated with outsourcing production are typically the same as those that affect operations of this type carried out in-house:

  • cost overruns; 
  • quality problems; 
  • limited availability of materials. 

At a time when the market is steered by COVID and worldwide constraints on semiconductors and other material availability, flexibility, and experience, as well as close cooperation between partners, are extremely important.

Fortunately, having the right competence, experience, resources allows you to assess exactly where the risks are and how to manage them.

4. Whole product lifecycle supported by an EMS provider?

The introduction of a new product into production should take place together with the production partner almost from the very beginning. Already at the initial stage, an experienced EMS provider will identify critical areas that need to be considered in order to reduce manufacturing costs, select optimal components or suppliers, and streamline processes.

Planning quality control and testing methods even before the design is finalized allows for efficient use of assembly and testing tools.

During the product life cycle, there are often engineering changes, which are introduced by the project owners’ initiative. These modifications are due to functional improvements or changes in market expectations towards the manufactured devices. The quality, efficiency, and effectiveness of handling such changes is a demonstration of the contract manufacturer’s expertise. Product change management is one of the most complex areas, which involves every nook and cranny of the cooperation. The change process must be handled quickly, flawlessly, and comprehensively.

In the phase of product phase-out and replacement with a new one, a reliable EMS provider will take care of minimizing leftover production materials and thus reducing exit costs. At the same time, the production partner will ensure, in consultation with the OEM, adequate access to spare parts in later periods.

5. Materials and logistics – fringe competence or essential?

Turnkey production relies on well-organized procurement of materials, ensuring continuity of supply. Materials often account for 70-80% of the cost of manufacturing a product. The EMS partner must have the right experience, tools, and organization to manage its supply chain. Since electronic products consist of several hundred to even several thousand different material items, managing this aspect becomes crucial from the point of view of costs, risks, and delivery lead times. Variable requirements at different stages of the product life cycle, fluctuating demand, and concurrent variable availability of components on the global market require well-thought-out contracts with material suppliers. Undoubtedly, however, there is a need to realize that good, wise cooperation between OEM and partner and EMS is essential for optimizing material management parameters. 

6. What allows both parties to simultaneously achieve outstanding profits, high quality, and product consistency?

Outsourcing of non-core tasks embodies the spirit of Lean Manufacturing. While the OEM concentrates on bringing products to market and fine-tuning the marketing strategy, the EMS partner specializing in device manufacturing focuses on improving core manufacturing and purchasing processes, and the resulting benefits are directly transferred to both sides of the collaboration.

Lean Manufacturing is one example of tools that maximize productivity while reducing production costs. Effective implementation of quality tools such as 5xWhy, Poka-Yoke, Ishikawa diagram, FMEA, 8D, as well as certification for quality or environmental systems allow maintaining stable, high quality, and optimal cost of provided services and products.

Although a large part of the production process is automated, decisions on the flow of the process, its parameters, applied tools, and continuous improvement require experienced and educated professionals. In addition to implementing and maintaining certified quality or environmental systems, the EMS partner’s employees should be trained in the standards that define the quality of electronics production: IPC-A610, among others. Other standards are also in use, which are the basis for implementing tasks in production processes according to industry best practices. However, regardless of the standards, the more competent, trained and team-oriented the staff of the EMS partner is, the more likely it is that the OEM as a customer will gain unique added value and will not risk its reputation when outsourcing production.

Author of the post:

Sławomir Pieszczek
CEO of JM elektronik sp. z o.o.

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