7 Things You Must Know Before Selecting an EMS Partner

By Ed Evangelista, Co-Owner of Federal Electronics

Introduction

Selecting an electronics manufacturing services partner (EMS partner) is a decision fraught with risk. Each year, original equipment manufacturers (OEMs) spend billions of dollars outsourcing electronics production and a large part of these expenditures is wasted. Why? Because selecting the wrong EMS partner can lead to significant problems in terms of cost, product quality, and customer retention.

Consider the risks of making the wrong choice:

Jeopardizing your production pipeline. This is the most obvious risk. Ineffective material management and capacity planning, poor quality yields, insufficient administrative or engineering bandwidth, or simply a misalignment between your business models can individually or collectively dismantle your production pipeline.

Cost overruns. Accuracy from both the OEM and the potential EMS partner during the quotation phase is critical if cost overruns and price creep are to be avoided. It all starts with the quality and thoroughness of the quotation package, which must adequately identify your expectations and requirements. A robust evaluation process ensures proper alignment with a qualified contract manufacturer. Failure at this early stage erodes margins quickly, especially if a mid-stream change in vendors is required.

Field quality problems. The only thing worse than poor quality yields at your EMS partner’s end of line is the latent quality problems that won’t appear until long after your product ships and is in use.

Intellectual property loss. Your intellectual property may be shared with other people who don’t have the right to know.

Supplier turnover and churn. Misalignment between a supplier’s and customer’s business models (ECO activity, schedule flexibility, mix/volume/complexity, etc.) will result in dissatisfaction and terminated relationships – introducing the additional expense and risks associated with successive transitions to new vendors.

But perhaps the greatest risk of poor EMS partner selection is the risk of losing your customers. As automobile manufacturers have learned when they announce product recalls, customer loyalty erodes each time a cost, quality, or delivery problem is experienced. So spending the extra time to conduct a thorough supplier evaluation will pay huge dividends for your business.

As you build a list of potential EMS partners, there are three qualifying criteria that potential candidates must demonstrate to warrant further consideration:

A record of on-time delivery performance.
A history of product quality that meets specifications and your appropriate certifications (UL, CSA, FDA, ISO, Mil, etc.)
A feedback system that measures delivery and quality performance, identifies gaps between actual and target performance, and mitigates the gap through formal corrective actions.

Identify and communicate your performance expectations on these criteria. If the vendor is not tracking to these expectations, or won’t show you metrics and charts to back it up, then eliminate them from consideration. Dealing with suppliers who don’t measure quality and delivery, and can’t demonstrate that they already operate within your standards, represents too much of a risk, no matter how low the price.

After compiling a list of suppliers that meet these minimum requirements, the evaluation process becomes more complex. Virtually all reputable EMS vendors will tell you they can do your job at an attractive price. So how do you select the one best suited to meet your needs?

I’ve labored in the EMS vineyards for over 20 years and witnessed the best and worst of contract manufacturing. Throughout that experience, I’ve observed there are seven key principles that help result in a successful outsourcing project. We’ve codified these principles and call them the 7 Things You Must Know Before Selecting an EMS Partner. Use these rules to help create successful supplier relationships.

1. Know your outsourcing strategy.

It’s virtually impossible to evaluate potential EMS partners if you haven’t first identified an outsourcing strategy. What is the starting point? What is your migration plan?

OEMs who are new to outsourcing often begin by selecting low-level commodity-based services, such as PCBAs and cable assemblies. In this scenario, it is quite common for the customer to consign some or all of the raw material, allowing greater control over the material planning and acquisition process and minimizing the risk associated with a vendor-managed pipeline. Frequently, consignment is a short-term strategy to deplete the OEM’s raw material inventory, evolving into a partial or full turnkey model where the supplier controls the acquisition of material. If consignment is a long-term strategy, then depending upon product technology and complexity, the OEM might be well served by utilizing a smaller, local contract manufacturer’s (CM). The CM will give the contract lots of attention and the OEM will have their ear.

But suppose low-level production is just the starting point. Eventually, the OEM plans to outsource higher-level products as full turnkey production (the supplier acquires the material and manages the pipeline). With this strategy, the OEM should tailor its search for a vertically integrated CM. (Vertical integration occurs when a single firm can produce multiple services, such as PCBAs, interconnect assemblies, box build, etc., more efficiently and cost-effectively than a number of firms can independently.) This approach compresses the supply chain and eliminates margin stack-up. Administrative services, such as order processing, raw material acquisition, and production planning, are more critical in this model and should become a focused part of the evaluation process.

So establish the evolution of your outsourcing strategy, and then select an EMS partner that can evolve up the value chain, scaling with you in terms of capability as well as size.

2. Your EMS partner’s business profile and capabilities must match your own.

Create a new bill of material and product structure to cost out the new configuration.
Determine the impact on finished product stock and any required rework.
Buy material to rework finished product, create process instructions that meet the new design, and complete the rework.
Repeat the above steps for any work in process.
Create new process instructions for the product yet to be produced.

If you know you will have frequent change orders, ask your CM to walk you through their ECO process. Make them show you how they do it and how long it will take. Look at their controls. If you anticipate issuing 30 changes per week, your EMS partner must have the bandwidth and infrastructure to manage the process. Assess whether the CM can handle your ECO volume.

3. There must be a personality “fit”.

Your EMS partner’s culture and personality should fit well with your own to ensure a strong working relationship. Consider the nature of your outsourcing approach. Are you looking for a tactical relationship where you place the order and the supplier simply processes it? Or do you want more of a strategic association, where you’re asking for additional assistance and value from a CM to help you move forward?

If you desire a tactical relationship, focus on chemistry with the vendor’s program manager and front-line operators – the people who will handle your key transactions (engineering, quoting, change orders, schedules). In this approach, the CM becomes an extension of your factory floor, where you send orders and they send you product. Make sure the supplier’s program management, engineering, and quality assurance teams have a great deal of strength because they will be your primary contacts.

If your needs require a more strategic relationship, then focus on the CM’s management team as well. They will be running what-if scenarios, developing administrative as well as technical process improvements, and offering feedback. You must trust their managers’ experience and accept their counsel to get the most from this partnership.

Recognize that every CM has its own way of operating. Some are difficult and inflexible, while others are creative and accommodating. Just because you and the supplier are both good companies, don’t assume the relationship will work.

4. Flexibility – the must-have for high-mix, low-volume products.

High-complexity, high-mix, low-volume electronics manufacturing does not run smoothly. Production has its fits and starts. Change orders are frequent. Products require frequent reconfiguration. So supplier flexibility is a prerequisite if you’re outsourcing this type of work. A vendor’s ability to rapidly flex production levels and quickly reallocate resources is very attractive.

The OEM must understand how much flexibility it requires. Does your business volume jump up and down like a yo-yo? Are your products introduced in shorter and shorter cycles? Are your systems highly configurable? Some OEMs make systems so configurable that each one is different. No two systems look alike, right down to the paint on the doors.

High-mix, low-volume OEMs are constantly reacting to their customers’ ever-changing requirements. Three weeks from delivery, your customer might say, “I don’t want this bell, I want this whistle. The things I thought I wanted, I don’t want at all. The things I didn’t think I wanted, I want them now. And by the way, I don’t want to shift my schedule to the right.” If that sounds like your customer base, then you must have a CM with flexibility and the infrastructure that allows change to flow seamlessly up and down the supply chain.

Some vendors call this flexibility “expediting.” I call it “reaction to volume variability”. This means that the supplier can easily handle production volumes that fluctuate wildly and don’t normalize at any one level or for any long period of time. Volume variability wreaks havoc on a CM that doesn’t have the capacity, processes, or finances to deal with it. For example, a truly flexible supplier has developed systems that slam on the brakes to avoid the liabilities of purchasing too much material — or speed up material procurement to meet an accelerated production plan.

Recognize that flexibility beyond a certain level typically comes at a cost. You can’t have it both ways. Low cost typically means lower overhead and production efficiencies achieved through higher volumes. Increased flexibility often requires higher overhead to manage and execute the higher rate of change.

5. Enterprise Resource Planning is a key capability.

Enterprise Resource Planning (ERP) is a critical element in the EMS partner selection process. Usually hidden below the waterline, the supplier’s ERP process manages both inventory and capacity. A robust ERP solution enables a vendor to respond quickly and efficiently to expedites (schedule pull-ins) and de-expedites (schedule push-outs).

Typically, the majority of the CM’s cost is tied up in material. Ineffective inventory and purchasing controls can drive material levels out of alignment with current and short-term demand. This ultimately can increase liability to the customer and/or affect the CM’s ability to respond to schedule fluctuations.

The OEM should look for three key capabilities in evaluating the supplier’s ERP solution:

A robust process (software/people/procedures) that generates timely information for immediate action by front-line people.
A closed-loop system that quickly identifies misalignment and initiates action to correct material and production bottlenecks upon discovery plus incorporates a communications system that notifies the OEM.
A system that identifies production gaps and balances supply with demand.

Remember, ERP systems exist because there is no such thing as infinite material and capacity availability. The good ones are very effective at mitigating the risk associated with late deliveries and expedited demand. A vendor’s ERP solution should accurately track the entire process, from material acquisition to final production. Make sure it identifies problems virtually immediately so resources can be allocated to bring the process back into alignment.

6. Understand your new product introduction (NPI) strategy.

Will your EMS partner become an active partner who collaborates on new product introduction (NPI)? Or will you design something, throw it over the wall, and let your supplier build it? Your strategy for NPI should impact CM selection.

An OEM who does not want a collaborative partner would be expected to provide very clean and documented packages that tell the CM exactly what is wanted. On the other hand, an OEM partnering with a CM on NPI will work a lot from concepts. The OEM may have prints and documentation but needs prototypes to validate the design. “How do we make the product better? How do we make it more repeatable for manufacturing? How do we build it with lower lead times and less cost?” are the types of questions that a qualified CM can help you answer. If you need help building it better, faster, and cheaper, it’s critical that your EMS partner has the value-added engineering assets for successful NPI.

NPI requires that, at the bare minimum, your EMS partner is developing the process needed to build the product. However, in some cases, the OEM may require product development assistance at the CM level as well. If this is your expectation, then make certain your supplier either has the appropriate internal design resources to support your requirements or, at the very least, access to external resources that can quickly and seamlessly be introduced to the process.

7. Buy on total acquisition cost, not just price.

Do you focus solely on the selling price when buying EMS services? It’s important, but the selling price should be just a starting point in calculating the true cost of contract manufacturing. Your end game must be total acquisition cost (TAC).

TAC represents the total cost of doing business with a supplier. Theoretically, if all goes as planned, the selling price makes up the total cost. But invariably, problems occur which add to that cost, hence the concept of TAC. TAC commonly includes all variable costs. When a supplier delivery is late, it might require increased expediting from your purchasing department and overtime from your production line. Whether you tabulate these costs or not, they do add to the price you pay for the product. If the product is defective and is not found until functional test, then it may require disassembly, repair, reassembly, and retest. The cost associated with these extra activities is part of the TAC. And of course, if the problems are significant enough to affect your relationship with your customers, then the costs could include the loss of future revenue. The bottom line is that anything causing you to divert from the established critical path can potentially increase TAC.

Best-practice OEMs have systems that can analyze the TAC and use it for EMS Partner evaluation. These systems assign value to intangibles, such as the ease of working with a vendor and their ability to expedite. An OEM assessing a CM must have a way to measure the other elements of the relationship that will add cost not just unit price.

Here’s an example. An OEM has a system that measures TAC by weighting supplier attributes. Two suppliers are on the preferred list. Supplier A is approved at a higher level than Supplier B because of performance. They both quote the same job. Supplier A comes in at $10 per unit, Supplier B bids $9. But the OEM adds $2 per unit to Supplier B’s price because he doesn’t deliver on time, quality isn’t as high, and flexibility isn’t as good. So now Supplier B’s landed cost is $11 per unit. Based on that comparison, Supplier A will probably get the job. Even though Supplier B’s selling price is $9, the TAC ($9 plus all of the pain and aggravation that goes with it) is really going to cost the OEM more.

Avoid the knee-jerk reaction of buying exclusively on the quoted selling price. While price is a significant part of the equation, make sure you understand what you’re getting for that price. Calculate the TAC and avoid the pain of selecting the wrong EMS partner.

Conclusion

Choosing an EMS partner is a strategic process. A successful long-term relationship will pay lasting dividends in lower costs, higher productivity, greater creativity, and increased velocity to market. But the stakes can be high. Virtually every decision can be a minefield. Don’t take anything for granted. Use these principles as a checklist in your EMS partner evaluation and selection process. Also, give the CM the opportunity to say, “No, that’s not going to work for me.”

Bouncing from supplier to supplier can be a painful, expensive, time-consuming process. Choose correctly, and the CM becomes an integral link in your supply chain that generates a competitive advantage for years to come.