 Across industries, manufacturing Sourcing isn't a new concept for Original Equipment Manufacturers (OEMs). “Make vs. buy” decisions have been around for a long time, and it's hard to find any company that completely manufactures its own products these days. Yet, historically speaking, electronics manufacturers are relatively new to the concept.
When consumers see a brand on a product they buy, they consider the quality, function, value and reputation of that brand and the product. However, chances are that product was designed and built by a completely different company than the brand says — and at a level of quality, cost and with superior delivery that the “branded” company could provide. Why are companies turning to “unknowns” to manufacture products with their name on it?
As recently as 10 years ago, vertical manufacturing strategies were still the rule for manufacturers of high-technology electronics. In 1990, the global market was worth nearly $100 billion, while less than 5 percent of all manufacturing was Sourced. A tremendous surge in manufacturing
Sourcing really began in the mid-1990s and continued into the 2000s. During this time, a large number of high technology OEMs were revising their manufacturing strategies to take advantage of the wave of Sourcing alternatives available to them, to both improve performance and reduce asset and operations costs. In today's challenging economic environment, while the
available market is down by most counts over 10% over the past three years, the Manufacturing Market Insider estimates the Electronics Manufacturing Services (EMS) market at $92.7 billion, down about 5.4% from last year, less than half the decrease in available market.
This indicates that while end markets have softened sharply during the recent downturn, OEM trends toward Sourcing, and thus the EMS 's share of available market, relatively speaking, continue to grow. Clearly, today's growth dynamics are very different from those of just a few short years ago.
Until recently, these arrangements were challenged by their ability to sustain operating performance, meet market demand, and deliver the benefits of lower overall product cost. In the economic downturn, high-technology companies have been especially hard hit, which translates into serious challenges for supply chain partners that had assumed greater responsibility for manufacturing. In many cases, these providers had acquired costly assets from the OEM's as part of the deal—assets that have ended up underutilized in the softer economic environment. And while demand was slowing for end-item electronics, EMSs and Original Design Manufacturers (ODMs) were hard at work tailoring operations to improve performance, investing in infrastructure, and building out services offerings to provide the OEMs with broader business solutions. In short, their attention was split between eroding end-markets and managing in-house matters.
In the midst of the downturn, OEMs, EMSs, and ODMs alike have seen some painful consequences of the ways these models were implemented not so long ago, when the biggest challenge the industry seemed to face was how quickly it could grow. Many arrangements were caught off-guard by the downturn.
Today's business climate marks an inflection point for both the OEM and EMS/ODM industries and their respective manufacturing strategies. For many OEMs, there's no turning back from Sourcing decisions—the assets are gone and the core competencies are no longer in-house. While future success is determined more by the business strategy (products and services delivered, markets served), the manufacturing strategy is a key enabler of the business strategy. It should be focused on giving the OEM greater flexibility, improved cost effectiveness, reduced cycle time, reduced time to market, and sustained or higher quality. Achieving these objectives is incumbent on both the OEM and its manufacturing Sourcing providers.
The Evolution of Sourcing: From Transactional To Collaborative Partnerships
Sourcing in the electronics industry has evolved dramatically during the past decade. In its earliest and most basic form, the OEM's make vs. buy decisions were based largely on opportunities to reduce costs or meet specialized manufacturing needs. The Source provider would take on manufacturing for specific products on a contract-by-contract basis. Through economies of scale across many such contracts, contract manufacturers were able to leverage operational expertise, lower-cost labor, and buying power—or some combination of these—to lower the costs to the OEM. For instance, an OEM making a broad range of computing products could achieve greater economies by working with a provider that specialized in building memory cards instead of maintaining that capability in-house. Because the provider built far more memory cards than the OEM ever would, the provider received significant volume discounts from its own suppliers—savings that the provider passed along in part to its customers. Also, because the provider specialized in manufacturing, it was more efficient at reducing setup and changeover times.
Such conventional sourcing served electronics OEMs well into the mid-1990s, when demand was relatively predictable, competition was less fierce, and products were simpler. Then, things began to change. Products grew more and more complex. OEMs found that they had to dramatically boost investments in capital equipment to keep up with new manufacturing requirements—which ate into profits. The pace of innovation increased dramatically, leading to shorter product life cycles and increased pressure to decrease time to market. Customers became increasingly demanding and fickle in a business where market share was king.
In response, a number of OEMs have used sourcing to quickly and cost effectively enter new markets. By teaming with an experienced partner, an OEM could significantly cut the time and cost involved in developing new products— such as Microsoft did in its launch of the Xbox
Some OEMs found that a move toward more collaborative sourcing arrangements could improve their planning accuracy and ability to respond more quickly to changing market conditions. By sourcing manufacturing and some of their “upstream” supply chain activities, OEMs could free themselves to focus on their core competencies, tighten planning processes.
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