Outsourced Electronic Manufacturing Revisited
One supply chain management strategy employed today by companies engaged in stable, repetitive processes and non-proprietary products is outsourcing the manufacture of product parts. It is common for an original equipment manufacturer (OEMs) that involved in electronics manufacturing to engage third parties to create required components. The OEM in turn uses these in the assembly of the OEM's final product. This contracting strategy has been employed for some time now, especially with the production of printed circuit boards and other electronic devices used in putting together commercial or industrial equipment, tradesmen electrical power tools, as well as household appliances.
Awarding contract assembly to an electronics Manufacturing Services (EMS) firm provides OEMs the opportunity reduce overhead operating costs, improve flexibility and have more efficient production processes that converts to "faster time to market" for their products. OEMs can dramatically cut on capex, freeing cash for other strategic initiatives like new product development or marketing. EMS companies in turn, can streamline their own processes and corner a market niche with their specialization. For the OEM, the strategy reduces direct human resource cost in addition to minimization of potential labor relations and legal problems. For EMS firms, it allows them to have business volume that makes investment in heavily automated processes viable to reduce manufacturing errors common with methods that involve a lot of human intervention.
However, contract Outsourced Manufacturing may not work for some companies. Taking out a critical aspect of the supply chain like manufacturing may do more damage to an OEM. An OEM, therefore, should assess the entire business plan relative to processes, information systems, management structure and performance monitoring. They must institute a holistic approach to any process innovation using outsourcing so that it will not become the "weak link" that could cause the supply chain strategy to fail.
OEMs are advised not to adopt outsourcing if proprietary technology or proprietary manufacturing processes are involved. Anything that gives a company positional advantage in the market should be kept within the company. If security protocols exist, outsourcing may prove difficult to monitor for compliance. It is also recommended that production of high-margin products or Wiring Harnessess services should not be contracted out. Environmentally sensitive products or those that need high levels of assembly or test specialization should not be candidates for contract manufacturing.
Outsourcing basically is employed to capitalize on economies of scale. EMS companies only want to deal with the assembly of medium or high annual volume products and therefore, it may not be cost efficient to outsource manufacture of components with low annual unit or dollar volume. In addition to high volume products, items that require minimal engineering changes are much more suitable for contract manufacturing.
Outsourced manufacturing is a stable and proven business strategy. But an OEM must ensure it is employed properly to bring in target earnings and business growth.