Global outsourcing is increasingly available to medium and even small OEMs. Managing director of TT electronics integrated manufacturing services, Andrew Cox, explains how to make the most of this opportunity In today’s market it is not just large OEMs that are globally outsourcing – medium and even small OEMs are being offered tier one service from tier two partners. To capitalise on this, they need to make the same careful assessment of project requirements that the manufacturing and logistics teams in larger OEMs have always made.
Labour cost can represent anything from 15 to 25 per cent of the unit cost at the factory gate, so there is a worthwhile saving available from manufacturing in a low labour cost region, however this saving can easily evaporate if other costs rise as a result. Take a look at where these costs arise.
Simplify production transfer
For example, the further away a supplier is the greater the temptation to reduce expenditure and skimp on face to face contact with the project team and site visits. An emerging breed of global tier two EMS vendors aim to make this easy and cost-effective by offering project teams local to the OEM. They give access to a portfolio of manufacturing sites around the world, all displaying the same technical capabilities and consistent, robust quality processes. Often these sites are mirror sites, with identical production lines located in high cost and low cost economies. This not only simplifies production transfer around the world, but also limits the need for costly and time consuming long-distance site visits.
Before making a final decision, explore what additional benefits the supplier can bring to the table to minimise the overall acquisition cost. Customers should look at the partners wider capabilities such as design for manufacturing (DFM) services, project management and supply chain management. Some of the larger tier two EMS providers differentiate by adding after market support, such as systems configuration to individual requirements and even shipment direct to the end customer.
The key issue with outsourcing low to medium volume manufacturing is that there is less room to amortise the non-recurring costs of bringing the product into production across savings in the unit manufactured cost. Global tier two EMS suppliers can simplify the process by offering a local EMS project management team that takes full responsibility for production transfer overseas to a mirror production site. It may be more efficient to take a project from NPI through to stable volume production at a local site before transferring.
The first question a global OEM will normally ask when making a manufacturing decision is where is my customer but this is a question that smaller OEMs are simply not used to. If there are customers for a product in Europe, Asia and the US, consider manufacturing in all three regions. A global tier two EMS can manage this process transparently and cost-effectively.
When considering this issue, look at the indirect costs of shipment as well as the direct costs. A lengthy sea-freight journey can have a far-reaching impact on the stock levels of finished goods and reduces the flexibility available to make design changes.
An implicit assumption on the part of customers looking at outsourcing to Asia is that the components will be cheaper as well as the labour. Not necessarily. The profile of component use in Asia is very different and parts stocked by most distributors in Europe may only be available on special order in Asia.
Global outsourcing is opening up to a new level of customer. The issues outlined here will help them appreciate the questions they need to explore when reaching a decision on which outsourcing partner to select and where they should be located.