Calculating total cost of outsourcing

ES July13 Pg14 & 16 CEM Sanmina2The total cost of outsourcing extends far beyond the cost of labour. Here, Sanmina’s Robert O’Rourke addresses the broader issues OEMs should consider when outsourcing

Despite being familiar with the concept of manufacturing outsourcing, the electronics industry doesn’t always make the right decisions when it comes to choosing an outsourcing partner. It’s easy to follow industry trends, like utilising low cost labour markets, without first evaluating the total cost, and while reducing costs and increasing margins drives every business, there are some of broader issues to consider.

Understanding legislation

Original equipment manufacturers (OEMs) must understand the legal regulations surrounding their product. Unlike compliance, which refers to good practice, regulations carry the force of law. Not meeting these standards can put an OEM out of business or even result in jail time.

While legislative regulations do not affect every sector, mission critical verticals such as medical and automotive are subject to this type of regulation. These vary between countries and governments, which dictates where a product can, or can’t be made.

Make sure any electronics manufacturing services (EMS) provider not only understands but also complies with global regulations, as well as local government regulations where manufacturing is taking place.

Go beyond labour costs

A common misconception for OEMs has been that offshoring to low cost labour markets is the major benefit of outsourcing. In certain instances however, this can actually drive up costs, such as when shipment costs cancel out savings on low labour costs.

From a financial point of view, the biggest benefit of outsourcing is to increase return on investor capital (ROIC). When manufacturing in-house, OEMs must invest in skills, factories and equipment as well as salaries for workers. Outsourcing can drive down initial investment as well as introducing 30-day payment periods for invoicing, which frees up cash flow, in turn driving up profit and ROIC. This should be the driving force behind any outsourcing decision.

Ensure design stability

A £1 design error found during the concept stage could multiply to hundreds of thousands once it’s running in volume. Identifying problems early therefore avoids significant financial costs. The best way to ensure this outcome is to select an EMS partner capable of running ‘design for X’ analyses at both the prototype and production phases. This helps ensure the reliability of the finished product, when it comes off the line, and for years to come.

Protect IP

Intellectual property (IP) is fundamental to many OEMs business and it is critical to get an IP agreement when engaging with outsourcing partners, particularly when they are involved in the design of a project.

Outsourcing a design to an EMS partner can provide expertise at the design phase that will streamline the manufacturing process. Partners need to work closely with the OEM and will have access to product-related data such as bill of materials, drawings and technical specifications. To avoid the risk of IP theft, OEMs need to establish an IP agreement stipulating that all their existing IP, and any IP developed as part of the project, will be owned by them. This also allows the EMS partner to retain their own IP, which is usually related to the manufacturing process.

Select integrated services

A fully integrated manufacturing service (IMS) provider optimises the full product life cycle. The shift towards this kind of service provider means one partner is responsible for everything from component production to final product assembly build and test. This can provide OEMs with  significant cost advantages.

For example, a product that has a bill of materials of 1,000 components purchased from 600 suppliers, 20 manufacturing process steps and many phases of functional testing, requires a team of buyers to interface with all the suppliers involved. It also requires technical engineers and quality professionals and if the product fails, the OEM would have to identify the issues and work with suppliers to resolve the faults. When one company is chosen to provide integrated manufacturing services, the OEM only has one entity to manage, reducing costs and simplifying management.

Outsourcing is a key strategy for OEMs to drive profit, but it needs to be approached in the right way. Any company considering an EMS provider should choose a partner with strategic alignment in terms of capabilities, accreditation, expertise and location. They should also conduct a full analysis to identify where the key savings will come from and work with their partner to maximise them.