Win-Win in contract electronics manufacturing

Texcel 1 RGB Commercial director at Texcel Technology, Peter Shawyer, explores customer relationships in the CEM sector.

Having spent some 35 years in the contract electronics manufacturing sector, I have seen some competitors grow and succeed while others fail and fall away. The question is: why? What does a CEM have to do to succeed in this sector?

Firstly, it is important to recognise that a CEM does not have a unique product or intellectual property that can be traded, so, ultimately each CEM is as successful as its customers. If its customers are doing well and growing, then they require more electronic assemblies and sub-assemblies, and the CEM is busy.

The second thing to appreciate is that customers need to invest a significant amount of time and resource building partnerships with a CEM, to the point where they feel they can depend on it for their product supply. As a result, no customer is going to change suppliers without careful consideration.

Thus, the customer choosing the right supplier, and the CEM choosing the right customer, are equally important. Naturally this can take a long time; typically 12 to 18 months. Determining what the right customer is depends upon the CEM profile, but deviating from the business model can be hazardous.

Finding a match
Basically, larger CEMs tend to go for volume contracts, which come with high set-up costs and low operating margins. This kind of contract demands relevant compliance requirements and is focussed on long term stable production plans. As a consequence, large CEMs are not as agile or flexible.

In contrast, small CEMs have more limited investment opportunities and tend to take on projects that are riskier or outside their normal service range, but they are able to make good margins when things go smoothly. So for the small CEM, it’s a question of finding sufficient projects that are an appropriate match for the company.

As one would expect, the other difference between the large and small CEMs is that the large CEM is corporate, focused on margins, and is typically an account-run business with little room for personality. Small guys on the other hand are typically hands-on manufacturing or design experts who focus on the process, are very flexible and work long hours covering many roles.

Creating a base
As these indicators highlight, CEMs can potentially get into trouble because they have the ‘wrong’ customers. For example, if a CEM reduces its customer base to just three or four clients in order to provide sufficient focus for each one, it is at increased risk of any one customer pulling out. This is particularly true in light of the time it takes to establish new customer relationships.

CEMs with large international players on their customer list will benefit from the large value orders they place, however, this kind of client can sap resources and profits with their demanding compliance and paperwork requirements. Conversely, trying to serve too many small customers can create problems if multiple customers want to change schedules, ask questions, or if they have payment issues. Cash flow is a big issue for CEMs and events such as customers delaying payment can push the more fragile businesses into financial crisis.

Middle ground
In summary, the best place to be, as a CEM, is in the middle range. This means a CEM should be big enough to weather storms and can work with valued customers as an equal partner. It also ensures the resources are available to invest in the business and at this scale it is easier to be more discriminatory when selecting customers that meet the required profile. For a company that is efficient at processing orders and scheduling, I believe it is better to have 30, £750K customers than just three, £8M customers.

The top priority for any CEM however, is to focus on customers and to behave like a service organisation, not a manufacturing unit. This is achieved by engaging staff and supporting them to be involved in the business, if possible, while having some fun.