OEMs rely on EMS purchasing expertise – by James Carbone

OEMs depend on their contract manufacturing partners to handle tactical and strategic purchasing of many components and other production materials

When an OEM evaluates an EMS provider as a potential manufacturing partner, it needs to assess not only the manufacturing capabilities the provider offers, but the purchasing expertise as well.

That’s because over the years, the requirements and expectations of OEMs of their external manufacturing partners have evolved. In the 1990s, large electronics OEMs would outsource to contract manufacturers when they had an upside in demand and could not fulfill orders in-house. Over time, OEMs would outsource board assembly to EMS providers even if they did not have an upside and gradually contract manufacturers were trusted with subsystem and system assembly fulfillment and aftermarket service.

As OEMs outsourced more manufacturing to EMS providers, they gradually began to rely on their manufacturing partners to purchase commodity components such as resistors and capacitors and lower value discrete semiconductors.

Today, EMS providers handle virtually all the purchasing of components on bills of materials (BOMs), including higher value semiconductors. In some cases, the EMS provider also handles strategic sourcing of production materials.

“In most cases the OEM customer owns the design and source selection for the approved vendor list (AVL),” said Jamey Mann, director of global purchasing for EMS provider Kimball Electronics, based in Jasper, Ind. “It’s our responsibility to insure the procurement side is actioned effectively.”

“We work closely with several customers on sourcing, supply chain, risk management, and supply,” added Mann. “Any time you can collaborate with both the customer and supply base, then you can develop a more robust supply chain.”

He said about 98 per cent of Kimball’s customers entrust the EMS provider with purchasing all their components needed for production, both lower value and higher value semiconductors. Many OEM customers also look to Kimball to “strategically source” materials such as bare printed circuit boards, items, packaging and lower value commodity components, according to Mann,

“Typically, on higher-value semiconductors, the customer decides the AVL and then expects us to execute based on the AVL,” said Mann. In cases where there are multiple sources on the AVL, “then we can determine which source to use as long as the source can achieve the correct price point and supply,” he said.

Relationship management

For instance. with printed circuit boards, Kimball has preferred suppliers that it recommends to its OEM customers. It is Kimball’s responsibility to own and manage that relationship for the customer.

Stephanie Martin, senior vice president, global supply chain for EMS provider Vexos, based in Markham, Ontario. Canada, said about 98 per cent of Vexos’ businesses is full turnkey, meaning it purchases the production materials for its OEM customers as well as manufactures for the OEM. OEM customers typically specify the electronic components and the manufacturers, but leaves it up to Vexos to purchase the components. many of which are bought from distributors.

“Because we are high-mix, medium-to-low volume, we buy through distribution although we do have a few manufacturers that we work with on specific parts when we have enough volume,” said Martin.

With few exceptions, Vexos can purchase from any distributors that it chooses. The exceptions are for parts manufactured by Xilinx and Micron which must be purchased from specific authorized distributors.

She said for other material such as raw printed circuit boards, Vexos purchases directly from board manufacturers. “We do the selection for the board house and most of the metal, plastics, cable harnesses and the build-to-print items,” said Martin.

Although Vexos has to use the AVLs of its customers, with resistors, capacitors and other passives “we try to steer the customer to suppliers that we are already buying from because we can get better prices and service from them,” said Martin. She said that Vexos will work with OEM customers, evaluating their BOMs to identify which components are sole-sourced by the OEN. Such parts may have alternate suppliers that may sell the component for a lower price.

Looking for alternatives

Mann said there are times when an OEM will request that Kimball provide potential alternate suppliers “to help reduce risk as well as create better productivity,” he said. “However, in all cases, it is the customer that must provide approval before any new supplier is introduced,” he said.

Alternate sourcing has become more of issue this year because many passive components are on allocation or have long lead times, according to Martin. “We are making suggestions to OEM customers moving them to component manufacturers with available inventory and shorter lead times,” she said.

Vexos buyers will contact the buyer or commodity manager at the customer and the customer will contact the OEM’s engineers to discuss alternate suppliers for a part, said Martin.

“We also have a quarterly market newsletter that we send it out to all of our customers to their key executives and to their supply chain people and try to let them know what’s going on with the market at each manufacturer,” she said.

Kimball also collaborates with suppliers when there are instances “where we might recommend alternatives to reduce the risk of single sourced material,” said Sherri Roos, materials manager for Kimball. Often that will occur during the quoting stage to ensure procurement strategies of the customer Kimball are aligned, she said.

“We work closely with several customers on sourcing, supply chain, risk management, and supply,” added Mann. “Any time you can collaborate with both the customer and supply base, then you can develop a more robust supply chain.”

Advantage: OEM

Besides a stronger supply chain, there are other for advantages for an OEM to outsource strategic and tactical purchasing to EMS providers, including reduction of manpower and system resources, greater efficiency and improved productivity, said Mann.

OEMs will often have access to world-class purchasing expertise because EMS providers have invested in in purchasing personnel as well as purchasing and supply chain software, said Sam New, principal research analyst with researcher Gartner Inc.

In addition, EMS providers have many OEM customers and hundreds, if not thousands of suppliers, which helps give them keen insight into the electronics supply chain. Often EMS provider can identify early market or supply chain trends such as component shortages and price increases because of their relationships with many customers and suppliers. In some cases, they can also identify emerging suppliers of new technology and help OEM customers to diversify their sources of supply.

Martin said cost reduction is a key benefit for an OEM when it entrusts its EMS provider to handle purchasing. “For one thing, they don’t have to carry inventory,” which helps reduce OEMs’ total cost, she said. In addition, an OEM typically needs fewer purchasing people on staff when it outsources.

“When organizations start to outsource they tend to cut back on their expertise on the buying side for that commodity,” said Martin.

With newer companies it’s a different scenario. “Now what we’re seeing is you have a lot of new companies that have no expertise in electronics procurement” to begin with, she said. They don’t hire a buying team, but rely on their EMS provider to source and purchase parts.

“Whereas in the past companies had the expertise, then started to outsource and then got rid of the purchasing expertise because they did not need it anymore,” said Martin.

In some cases, companies that never manufactured electronics are now building some products that have electronics subsystems. Those companies also don’t have in-house electronics expertise. As a result, they also are relying on EMS providers for that expert.

“That is happening a lot actually,” said Martin. “We’ve seen three or four customers that have been purely mechanical moving towards electronics and don’t have the expertise in-house. Some of them are just pure design firms and don’t have any manufacturing at all,” she said.

She said while there are advantages for an OEM having their EMS partners handle purchasing, there are advantages for the EMS provider as well.

More buying clout

Being able to combine the component requirements from numerous customers gives EMS providers more purchasing clout with suppliers.  “It gives us more leverage with distributors, or component manufacturers,” said Martin. “It gives us more buying power when you go full turnkey.

Such buying power is more important than ever to EMS providers because EMS is a low-margin business. By combining the purchasing volumes of multiple OEM customers, EMS providers obviously can negotiate a better price for components which can positively impact the EMS providers bottom line.

EMS purchasing on behalf of OEM customer is “kind of a win-win for everyone,” said New.

Martin added handling purchasing for OEMs also “gives us more control over our production cycle.”  Years ago, an EMS provider would have to wait for the OEM customer to supply material needed for production. “Sometimes our customers would be our suppliers,” she said. “They would hold us up from going into production” because customers would buy the components and their purchasing “cycle was not aligned with ours,” said Martin. Now we are more in control of our own destiny to meet the committed needs of our delivery,” she said.

While there are advantages for EMS providers when an OEM outsources purchasing, there are also challenges because there is increased responsibility and scale that must be managed effectively, according to Mann.

Mann said with many OEM customers “bringing new suppliers to the table, it is an always changing landscape.”  He said because Kimball has to use the suppliers on its customers’ AVLs, it can make it more difficult to concentrate spend with the fewest number of suppliers, which is necessary to get a better price for parts.

“However, there are always opportunities to consolidate spend to a smaller subset of suppliers, mainly driven by multi-sourced AVLs,” said Mann.

He added that OEMs are placing their trust in “our abilities to ensure not only a competitive solution, but also to deliver world-class supply chain programs.” To do so, EMS providers must continuously develop strong supplier relationships. “Then managing the expectations become a much easier task. It takes hard work and diligence, but it is a challenge we accept every day,” said Mann.

Managing design registrations

Another issue for EMS buyers purchasing from distributors is design registration.  Martin noted a distributor may work with an OEM customer and design in a particular part from a component manufacturer. When that happens, the distributor registers the part and then the distributor “receives a premium for maintaining the registration,” said Martin

When the OEM outsources manufacturing of the system that contains the registered part, “we have to be able to find out which distributor holds the registration for the part because the price delta between a registered part and a nonregistered part with a particular distributor that does not hold the registration is very large,” said Martin.

She said Vexos needs to work with all of the distributors who could potentially have design those parts in. “It’s kind of a fishing expedition to find out. The customer’s engineering people typically do not know or do not understand how the design registration process works,” said Martin.