By John Bauman
Global Insight |
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The contract manufacturing business, once just a cheap source of labor for assembling electronic equipment, has been undergoing a radical transformation. The industry got its start assembling basic computer components and other electronic equipment—typically at lower costs. But as time has passed, contract manufacturers have become full-service electronic manufacturing service (EMS) companies. In today's marketplace, original equipment manufacturers (OEM) are being pressured to outsource manufacturing, and increasingly design and post-manufacturing services, to focus on core competencies. Indeed, much of the growth in the EMS sector has been born of OEMs divesting their manufacturing facilities. For example, Celestica is the result of IBM spinning off its largest product-level manufacturing group.
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In the second-half of 1990s, large EMS providers acquired a stable of manufacturing facilities and expanded their services to include complete end-to-end turnkey design and manufacturing processes. Many EMS providers now support the whole "food chain," from design to end-product. Engineering-heavy new product introduction (NPI) centers, often located near an important customer's design activities, have begun to crop up. Prototype and pilot production runs (preproduction activities) are seen as a key means to gain volume business from OEMs demanding one-stop shopping. In addition, EMS firms have also been taking over aftermarket work, warranty repair work, and ongoing maintenance. As a business model, it seemed to be a winner, as the top-five EMS companies—Celestica, Flextronics, Jabil, Sanmina-SCI, and Solectron—grew an average of 36% per year from 1994 to 2001.
Yet, large vertically integrated EMS firms faired poorly during the recent downturn and
were widely panned. The hard times exposed some of the critical weaknesses of the EMS industry, including excessive expansion and poor supply-chain management. A surprising shortcoming brought to light by the inventory disaster was the deficient supply-chain management relationship between EMS and OEM. Poor communication and a lack of clear delegation of important tasks in the EMS/OEM relationship was a key factor behind the inventory glut that caused so much misery in the electronics supply chain during 2001 and 2002.
Now that the nascent recovery appears robust, the vertical-operating structures assembled over the years by some top-tier EMS providers—once considered a liability at the nadir of the market downturn—are now being hailed as a competitive advantage during the recovery.
Risk management is rapidly becoming a central theme throughout the boardrooms of contract manufacturers. When demand fell off, EMS firms realized they had too much in the parts pipeline and tried to put on the brakes. In most cases, manufacturers were stuck with a significant inventory of parts. Enter risk management. New contracts clearly specify precisely how much exposure different companies in the supply chain have, i.e., when the liability shifts from one company to the next. Likewise, EMS companies are building intelligence into their supply chains with the right information technology and tools.
Building on a flat 2003, total EMS revenue is widely projected to rise more than 10% annually, reaching $150 billion by 2007. EMS firms' penetration of the market for product-level manufacturing in 2000 stood at just 13%. Eventually, brand-name electronics firms expect to outsource more than half of all total production needs on average, indicating that there is still plenty of headroom for growth in the EMS sector.
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