The electronics contract manufacturing business has grown tremendously in the past 10 years. Many U.S.-based companies have outsourced to EMS providers in China to reduce production costs. Some, on the other hand, have moved their production back to the U.S. Others are still pondering the best outsourcing strategy. John Koon, Express Manufacturing Inc., asks, are you looking into outsourcing? What criteria are used to develop a sound outsourcing strategy? and Does outsourcing to China guarantee lower production cost than building in the U.S.? He also shares useful criteria for creating a successful outsourcing strategy.
Developing the Best EMS Strategy
There are a lot of details to consider in developing an EMS strategy. The first question often is, “Where can we get the lowest production cost?” Usually, the answer is China. If the product and the production volume are right, this may be a correct answer. However, many factors could change this answer. They include total cost management, logistics management and support, quality requirements, and the communication process. This comprehensive approach will ultimately impact the company’s profitability and competitiveness.
Total Cost Management
While the unit cost is a very important factor in the EMS outsourcing strategy, the total cost concept is more important. Some people like to lease a new car every few years; I like to buy a new car and keep driving it. When the car gets old, the repair costs will increase. When the annual cost of repairs is higher than the total cost of the car payment in a year (assuming I have an auto loan), then it is time to buy a new car. In this example, there is a trade-off between the car payment and the repair costs.
Looking only at the initial product unit cost is like keeping the old car. I don’t have any car payment but the total cost of operation is higher. The same concept applies here. The cost factors include labor, materials, and handling.
Labor cost. While there are a few exceptions, China usually has a lower labor cost than that of U.S. labor. It is not surprising why most people would assume that building products in China would automatically reduce their product costs. Perhaps a more important consideration is the labor content. If the product has high labor content, the above assumption is correct. If labor content is low and the electronic assemblies are built by automated SMT machines, with component costs the same, there will be negligible savings of product cost whether they are built in China or the U.S. On the contrary, products built in China will accrue additional shipping and customs costs. Box builds, on the other hand, usually have a higher labor cost in assembling and testing. In theory, companies gain a cost advantage by doing final assembly in China. In reality, this depends on the weight of the final products and the mode of shipping. This landed cost of the complete unit should be factored in the customer’s cost formula.
Materials costs. Materials cost is another element in the total product cost equation. Electronic assemblies are made up of a bare PCB, many electronic/electrical components, and other miscellaneous items such as cable assemblies and metal parts such as heatsinks. While it is true that components can cost less in China or Asia, as most of them are made locally, some components are not available in Asia. In this case, the sourcing has to come from the U.S. and a Chinese EMS will need special handling of these parts from the U.S., adding costs. At times, an item in the bill of materials (BOM) takes an unusually long time to return the pricing information. When this happens, it can be an early warning sign of potential problems with component supply.
Another phenomenon recently published cited that counterfeit parts are used by some EMS providers to give an initial low-cost quotation. Nowadays, many reputable manufacturers in the U.S. have consultants to check for such unqualified parts. When counterfeit parts are used, product quality is compromised, along with the reputation of the manufacturer. A “Copy Exact” policy provides an added assurance that counterfeits will not appear in customers’ products. It also supports intellectual property (IP) protection.
More EMS providers are aware of the importance of having certifications such as ISO 9001 (Production) and ISO 13485 (Medical Devices) and complying with such standards. These certifications have helped EMS providers produce better products. However, unless these ISO guidelines are put into practice, their quality results may vary. Sometimes, when a new order is issued for the same products, the product quality may not be the same as the first order. Customers should audit the EMS provider’s operation process regularly. Within the ISO standard, it allows a wide range of shop floor control methods to be used. Some EMS providers will track the assembly of the products through each phase of manufacturing to isolate any problems and improve quality. No matter which method is applied, the key is to keep an eye on the quality process.
Logistics Management and Support
Lead time. One important consideration in choosing an EMS provider in the U.S. is the short lead time requirement. It is much easier to have a local EMS provider build a production run and ship to the product’s destination within the U.S. This is achievable with an EMS provider from China; however it will take a lot more planning to allow for the additional time requirements and there needs to be a contingency plan in place. Given enough preparation time to plan thoroughly, EMS providers located in China can meet these requirements. Unfortunately, time is always in short supply.
Volume, shipment, customs, and warehousing. Customer location makes a difference in selecting an EMS provider. If most of your end customers are in China, it would make sense to have the products built by a good turnkey EMS provider in China that can drop ship the products directly to the end customers. In this case, it may even be a cost-saving move to have a local quality control (QC) office located near the EMS provider. If, on the other hand, you need to perform your final assembly and test in the U.S., then it is a different matter altogether. Keep in mind that while labor costs may be lower in China; don’t forget to figure in the time and cost involved in customs when the products are shipped to the U.S. Usually a broker is used, and a brokering fee is charged every time when customs clearance is involved. Since time/cost depends on the volume of your production requirement; figure out in advance the quantity of each shipment and whether you will use a warehouse. For example, when electronic consumer products are involved, it is usually in higher volume and the shipment demand by the retailers has short lead times. In this case, when goods arrive in containers (typical shipping method from China), they have to be stored in a warehouse, adding to the total product cost. On the other hand, if products are made in the U.S., just-in-time delivery can be planned more easily. With proper planning, you may even be able to save the cost of a large warehousing. For some EMS providers, you may even use their turnkey services to drop-ship directly to the customers within the U.S. — no warehouse is needed. It pays to do some detailed analysis to find out which option is best for your production needs.
Post-sales support. Most EMS providers, whether they are American or Chinese, use program management representatives to handle customer needs. Keep in mind that these are only the front line people. True productivity potential depends on how well they work with their internal engineering and production teams.
Finally, how an EMS provider handles problems and product rework has a significant impact on the cost formula. A Fortune 100 company complained about a cable assembly problem to the EMS provider who built these products. Instead of requesting that the customer return the cable assemblies, the EMS provider sent a crew to go on-site to rework the cables at no cost to the customer. Consider post-sales service when selecting the EMS provider.
One Harvard University professor taught students about how difficult communication was by telling them “communication does not exist.” When one person communicates with a seemingly simple term, it can be totally misinterpreted by another person. One cannot assume such thing as “common sense” in a cross-cultural situation. An American sales executive visited a potential customer in Japan. After a lengthy discussion, the sales executive noticed silence from the purchasing team sitting across the table and he thought the buyer was in agreement with everything he presented. He kept pushing for the purchase order. When there was no further response, he told himself that they just needed some more convincing so he repeated the benefits of his offering and pulled out the proposal and asked for the approval signature. A simple response was uttered by the Japanese senior executive very slowly, “V-e-r-y...difficult.” No purchase order. The major misunderstanding in this case was that their silence was mistakenly interpreted as a sign of approval. What the American sales executive should have done was to ask the purchasing team to review the offers and give them time to raise objections. Then the sales process would have continued. Likewise, it is important in the cross-cultural situation to understand what the other side really means. The old saying of “no problem,” for example, means “I am willing to work on it,” and not literally “problem free.” Working with a local U.S. EMS provider will make communication much easier. That is why some companies like to work with a local EMS provider or at least an offshore EMS provider with a local representative. A better solution is either to hire someone with experience in handling overseas EMS providers or work with a local EMS provider with production facilities in the U.S. and China.
In forming an outsourcing strategy, what should an American company do? Consider the total cost management, quality requirements, the communication process, logistics management and support, then come up with a plan. Meet with the EMS provider and audit their facilities. Once an outsourcing partner is selected, make sure to audit their operations on a regular basis.
With multinational EMS providers, a customer can start their production in the U.S., especially for product development. Should the final product become a candidate for manufacturing in China, a multinational EMS company can manage the product transfer from the U.S. to its own facilities or partners in China seamlessly. In this case, the customer will be dealing with a U.S.-based company, both in the U.S. and China. This ensures that the maximum benefits of EMS outsourcing are achieved. The customer will always know who they are doing business with and can be assured that their IP is protected.
To compare the outsourcing offerings, obtain quotes from EMS providers in the U.S. and in China, or companies that operate in both locations. Whichever decision you make, it is important to look at the long term objective to make sure your strategy is sound and profitable.
John Koon, director of corporate communications & public relations, Express Manufacturing Inc., 3519 West Warner Avenue, Santa Ana, CA 92704, may be contacted at (714) 979-2228; [email protected]; http://www.eminc.com. Express Manufacturing Inc. (EMI) is an EMS provider with established production facilities in both southern CA and Dong Guan City, China. EMI Asia has identical production processes to the CA location. EMI provides consignment and turnkey EMS: new product introduction (NPI), PCB assembly, sub-systems and box build, test, warehousing, order fulfillment, and refurbishment. EMI holds ISO 9001:2008 and ISO 13485 (Medical Devices) certifications.