How much of my electronics manufacturing should I outsource?

Once you have decided to outsource to an Electronics Manufacturing Services (EMS) partner you need to think about how much of your existing operation you plan to relinquish.

Will you retain some control and hold onto existing staff, production equipment, and processes? Or do you intend to hand over as much as you can to the EMS provider in order to focus on product design, sales, and marketing activities?

It’s widely accepted that the further along the outsourcing scale you go, the more benefits you stand to enjoy. But of course, putting all of your eggs in one basket takes a large degree of trust and requires commitment from key decision makers across your business.

In this blog post, we look at 4 distinct areas Original Equipment Manufacturers (OEMs) outsource – procurement, assembly, test and logistics. We explore the benefits associated with relinquishing each of these and highlight a number of questions that must be considered before any final decision is made. 

Procurement

The majority of OEMs outsource their material procurement when they decide to partner with an EMS. Although some EMS providers will offer a ‘labour only’ service most prefer to have control of the supply chain. The advantages to the OEM of outsourcing their material supply chain include a reduction in stock holding, improved cash flow, and a reduction in the administrative tasks associated with buying in the material. If you haven’t stopped to think about just how many people and processes are involved in your company when ordering, receiving, storing, issuing and paying for material it’s worth mapping out - the hidden costs can be frightening! Another benefit to the OEM relates to freeing up space within their warehouse which can then be used for more productive tasks.

Before outsourcing your procurement function you should try and answer the following questions:

• Do we plan to free-issue our material to the EMS provider or let them manage everything? Do we have the controls and staff in place to manage free-issue material (if that’s what we decide) and how will material delays and quality issues be communicated to the EMS provider and addressed internally?
• What equipment, storage and packaging will we need to keep based on our decision above?
• How many different assemblies/products do we plan to outsource? How will this affect our decision when it comes to material procurement? Is there a danger we will be liable for more stock if we decide to retain certain products in-house and outsource those that share common components?
• How will our existing supplier relationships be impacted? Which suppliers are critical to our business and how will the EMS partner manage these?
• What cost benefits could we expect to see if we hand over all of our material procurement to the EMS provider?
• How could quality improve if we outsource our entire supply chain? Which pieces of material have caused us a challenge over the years? How could the EMS provider help here?

It’s widely accepted that 80% of the cost and lead-time of any electronic or electro-mechanical assembly is made up in material, so it’s vital you make the right decision for your business. But if you are not sure how much of your supply chain you should outsource, or how your decision may impact your original outsourcing goals, it’s worth having the conversation with potential outsourcing providers before you make the move.

Assembly

The complexity of your product and the volumes you require will determine which EMS providers are best suited to your requirements. For example, if your product consists of a relatively simple printed circuit board assembly (PCBA) in a basic enclosure, the majority of UK EMS providers will have the equipment you need. But if you plan to flood the market with hundreds of thousands of them, you will probably need to consider an offshore supplier as low cost/unit price is going to be a driver for you. If, however, you require panel wiring, rack assembly or electro-mechanical capabilities in low to medium volumes, the number of potential suppliers available to you starts to reduce rapidly.

So, how much of your product assembly do you plan to outsource? Here are some questions to consider:

• Are we looking for just a PCBA supplier or someone that can deliver back a completed unit?
• What current challenges do we have in production? What pain points do I need the EMS provider to address?
• If we retain elements of the production process in-house, what equipment, staff, skills, and processes will we need to retain? What costs are associated with these, both now and in the future?
• What supply chain capabilities and manufacturing services will the EMS provider need in order to meet our objectives?
• If we outsource all of our manufacturing what impact will this have on the current team? Will we be able to redeploy our workforce in other areas or are we looking at a potential redundancy or TUPE situation? If so, are HR aware of our plans?
• Are there any specific tooling or jigs needed during the production process? Will these be transferred to the EMS provider or will we need to invest in more?

Generally speaking, the more of the product assembly you outsource the greater the benefit to your business. However, not all OEMs are ready to hand over everything in one go and those that are have spent months, if not years, planning. The key thing is to agree what success will look like in the future internally and then work with your EMS partner on a project plan with agreed milestones to make sure you achieve those objectives.

Test

The outsourcing of test can be a challenging area for OEMs. There can sometimes be confusion over what is and isn’t included as ‘standard’ by the EMS provider, along with what parts of an assembly can actually be tested. For example, both flying probe and in-circuit test (ICT) check for manufacturing defects. A PCBA could pass these initial tests but that doesn’t guarantee the finished unit will then work when it’s taken out of the box or installed on-site. Neither flying probe nor ICT ‘test’ the product design so additional checks will be needed if the OEM needs greater peace of mind.

The type of product you plan to outsource will usually determine which test solution is right for you. Quite often, the OEM will require a number of different tests to be carried out by the EMS provider. For further information on all of the options available to you, along with case study examples, you may wish to download our eBook – the definitive guide to test.  

So when it comes to test, here are some questions you might want to consider:

• How much of the assembly are we planning to outsource? If we are not outsourcing the entire product, how much of the unit will the EMS provider realistically be able to test?
• What level of hardware and/or software is required to outsource the test of our product? Do we have this equipment available to transfer to the EMS provider or will we expect them to source their own? How clear are our test specifications, is everything documented like it should or is there work to be done in this area? What sort of cost is going to be involved if we need the EMS partner to duplicate the test equipment we currently have?
• What test capabilities will our potential outsourcing partner need to have on-site?

Logistics

Logistics, particularly outbound, is often an area that is overlooked during an outsourcing strategy but it can make a huge difference to success or failure. For example, unless you outsource all of the assembly and test, the EMS provider will have to package the PCBA or sub-assembly and ship it to you, only for you to re-open this packaging, dispose of it and then package the product back up again when you’re ready to ship to the end user. Not only does this add extra layers of waste, it also creates an opportunity for double handling and the potential to introduce damage.

If however, you outsource all of the assembly and test of your product to the EMS provider, they can package the completed unit in your own branded packaging. They can then deliver this product back to you, for you to sell on when you have demand, or they can ship it straight to your end user anywhere in the world. This is the ultimate outsourcing agreement and allows you to focus purely on product design, sales, and marketing activities.

When considering your shipping requirements, here are some questions to think about:

• Where is my market and how quickly do I need to be able to respond to demand?
• How much of my current organisation is involved in picking, packing and shipping products? Is this a core activity for us, do our customers value this?
• How much space is taken up with goods coming in and going out of the business? What could this additional space be used for if we didn’t have to hold stock on the shelves?
• What specialist lifting or handling equipment would an EMS provider need to have if I wanted to outsource all of our shipping to them?

How far will you go?

As we said at the beginning of this post, the more of your procurement, assembly, test, and logistics operation you outsource, the more benefits you can expect to see. But that’s not to say you won’t see benefits from outsourcing if you don’t hand over everything to your EMS provider on day one. In fact, our advice would be to hand over the elements of your operation that are causing you the most pain and then plan on moving other functions or tasks over once you are in a position to do so. The first six months of any outsourcing relationship is critical and it’s advisable not to introduce too many variables early on. That said, there should be an ‘end goal’, something to work towards with your EMS partner. A fully outsourced solution may not be feasible for several months or even years, but providing you both understand what the long-term plan looks like, a suitable project plan can be put in place.

Hopefully, this blog post has helped and highlighted some questions to think about before you make a final decision on your outsourcing strategy and the most suitable supplier.

Image by Alex L’aventurier