Arguably, industrial electronics is once again falling victim to the consumer electronics market: the increase in personalisation and customisable interfaces in consumer electronics is gradually forcing industrial electronics manufacturers to offer a similar service.
So where does this leave Original Equipment Manufacturers (OEMs)? It gives them the opportunity to stay ahead of their market and adapt their own manufacturing strategy before the competition catch on. One such option, known as Configure-to-Order (CTO) manufacturing, or Postponement, allows OEMs to respond dynamically to unknown or changing customer demand.
In this post we’ll look at what we mean by the term CTO, the importance of supply chain management, where responsibilities lie when setting up new agreements with an Electronics Manufacturing Services (EMS) provider and some of the benefits OEMs can expect to see.
CTO manufacturing involves an EMS provider putting in place a dedicated production line for your product, allowing you to ‘call off’ configured and tested units when you need them, with a reduced lead-time.
The process typically begins by manufacturing enough ‘base’ (or embryo) units, which are then put into stock until a customer order is received for the top level variant. Once this demand is sent through, the correct quantity of embryos is taken from stock and configured to the specification desired by the end customer. This is particularly effective when the OEM offers a wide range of product variants but can’t easily predict which ‘flavour’ will be required at any given time.
I always like to use the ice-cream analogy.
Before setting off on its daily round, the van will be stocked with cones, ice-cream and a range of different toppings. Unfortunately, it’s only after they start playing their musical jingle that they find out whether their customers want chocolate sauce, strawberry sauce, sprinkles, a flake or a combination of all four. There’s no way they can accurately predict exactly what their customers will want until they turn up at the side of their van.
Yes, they might be able to look back at the last few weeks and months to see what toppings are more popular than others but that’s as far as they can go. And you can almost guarantee that if they decide to stop stocking a ‘slow moving’ topping, their next set of customers will want to order it. Sound familiar?
The skill therefore, is creating a stable supply chain which is flexible enough to cater for all possible combinations at a moment’s notice, but without investing in more stock than is really needed.
When setting up a CTO agreement with your EMS partner, there are some aspects that need to be aligned prior to the first build in order to ensure all parties’ needs are catered for and Service Level Agreements (SLAs) can be an effective way of achieving this.
Setting up a successful SLA that has both parties’ best interests in mind can help resolve a range of production pressures. The main aim of the SLA is to ensure that each party is contractually bound to uphold their commitments.
Of course, each SLA will need to be specific to each product and would typically include details such as price, quantity, build and delivery timescales along with time frames for order placement and product turnaround.
SLAs can reduce the time and admin associated with order placement as you only need to raise firm orders for the configured and tested units as and when the end user needs them – the ‘embryo’ units and all of the material and labour associated with these would not need to be ordered separately. Instead, the value relating to this stock would be included within the SLA which you would commit to on an annual basis when you sign up. It’s worth noting that running an SLA with any supplier needs close management.
It’s much easier to see what stock you are committed to when you can see firm orders in place, so when there aren’t any, you still need a mechanism in place internally to make sure that the value you have signed up to behind the scenes is visible somehow.
In addition to confirming order quantities and stock liabilities, SLAs also serve as a commitment of expectations in regards to Key Performance Indicators (KPIs) for both the OEM and EMS provider.
Of course, nobody knows your product better than you. Therefore, it is important that all of your valuable product knowledge is transferred across to your EMS partner. This is vital in ensuring that your chosen assembly partner can manufacture your product to the same specifications that you have come to expect.
However, over time, it’s recognised that varying degrees of ‘local knowledge’ can build up on the shop floor which don’t always make it back to the relevant department or build pack. So prior to any outsourcing project, regardless of whether it will be run with CTO in mind, we recommend that an internal audit of your own data packs take place in conjunction with your production staff to ensure everything is captured. If the materials being used out on the line, or the technique carried out at test differs in any way from the set of instructions you’re about to hand over to your EMS provider, chances are they will replicate your ‘current state’ which may not meet your expectations.
As we have already touched on, implementing a successful CTO manufacturing strategy is reliant on a comprehensive and established supply chain being firmly in place. Without one, assembly times can increase, material pricing can go up and product quality can be compromised. Partnering with an EMS provider that has established and reliable supply chain relationships already in place helps relieve these pressures and gives considerable reassurance that your product will be manufactured with minimal delay and with cost effective quality parts.
Managing supply chains takes place in a variety of ways and each outsourcing partner and the relationships they hold with their material suppliers will differ. Some EMS providers will create Letters of Intent (LOIs) for key items to help minimise both risk and production delays on CTO projects. These act as a forecast between the EMS and their suppliers for the material parts required in build and the estimated annual usage and unit pricing is agreed at the start of the contract. Any parts with extended lead times will usually be ‘buffered’ so that they can be delivered into the EMS provider, often next day, and certainly well in advance of their standard lead-time.
Ensuring the right parts are delivered at the right time to the right place is a constant juggling act. Implementing a CTO strategy usually requires a significant upfront investment in stock by the EMS provider. Therefore, any changes to material supply, for example the result of a product re-design or part change, must be communicated efficiently to them in order to minimise the amount of potentially redundant stock they have in the pipeline at any one time.
Once you have things up and running, it’s important to ensure regular communication is maintained between you and your EMS partner. Dedicated account managers within the EMS help ensure that this communication is managed appropriately and that there is always someone on hand with an in-depth knowledge of your product and account.
It is recommended that regular business reviews are held to ensure that the terms outlined in the original SLA are still suitable and upholding the needs of your business. For example, you may find that replenishment levels are too low once your product is established within the marketplace and adjustments need to be made. These would need to be discussed with the EMS provider in order for them to make the necessary arrangements to the supply chain and production line and accommodate the increase in demand.
Outsourcing your manufacturing and implementing a CTO strategy to an EMS provider is not something to be taken lightly. It takes time to set up and robust supply chains and manufacturing capabilities are imperative to its success. Which means it’s vital when you’re looking to partner with an Electronics Manufacturing Services (EMS) provider that you challenge them on their past experience in this area. How many of their customers are running a CTO strategy? What level of complexity exists in these products? If the answer is ‘one, and not much’, then you will need to decide whether or not they are the right solution for you.
Some OEMs will never have the need to implement a CTO strategy, while others will struggle to respond to the demands of their changing market without it in place. If, however, you can find the right EMS provider for your CTO needs, it can be hugely beneficial to both your organisation, and to your customers.