The growing population of entire world demands the exploration of new ways as to how the people of the world do business and earn their living. Today there are countless businesses either small, medium or large are accelerating and providing their services or goods to consumers or customers. These business and firms main objective is to increase their profit while keeping the expenses and cost of manufacturing as low as possible. In doing so, they sought for cheap labor, inexpensive raw material, explore different ways to lower the running cost of business like electricity bills and other types of overhead expenses that can ultimately increases the cost of manufacturing of a product and thus reducing profit margins. Mainly the larger the business the more their employees, the larger their infrastructure and hence more expenses.
So, we have recently noticed the boom in manufacturing industry where the leading manufacturing company’s heads have used various methods to cut the manufacturing costs by employing automated robots and cheap labor that can work for several hours without asking for more perks and privileges. This is the reason why, in European countries and in USA, the cost of production is higher than as compared to other countries like China, Japan, Singapore and Taiwan where their currency is also not very high, the labor is cheap, raw material is also easily supplied economically and electricity is also cheap.
The larger enterprises prefer to open their factories, industries and facilities in countries where said parameters are highly optimistic. Since China is the world’s largest country by population and their government’s policies are also very highly favorable for investors, large industrial manufacturing companies and enterprises and where people of different dialects also work in cooperation with each other. The demography of China is also in favor of investors and the place is also very secure for foreigners in terms of internal security and tourism.
Now, if I were to be the owner of a multibillion dollar enterprise, I would suggest to build my head quarter in China, and why not..! When every faculty of the world is there and people all around the world like to visit there and is also the world’s largest market of electronics product and also has more than 100 big companies’ headquarters in Shanghai.
What is Electronic Manufacturing Service (EMS):
So what does this EMS actually is..? I am sure you are familiar with world’s leading name of mobile phone manufacturer “Apple”. Yes.. And IPhone is a dream of every one of us to have. But know what… from where these iphones come..? The world class iPhone is the product of Apple Incorporation. Apple Inc is the company based in USA, California and they design, develops and sell their product all around the world. But since Apple owners know what we discussed above, so they “outsourced” their production work to another company named “Foxconn”. The Foxconn is the big name in electronics manufacturing company and Information Technology (IT). Foxconn has it’s headquarter in Tucheng, Taipei, Taiwan. This company was accused of paying very low wages to its labor and forcing them to work pas legal overtime limits. Foxconn is the manufacturer of world’s top brands of electronics like Blackberry, Xiaomi, Play Station 3, Nintendo 3DS and iPhone and iPod. In this case Foxconn Corporation Limited is the Electronic Manufacturing Service Provides (EMSP) or simply (EMS) for the top OEMs like Apple and Intel. The company Intel selected Foxconn to be its EMS or ECM (Electronic Contract Manufacturer) to manufacture Intel branded motherboards, so Foxconn announced to develop its manufacturing facility or plant with US$ 500 million in southern China in the city of Huizhou. In this case again Intel is OEM or ODM and Foxconn is ECM. The main thing why Intel (OEM) will do this is to leverage cost to scale. Intel will pay Foxconn to purchase land, build manufacturing facility, train the employees, do installation and commissioning of expensive machinery and test equipment at the facility, but not in Intel’s headquarter but in country like China where it is economical. This will greatly reduce the overhead expenses of Intel while speeding up the process by parallel processing (Dealing with the ECM “Foxconn” while at the same time developing great RnD infrastructure at the headquarters to bring more better ideas and enhance existing design) and marketing and spreading its products in the world’s potential customers in major countries.
Electronic Contract Manufacturer (CM or ECM or CEM):
The term Contract Manufacturer (CM) is used for those companies that are given contract by their client as small as individuals or as large as enterprises to manufacture products on large scale by their (OEM’s) brand name and sell them to OEM’s customers on their (OEM’s) behalf. Their domain is not specific to electronics or embedded system designs but it can be any other field.
The ECM or CEM (Contract Electronics Manufacturer) is basically a company that works under contract with its OEM. ECMs are CMs dealing only in electronic, electrical or firmware products. The ECM can manufacture individual parts, or complete assembly (the integration of individual parts) and can manufacture final product from start to finish. The OEM will hire the ECM from the large pool of various ECMs available. It first finds the suitable ECM that fits best for its product manufacturing task and then initiate a contract according to which all IP rights are to be adhered with the OEM or ODM and ECM will not claim any right to design and will not share the design to third party. However there are various fields in which ECM and ODM works like software designing, supply chain management, hardware development or value added services. The ECM is particularly specific to the Electronics Engineering Industries where the core of the business is “Electronics or Electrical”. Like in medical field there are numerous OEMs that outsource their jobs of manufacturing sensitive medical devices to ECM/ EMS. In Aerospace and Defense top worldwide military electronics jobs are outsourced to ECMs that are many times hidden and kept secret.
Types of Services offered by ECMs:
The types of services offered by ECMs are categorized in three parts. 1- Front End services 2- Manufacturing Services 3- Back End Service
Front end services include Engineering Design analysis, prototyping, engineering lifecycle evaluation, environmental engineering, product development, and tool design and process technology development. In the domain of supply chain services included are planning and consultation about raw material supplier, BOM Analysis, purchasing, logistics, and regulatory compliance.
On the manufacturing side, the services provided are SMT/THT PCB manufacturing and PCB Assembly (PCBA), die casting, plastic injection molding for enclosure / casing , machining and tooling, backplanes, cabling/harness, QA/QC assurance and documentation
On the back end services there are logistics services like Freight forwarding, warehouse management, distribution and e-commerce, regulatory duty and customs clearance, order fulfillment. Besides logistics, after sales services are also very important, like reverse logistics, repair and warranty, replacement, failure analysis, e-waste and recycling.
Intellectual Property (IP):
The intellectual property is actually an asset that contains intangible work, that is the result of high quality research and development (R&D) work based on innovative idea or creation. The intellectual property is related to human intellect brining up novel ideas and out of box thinking finding solution to any problem through invention that was never existed before pertaining to humans as individual or society. Trademarks, copyrights and patents are the example of IPs. The IP exist in every field of life including but not limited to Marketing, Engineering, Business, Law and Finance. Our discussion in this article is specific to IPs in Electronics Engineering field
Original Equipment Manufacturer (OEM):
As the name implies, the OEM is the one having capability to design, develop, assemble and market its product at its very own production facility. However due to increasing challenge with respect to business point of view and keep the position in industrial market place and leave behind other players in the market, the OEM will outsource its product manufacturing task to other large companies (ECMs or EMS) that do manufacturing on large scale in competitive prices. The three main reasons why these OEMs will outsource their manufacturing jobs to ECMs are 1- Speed to Market 2- High Quality 3- Low Price. Due to these factors many OEMs are unable to enhance their profit margins and their profit margins are dwindling. The only way to solve this issue is to integrate experienced outsource partner (ECM/EMS) into their supply chain. When the high quality product is in demand, the speed of manufacturing will slow down because of additional steps of manufacturing that ensures Quality Control (QC) and inspection steps. But the price is also increased with high quality. For low quality product, the speed can be greater and the price is also lower. Hence the EMS will produce products on various quality levels and different price levels depending upon the demand from their client. Like Apple products, iPhone, iPod are always high quality and hence high prices but due to slower speed of manufacturing it can be available in low quantity in market, but that does not have any effect on demand and supply balance because due to high prices the demand of iPhone is low and only targeted to specific niche clients, hence the demand / supply balance is maintained. The example of OEM is like it hires or award the contract to the EMS Company and then it labels or prints its logo on the products to keep the IP rights and sell the products by its names. So the letter “M” in OEM is actually not suited because they usually are not the Mass Manufacturers instead they are the designer or original design owners that can develop on very small scale or make prototype for the proof of concept.
Original Design Manufacturers (ODM):
The original design manufacturers ODM are those companies having the invention, design and ideas on paper and they have brains that come up with new inventions but they do not have the facility or production / manufacturing plant to give shape to their invention.
Example is like an engineer having some observations about the people going in gym. There he observes that while running on treadmill the runner does not have any idea of the heart rate he is at. So he comes up with an idea of designing a wearable electronic gadget that will continuously monitor the heart rate and can have other features like accelerometer and Bluetooth module. Now this person or a small company or enterprise is called ODM. Still the letter “M” is not actually the manufacturer but it can be replaced with “Inventor or Out-of-Box thinker”. It is highly critical that ODMs beware of copycats and select/choose the right EMS or CEM that will not steal the “Original Idea” of ODM.
Difference between OEM and ODM:
For example if we say Apple is ODM then Foxconn will be its OEM. The ODMs are those giants that have complete designs of their products but lack the facility to mass manufacture. While OEMs are those having manufacturing facility but do not have the designs ownership.
How to choose EMS Manufacturer
The selection of EMS manufacture is such a crucial activity like selecting your life partner. There are many aspects as to which, the OEM has to focus one of which is long term cooperation with your selected EMS. The main features for EMS selection which every OEM must take care of are 1- Value added services 2- cost 3- Quality 4- Delivery
The following are top 10 queries that an OEM must find answers before hiring an EMS.
1- EMS Provider Capabilities:
As an OEM it is essential to know what the exact capabilities of your EMS providers are. There are different tiers of EMS providers where Tier 1 comes with High volume and low mix (HVLM) type and Tier 2 comes with HMLV High mix low volume. Volume here means the quantity or number of units built. Mix means having capability to deal with various kinds of technology or sub-categories. Like medical electronics is something that has low volume but consumer electronics is high volume. Usually tier 1 EMS providers have great purchasing power and strong supply chain management. While Tier 2 can have strong capabilities on technical side but not as strong in supply chain, warehouse management and purchasing. The OEM must see which EMS provides more flexibility and special services and then choose EMS accordingly.
It is highly important that the capabilities, capacity and services offered by EMS must meet the required and particular needs of OEM. The OEM representatives may visit the site/plant/facility of EMS to visually check for satisfaction instead of just going through the pamphlet or brochure of EMS Company. Only relying on EMS slide shows and superficial details and making a decision to choose EMS is not wise.
2- EMS Provider’s certifications & standards
There are many EMS providers having long lists of certifications that may show their profile qualification but those certifications can be in other industry or product which is irrelevant to you as OEM and you don’t require it. Hence it is vital for OEM to know about the industry it belongs and find relevant certifications that EMS providers have. Also those certifications must have proper validity time and not expired. It is important to understand about EMS provider’s certifications and standards that they comply with yours as OEM as well. The standards practiced by any potential EMS provider matters a lot. It gives the confidence and credibility to OEM. Many times most EMS providers maintain records for human resource training about the standards like OSHA, RoHS, IPC, IEEE and NEMA standards. Some EMS provider also give certificate of compliance with electronic products they ship to their customers as a proof of conformity standards of industry.
3- EMS supplier’s manufacturing locations
It is highly important that OEM and EMS supplier both reside in same country, however most of the times OEM hires EMS providing company in a country where overall cost of production of goods become low and EMS also shares the saving from the manufacturing cost with OEM. Most of the EMS companies have their manufacturing facilities in China, Taiwan and other similar centuries where overhead charges, labor cost and part are inexpensive than any other country. The language can be a barrier for communication between OEM and EMS representatives especially when their native languages are different. It is also highly important to get information and understand the plans of EMS provider where to install their manufacturing facility in future. The location of EMS is important in view of logistics. It is favorable to select EMS located in a country which is in proximity to potential customers/buyer countries so that the freight charges are minimal and delivery or lead time is minimal. The biggest example is the market / potential customers of smart phones and iphones is in Pakistan and India, and the most of the outlets of big OEMs are situated in China. The recent development of One Belt One road in collaboration with Pakistan named China-Pakistan Economic Corridor (CPEC), is an example of a strategy that Chinese government is applying in order to get access to entire world market by Road Way instead of going through ship and boats. The geography of Pakistan enables Chinese based EMS or CEMs to reduce their delivery lead time and distribute their goods faster than before and capture whole world economy.
4- Is the EMS Company financially stable?
There are various standards set by OEMs to judge whether the EMS is financially stable or not. However this data about financial terms like cash flows, assets and similar can be confidential and is not easy for OEM to get. If the EMS financial position is audited by the certified public accountant than the data can be available easily while in opposite case the information is private. So another credible source can be used to get that information. A scrupulous analysis of this information can help avoid short term relationship with your potential EMS supplier due to unpleasant financial matters.
5- Potential EMS Provider’s quality metrics
Quality is something which must not be compromised. However this is not the case if you believe in false assurances from EMS providers saying “100% Qualified”. To judge the quality standards of EMS there are some quality metrics of EMS that will tell the truth about the quality claims of EMS. The corrective actions according to quality metrics taken to improve and add value to the quality in general will show the quality index of EMS provider. It is better to choose EMS that follows its own quality metrics and address issues rising due to lack of quality and strive for quality improvements and that their quality metrics are consistent with your (OEM’s) standards.
6- Cost Management Ability of EMS
The main reason why OEM outsource their jobs and hire EMS is to run production with minimal cost. This allows OEM to award the contract to sub-contractor or EMS and then focusing on its research, development and marketing activities. This step of analyzing various EMS portfolios to check how they cut manufacturing cost is very important. OEM must choose those EMS who have definitely saved money in production lines by cutting/reducing cost. It is also equally important to choose that EMS that will share the saved money with OEM. It is important for OEM to understand how potential EMS generates quotes using which cost calculation methods. Whether they use last price or historical cost of components or they use the given BOM to check the best price in market. Whether they use historical records of time they take on average to complete the job or they actually study the details of job assigned to determine completion time.
OEM must find answers to what is the buying power of EMS and are there any retailers distributers in their supply chain to help speed up the work. How they will reduce cost starting from few prototypes to large / bulk manufacturing. How the hourly rate and wages calculated and what is are the overhead charges. OEM should determine “target margins” of EMS. How EMS maintain their profit margins to prove to be long term partner with OEM. OEM must try to find why EMS will end partnership with OEM. Once EMS is selected by OEM, it is very costly to change EMS and break partnership.
7- Intellectual property (IP) security Assurance
If you design or invent something or you have some unique idea, you are always aware that someone will not steal it away from you. So you always try to take measures to secure data. Similarly when OEM hires an EMS it will make sure that the Intellectual Property (IP) is not compromised. This is particularly important when EMS is from international or foreign country based. EMS has to make sure that restricted information of OEM is not shared with anyone either intentionally or accidentally. OEM can check for the EMS data handling procedures, network security layers and employee signing up process.
8- New Product Introductions (NPI)
OEM should as EMS to about their processes of doing NPIs, their manpower expertise and past experience of any successful NPI. Simply claiming for NPIs and not successfully completing it will not do the job.
9- Post production support
Post production repair facility, product warrant and liability policies are some value added services. OEM must assure that these services are provided by EMS. This can be done by checking reference and feedback of customers on the portal of EMS online e-commerce websites.
10-Why only YOU
As OEM, you should ask (but actually observe) your potential EMS why should we choose you as our EMS partner. Keenly observe the response, the timing and frequency of response and how they entertain your queries. Observe whether they focus on meeting the needs of OEM or simply want to sell their services. You as OEM should know that EMS has complete knowledge of OEM’s needs and how does it value the overall contract between the two. OEM representative and HR should interview comprehensively to know about their potential EMS strength and weaknesses. During the meeting or interview, OEM should measure the professionalism, knowledge, expertise, flexibility and how minimal will be the remote management for OEM if a potential EMS gets hired.
How to control EMS Cost
The whole sole main purpose of OEM to outsource the production and manufacturing work to EMS is to increase the profit margins and gain more market in lesser time. However many OEMs do a very superficial analysis on the cost calculations of production and usually focus on “unit cost” to calculate their breakeven point and hence calculate the profit margin. This is not the case however for successful OEMs who see deep inside on the EMS organizations capabilities and their methodology to control “total cost of production”. The full cost or the total cost should be calculated or evaluated over the lifetime of the product itself. Because many EMS while promoting their portfolios to OEMs persuades them to see only the unit cost but this misleads OEMs. The true cost of project or total cost of production has many other financial factors that can raise the unit cost to greater extent.
The unit cost is actually the fixed and variable costs that are visible cost that many OEMs take into account in their financial cost analysis. This includes the material cost, labor charges, and fabrication and assembly costs. The cost per unit product is calculated simply by adding all above mentioned visible cost and dividing the sum by total quantity of units. On the basis of the calculations many OEM will select the EMS with lowest figure to be their EMS partner for long term relationship, which is absolutely not wise decision.
There are many hidden/indirect costs that OEMs must consider and take look into a broader picture of cost analysis. These include the time you as OEM spends on the venture, the cost required to undo something that goes wrong during production run, supervisory time to cost, flights and tickets, hotel, meal and luxurious charges and time taken by engineers on tours, subsistence and administration costs are typically neglected while calculating cost analysis. These can be minimized by residing in low cost hotels, using cheap airlines services, spending lesser on TA/DA allowances and overall fine tuning the financial strategy to overall control the total cost of project.
Risk Assessment and Contingency:
The total cost of the project can also rise because of some unforeseen happening. These uncertainties can increase the base cost estimate of the project to some extra margin called “contingency margin”. The contingency is the extra amount kept in surplus to the base cost of project to cover any know or unknown risks in the project so as to avoid cost overrun. This estimate is based on the project owner OEM’s confidence about the calculation of total cost of project and that the cost will not exceed certain limit of confidence. There are two ways to determine the contingency amount
1- Single point estimate:
In the single point method the rough estimate is made according to the percentage of the base cost of project. Contingency = % x Base cost estimate. This percentage is determined by a team of experts in estimation and competency analysis. There is also a predetermined method defined by AACE where the project can be classified according to common risks. For example class 2 is classified for 15% contingency and class 5 for 40% and so on. However this method is not viable for more specific, typical and larger projects where risks factors are more grievous and needs high attention.
2- Probabilistic method.
In probabilistic method, the statistical distribution of data is used to design uncertainties models. The probability of risk or uncertainty is determined at every point after exceeding the base cost estimate unlike the single point estimate as can be shown in figure. This method is more time taking and requires more funds than single point and is usually applied on larger businesses and projects. This can further be classified in two
- Expected Value
This technique is used for risk management and then making a decision based on the analysis. First all the risk associated with the project is listed and then the chances or probability of occurring that particular risk is multiplied by the impact (monetary value) of that risk on the project. Adding up all the values in the end will give the total expected value of due to the listed risks.
Expected value = Probability of occurring the risk x Impact if it occurs
The assessment is made by team of professionals to evaluate the impact of cost associated with the risk factors and distributed cost estimates are assigned. The readymade simulation tools are used and various algorithms are available like Monte Carlo to simulate the results and risk management team will then take decision accordingly.
- Range Estimate
In this method only critical risk elements are need to be identified and then respective cost elements are found that will have significant impact on the project. Important correlations are incorporated among different critical cost elements then a simulation model is run. The cost element will have a range between minimum and maximum values and cost value can randomly change between these limits resulting in total project cost distributed on the range of estimate. The graph on the right shows the difference between cost estimates by using “cumulative distribution” contingency vs. without contingency.
So we can say that contingency is actually calculated on the basis of associated risks factors, the degree of uncertainty, and the confidence level to show that project budget will meet expectations. In order to keep the project within budget, sufficient contingency is necessarily added in the base cost of project.
How to monitor electronics manufacturing service (EMS) quality
When it comes to quality, a word comes in our mind “No Compromise”. Yes that is true..! A good OEM enterprise must seek for specialist EMS providers that have excellence in quality product development and manufacturing. The lack in quality and compromised quality production will result in OEMs portfolio defamation, consistent complaints from customers about quality of products and increased product returns and increased cost of post-production services that is repairs and customer services. So what should an OEM do in order to choose the EMS provider that assures best quality production run and appears to be the best EMS partner for OEM.
Quality Control: (QC)
The process of quality control requires the corrective measures to be taken when a defect occurs in the product, employee or human resource training schemes, implementing test procedures, fault or malfunction reporting that is related to product. It includes review and analysis of the product. The features of the product determine how the QC is implemented on it. The products on manufacturing lines of automobile industry are way different from Printed Circuit Boards on the manufacturing and assembly line in electronics industry. Hence QC procedures vary differently. QC is done by QC team headed by QC inspector who make a final report and submits to higher authorities.
Quality Assurance: (QA)
Quality Assurance (QA) on the other hand is the methodology to improve the process of manufacturing. The QA focus mainly on process instead of product. Being EMS, the optimum utilization of resources and best practices makes the process to yield more products of good quality. The QA team will ensure that all the activities of manufacturing process is as per the planned production protocol. The impact of QA comes before the QC starts, so it is vital that pre-audit of project by professional QA team be conducted to avoid any production errors.
Here are some of the factors that will tell about potential EMS providers about the quality practice and levels they adhere to.
- ISO Credential:
In perspective of Electronic Manufacturing Services (EMS), the ISO certification tells the OEM that this organization follows the international organizations electronic and electrical industrial standards. Some of the main ISO certifications for EMS are ISO 9001 which is internationally accepted standard for QMS (Quality Management System) which defines the EMS ability to consistently deliver products and services as per the customer requirements and meet the regulatory requirements and show the trend of continuous improvement in documentation and system of organization of EMS. A proper written procedure like “Standard Operating Procedures SOP” must be documented. It defined management’s responsibilities, resources management, measurement, analysis and improvement of QMS through actions like preventive measure and corrective actions and internal audits.
The ISO14001 standard gives the pragmatic tools to EMS provider in electronics industrial sector to addresses the environmental issues due to carbon emission. This standard highlights climate change issues and product life cycle.
ISO13485 addresses the medical instruments and electronic products. The EMS provider certified with ISO13485 needs to show that it actively implements and maintain the quality standards.
The AS5553 standard is related to counterfeit electronic components detection and avoidance and their disposition and mitigation.
The AS6081 standard targets the distributors involved in selling / distributing counterfeit electronic parts. It identifies genuine components sources / suppliers and control and report suspects in fraudulent parts supply.
- Document Control:
The good EMS is the one that has perfect expertise in proper documentation of records and that implements “Engineering Change Notes (ECN)”. The ECN is the documented changes in design of a product, after the initial design completion, throughout its life cycle. The documentation of feedback and reviews from customers about product. Timely updating of engineering design drawings and documents can lead to minimal process errors
- Incident Management:
The tracking and management of quality issues when arise and handling and corrective measure taken are the abilities which most OEMs seek in their potential EMS providers. The good QMS system will assign responsibility to different QM/QC team members in case of incidence occurrence. Access of personal computers and networking access be assured so that all staff and other members of EMS organization get update about the incidence and report back about the quality issues.
- Component Management:
Supply chain management and inventory, stocks and warehouse management directly affects the quality of end product in EMS provider. The procurement team should be keen about the quality of raw materials and components being purchased because ultimately the quality of procured stuff will affect the quality of end product.
- Performance Metrics
The performance data indicating the quality of services (QoS) of EMS provider is the key thing that OEM wants to analyze. The EMS firms practicing six sigma or similar standards are better choices for OEMs. The performance metrics will show how many defected units are manufactured on production line per total production run. This data is the proof of the quality of performance and shows the defect or shortcomings in production line or process of manufacturing.
Finally it can be said that, the electronic manufacturing services is a complex industry where competition is very high. OEMs must carefully analyze their potential EMS providers on the basis of performance parameter discussed in this article. Once OEM choose an EMS, then it is highly costly to break the contract after long term cooperation and re-hire another EMS, this may badly affect the OEMs profitability and reputation in longer run.