By Cyril Fernandes
Senior Vice President, Marketing and Corporate Development
EPM Global Services

Original Equipment Manufacturers (OEMs) face unique challenges in maintaining competitive advantage. Taking cost out of a product while improving features, functionality and performance is a balance that can be difficult to strike. And for Small to Medium Enterprise (SME) OEM’s, the challenge is exacerbated by lower volumes, rapid NPI cycles and fewer internal resources. While the potential cost savings associated with offshore manufacturing and the global supply chain may be appealing for SME OEMs, it can be an option that proves more costly in the long run. The following looks at some of the advantages and disadvantages of the global supply chain solution, and an exciting new option for SME OEMs.

An Evolution of Outsourcing

Through the 1990’s, the SME OEMs began outsourcing operations to North American Tier 2/3 EMS providers. This approach allowed them to maintain, and in some cases, enhance competitive advantage by allowing them to focus and invest in growth activities such as product development and marketing, while effectively managing operational costs and the requisite capital investments.  

At the same time, cost pressures in the highly competitive large enterprise and consumer marketplaces prompted large OEMs to establish their global supply chain in lockstep with Tier 1 EMS providers. This resulted in the setup and eventual migration to low-cost geographies, primarily in Asia and Mexico for the Tier 1 EMS providers and their OEM customers. The offshore solution was attractive and viable for several reasons: low labor costs for a skilled workforce; manufacturing infrastructures equivalent to if not better than similar North American infrastructures; communications technology that enabled real-time communications worldwide; and proximity to component and sub-assembly manufacturers located in these low cost geographies.

A natural leveraging of the cost benefits provided by the larger Tier 1 EMS providers resulted in competitive cost advantages in the marketplace for those large enterprise OEMS who were smart enough to realize the value of a global supply chain strategy developed in partnership with them. This created significant value, and ultimately, competitive advantage. The natural outcome is evidenced in the drop in consumer costs for large enterprise and consumer commodity items such as PC’s, servers, audio and video products, etc.

Increasing Competitive Pressures on Small OEMs

As with all economic cycles, the conditions that established the global supply chain strategies for the large enterprise OEM and consumer marketplaces a decade ago have started to manifest themselves in the world of the SME OEMs. How this is addressed is vital to the competitive advantage that these organizations will hold in the global marketplace.

Partnering with North American EMS providers allowed small OEMs to immediately realize cost-savings. EMS providers delivered economies of scale through the North American supply chain, combined with state of the art manufacturing infrastructures and systems. Translating this supply chain model on a global scale can be challenging. Issues related to cultural, geographical and communication differences, equipment/infrastructure investments required for movement of manufacturing between facilities, vendor stability, vendor financial strength, quality, materials management, IP protection, and responsiveness are all critical and sometimes insurmountable challenges for small to mid-size organizations to face on their own.

Perhaps most significantly, SME OEMs must consider the trade-offs associated with offshore manufacturing. A key element, possibly unique to the SME market is the issue related to product lifecycle and the necessity to have an agile and responsive system in place to address rapid technology changes. While materials acquisition and fulfillment processes can benefit from a cost reduction perspective, product development and engineering processes can be compromised, especially during the early stages of product life cycle. Typically, SME OEMs have greater NPI and change requirements due to the nature of the industries that they are involved in. A close alliance with the EMS provider is necessary to ensure the integrity of product development.It is rare that the design functions are located offshore, thus the need to have local access to the EMS provider is a necessity. Simply put, going offshore immediately may not always reap the expected benefits and could compromise the success of the product throughout its entire lifecycle.

Options for SME OEMs

Executing a global supply chain strategy with a Tier 1 EMS provider is not necessarily the answer for SME OEMs either. While there are some Tier 1 offerings designed to accommodate smaller scale requirements, they are typically a patchwork fix to address the challenges the SME OEMs faces. The fundamental issue most SME OEMs face when dealing with Tier 1 EMS providers is that they do not produce volumes sufficient to justify an effective relationship. Further, the local infrastructure required to support product early in its lifecycle may not be agile and responsive enough to deal effectively with rapid technology change.

Options to full-scale offshore manufacturing do exist for SME OEMs. For example, partnering with North American representatives of offshore EMS providers may be an option, but this only partially addresses the issues. Typically the OEM is not dealing directly with the offshore EMS provider, but rather through the representative organization in North America. The problems of cultural, geographical and communication differences may be mitigated somewhat through this type of arrangement; however the issues of IP protection, equipment/infrastructure investment, vendor stability and financial strength, quality, materials management and responsiveness will still exist to a certain degree. In addition, the nature of the tripartite business relationship between the SME OEM, North American representative and offshore EMS provider can be complicated.

Another option often presented by North American Tier2/3 EMS providers is to partner with an offshore provider. This is in essence a variation of the previous option. Again, the issues of IP protection, equipment/infrastructure investment, vendor stability and financial strength, quality, materials management and responsiveness will come into play.

In these two options, the type of relationship required to directly and effectively support the SME OEMs does not exist. A high level of communication and partnership is required for an effective global supply chain strategy for product at all stages in its lifecycle. This issue is one of “partner presence” with the EMS provider. Without partner presence, the expansion of the global supply chain strategy will be difficult to sustain over the period of time required to make it successful.

The EPM Global Solution

EPM Global Services, an established Tier 3 EMS provider in Markham, Ontario, with a solid 10 year history of providing innovative EMS solutions, has created and implemented its Hybrid Manufacturing Solutions (HMS) program specifically designed for its North American and European SME OEM partners.

HMS is a global supply chain strategy designed to leverage the global reach of EPM Global Services specifically for the SME OEM customers’ benefit. HMS allows SME OEMs to effectively reap the benefits of a global supply chain strategy while maintaining local partner presence for an entire product lifecycle – from concept through manufacturing, fulfillment and after sales support and services globally.

EPM Global opened its wholly owned subsidiaries in Shenzhen, PRC, Hong Kong and Manchester, New Hampshire, USA in early 2006 to provide EMS solutions for North American SME OEMs. The newly opened greenfield facilities have common manufacturing and systems infrastructures, providing high levels of flexibility without the additional investment costs required when moving manufacturing between facilities. A common systems infrastructure also ensures that information on the progress of manufacturing is available real time from any location.

Key to the HMS strategy and its success with its customers is the local presence that the Markham and Manchester facilities provide. This partner presence gives SME OEMs the advantages of local representation and global reach without having to deal with the issues traditionally associated with a global supply chain strategy.

EPM’s HMS solution provides SME OEMs with the ability to create unique strategies that maximize the effectiveness of the global supply chain that take advantage of the global strengths of all EPM facilities through all stages of the product lifecycle. HMS allows for the creation of a blended strategy where, for example, a product early in its lifecycle may continue to have the core manufacturing done at any of the North American facilities, while the materials supply chain is being setup globally. At a point in time, in concert with its partners, manufacturing, fulfillment and other provided services may be migrated to any of the EPM Global locations where it makes business sense.