In spite of supply chain collaboration, MRP technology, supplier consolidation and a long period of ample component supply, a panel of leading EMS providers say they have less visibility than ever into demand signals from their OEM customers.
Executives from U.S.-based OnCore Manufacturing Services, Variosystems Inc., Kimball Electronics Inc. and Plexus Corp. gathered recently to celebrate the 10th anniversary of Future Electronics Inc.’s Memphis Area Distribution Center. “Customers have less visibility into demand than ever, so that means we have to be more flexible than ever,” said Steve Korn, vice president, North American operations and global supply chain for Kimball Electronics, during a panel discussion. A similar sentiment was echoed later by a panel of supplier executives. “Customer forecasts are worse than ever,” said Matt McKenzie, president of CUI Inc.
For the EMS providers, offshoring is one of the key reasons customer visibility has declined. OEMs and their manufacturers operate on opposite sides of the globe. Shipments take 6 weeks or more to reach their destinations. Components available in one region may not be available in another. “Supply chains are moving quickly,” said Chris Durham, senior vice president of supply chain management for OnCore. “We have to work with our customers and sometimes their customers to customize the supply chain.”
In an effort to remain competitive with foreign manufacturers, U.S.-based OEMs want EMS partners in Asia. Their domestic EMS providers have responded by expanding overseas. “Our customers are small and mid-sized and don’t have an infrastructure in Asia,” said Durham. “They need a partner with proximity and design support in both the Americas and Asia.”
Even as demand visibility has worsened, customers are expecting more and more support from their EMS providers. “Customers don’t want to hold any assets on their books,” said Durham. “So EMS will continue to source [components on OEMs’ behalf].” “Customers just assume we will take care of engineering support,” said Peter Ermisch, co-founder and general manager of Variosystems. “EMS don’t get paid for that—but we are doing it to remain competitive.”
Rather than bemoan the challenges of offshoring, these EMS panelists have adapted. U.S. customers are used to same-day communication with their EMS partners, high-quality products and quick-turn, local prototypes. After some projects developed in the U.S. didn’t translate well to Asia, Variosystems changed its procedures. “Now we run a prototype locally and work all the bugs out of it first,” said Ermisch. “We move it to Asia only after the kinks are worked out.”
U.S. OEMs also appear to be tiring of late-night phone calls to Asia for engineering change orders or dealing with component glitches. Plexus, said Scott Theune, vice president for supply chain, acts as a centralized help center for its customers. “We’ve learned to deal with such customer issues internally,” Theune said. “We focus on communicating with our customers so they have fewer points of contact.”
Customers are also increasingly reluctant to carry components they may not use. Lessened visibility means supply and demand forecasts rarely match up. “Customers don’t want to hold assets on their books,” explained Durham. “Even if OEMs could [manage their supply chain], having assets off the books helps their bottom line.”
These EMS companies have turned to distribution to increase their flexibility and decrease their asset risks. Since global distributors store inventory in all major regions of the world, they are well-suited to quickly manage order upside and downside. “The reality is EMS companies have problems being that flexible with [customer] supply chains,” said Durham. But there’s a perception that distribution is expensive, the panelists said. Although EMS companies can save costs by ordering large volumes of components directly from suppliers, cancellations may leave the EMS and the OEM with excess inventory. “We find we have to educate our customers about distribution,” said Kimball’s Korn. “Distribution is more flexible and we have to show customers there is a [cost] advantage to that.”
“Customers have reduced visibility [into their end-customers] and they expect us to manage that,” Durham concurred. “We, in turn, can push that [management] down to distribution.” In situations where OEM forecasts are too optimistic, the EMS companies said distributors have been willing to work with customers on excess. Distribution’s broad customer base increases the likelihood that one OEM’s excess is another OEM’s necessity. “If we have an agreement in place with a distributor, and we show our customers we can work with 80 percent of their excess, they are more willing to deal with – or even pay for – the remaining 20 percent,” said Theune. “They key is to have the fewest surprises.”
Visibility challenges aside, the EMS companies have found a number of advantages to expanding offshore. Ninety percent of the products Plexus manufactures in China are sold in China, Theune said. Variosystems has been better able to manage scalability challenges, said Ermisch. Projects that need to be scaled up quickly can be managed from Variosystems’ Sri Lanka site where the EMS utilizes more manual labor. “Sometimes, that ability outweighs everything else,” said Ermisch.