EMS providers tell customers: 'Let us do it'
Customers weigh merits of deeper collaboration
By Claire Serant / EBN /(10/08/2002 11:44 AM EST)
EMS providers are waging an informal campaign to persuade their customers to take full advantage of new-product-introduction (NPI) services, a move that ultimately may demand that the contract manufacturing industry surmount its biggest challenge yet.
By tapping NPI services at the conceptual stage, EMS providers claim they can help their OEM customers cut costs, improve time-to-market, and streamline new designs to optimize manufacturing efficiencies. That would represent a marked change, given that OEMs historically have embraced such services primarily to aid them with product redesign.
"Getting involved at the [midpoint of the development] process is too late to have significant product-cost impact," said Jeff Bloch, an analyst at iSuppli Corp., El Segundo, Calif.
Indeed, OEMs that until now have maintained a stubborn attitude when it comes to sharing their designs with manufacturing partners are starting to realize the benefits.
At the Supply Network Conference held in San Jose late last month, sponsored by EBN and the Institute for Supply Management, Franklin Grosvenor, senior director of manufacturing at Cisco Systems Inc., called NPI an "untapped opportunity."
"NPI was the sole domain of OEMs, but we should engage EMS as early as possible to [take advantage of] cost-reduction opportunities," Grosvenor said. "EMS knows how to get costs down."
According to the numbers, however, it's apparent that OEMs have a way to go before they are won over. Last year, EMS-sponsored NPI services generated between $3 billion and $5 billion, out of worldwide EMS market revenue of $100 billion, according to Randall Sherman, an analyst at New Venture Research Corp., Nevada City, Calif.
"Right now it's a tug of war over how much EMS companies and OEMs should do," Sherman said. "Some of it is political and territorial because OEMs feel design is their value-add. They don't typically allow EMS companies to do much unless it's a very low-end product.
"Some companies like Sun Microsystems allow EMS providers to design certain types of workstations but will keep next-generation, leading-edge activities in-house," Sherman added.
Lucent takes the leap
But within the past 12 to 18 months, beleaguered Lucent Technologies Inc. has started to rely more on its EMS partners' NPI services to help reduce costs, said Steve Sherman, vice president of manufacturing strategies at the Murray Hill, N.J., company.
"We want our manufacturing partners to participate [in the design process], to offer input on how well a product will get launched during manufacturing, and look at how cost-effective it will be," Sherman said. "For us, we wouldn't be effective any other way."
So far, Lucent has handed over some of its printed-circuit-card layout work and PC-board assembly to its EMS partners-Celestica, Jabil Circuit, and Solectron.
"We always go to EMS companies for NPI as it relates to design for X, design for manufacturability, design for testability," Sherman said.
In addition to assigning an EMS representative to its new-product design teams, Lucent's EMS partners help the company to re-design mature products with an eye toward reducing materials costs. "We go to our EMS partners and say, 'Entertain proposals on what you can do with these existing designs,' " Sherman said.
Solectron pushes NPI
Solectron Corp.'s OEM customers, especially those in the networking, notebook, high-end server, and telecom markets, are doing more than "re-spins" for NPI, according to Vince DePalma, vice president of technology and NPI at the Milpitas, Calif., company. Solectron has 23 NPI sites, 12 in North America and the rest throughout Asia and Europe.
"Our customers are including us in the conceptual design phase by asking us to work with them in a variety of ways, such as to augment their design teams," DePalma said. "In some cases, we do things as simple as board layout or the layout of the chassis, backplanes, power packaging, and cooling mechanicals."
Before, Solectron engineers would take a schematic and perform layout, simulation, and design checks to make sure the board was laid out correctly. Now, Solectron's NPI teams are asked to perform those functions in parallel with its design efforts.
"Our customers are also asking us to be involved in a higher level of component selection for those designs," DePalma said.
At Singapore's Flextronics International Ltd., customers are urged to appreciate the strengths of their manufacturing partner to realize savings, said chairman and chief executive Michael Marks, during his keynote address at the Supply Network Conference.
That might happen more as vertically integrated Flextronics markets its internally designed wireless handset, PhoneOne, to OEMs such as Alcatel, Motorola, and Siemens. The cellular phone, which contains internally sourced PC boards and plastics, could result in an operating margin of 12.8% compared with the 3% margin EMS companies generate through more conventional services, according to Thomas Hopkins, an analyst at Bear Stearns & Co. Inc., New York.
At Jabil Circuit Inc., a St. Petersburg, Fla., contractor with six NPI locations-two each in Asia, Europe, and the United States-requests for product development also have increased.
"That's because we've either partially designed or wholly designed the products," said Mike Ward, Jabil's vice president of operational development and supply chain management/IT. "We might design a product, but we don't hold the intellectual property. We assign IP rights to our customers."
NPI services at Plexus
A similar story is told at Plexus Corp., a Neenah, Wis., contractor with six NPI centers-one in the United Kingdom and five in the United States. Plexus' NPI services contributed between 14% and 16% to its revenue in the last quarter, according to the company.
"OEMs are coming to us to provide a greater depth of manufacturing and design engineering and for us to become an extension of their operation," said Steve diLoreto, president of Plexus NPI Plus.
Although demand in the electronics sector remains weak, diLoreto said OEMs eventually will discover that by tying up with EMS providers at the conceptual level, they stand a better chance of capitalizing on the next market upturn.
"When the economy improves, OEMs will want to bring products to market faster and they'll find that they don't have the deep resources to do it," diLoreto said. "They won't be able to scale quickly." |
