When the Dow Jones stock index recorded its largest single-day loss in late September 2008, many investors panicked. But billionaire investor Warren Buffet took a different stance – declaring the time was right to buy United States stocks. Buffet saw opportunity amidst chaos. That’s a lesson the electronics supply chain would do well to consider in current economic times, industry executives argue.
“When business starts to go bad, people panic. As a result, they tend to abandon their long-term strategic course, scrambling for short-term relief,” said Greg Frazier, executive vice president, supply chain business development worldwide, Avnet Electronics Marketing, Phoenix. For example, Frazier has recently fielded a flurry of calls from small and mid-size OEMs asking about outsourcing – customers that had previously decided that outsourcing was not the right fit for their company. And though under the right circumstances outsourcing can certainly provide an OEM with significant opportunities for savings, it is no panacea. “When they hear major OEMs like Sony announce plans to close 10 percent of its plants worldwide and shift more manufacturing to outsourcing, they question their (manufacturing) decisions,” Frazier noted.
Supply chain integrators like Avnet work closely with OEM customers to evaluate the pros and cons of outsourcing, said Frazier, who cautions companies to be particularly vigilant in their evaluation of suitability and financial stability of potential contract manufacturing partners. A recent report from electronics research firm iSuppli Corp. found that the global electronics contract manufacturing sector has begun to feel the impact of the slowdown.
Growth in 2008 for the contract manufacturing sector is estimated to be almost half of the 16.1 percent recorded in 2007. “As the end markets erode die to recession, the trickledown effect will cause less significant revenue growth for electronics supply chain participants, including electronic manufacturing service providers (EMS) and original design manufacturers (ODM),” said Adam Pick, principal analyst, EMS/ODM, for iSuppli, El Segundo, Calif.OEMs must also carefully consider the regions in which they plan to outsource. “Everyone’s automatic assumption is that Asia is the go-to region. But when you factor in energy costs, which have only recently begun to come down again, and rising labor rates, local alternatives like Mexico can be very attractive,” said Frazier.When selecting an EMS partner, it's also important to remember that one size does not fit all, said Craig LaBarge, chief executive officer and president of LaBarge, Inc., a St. Louis-based EMS provider. “Depending upon the nature of their business, OEMs will have different expectations for their outsourcing partners. Our core competencies are very different than those of a provider that's set up to produce large volumes of a consumer-oriented product, for example.”
LaBarge's niche is producing low volume, high-rate-of-change, high-complexity electronic assemblies, which may be used in applications ranging from military and aerospace to industrial and medical. While the current economic environment presents an excellent opportunity for OEMs to further utilize outsourcing as a way to reduce their manufacturing and design costs, there are challenges and difficulties that come with this kind of change. “In our experience, the most successful situations are those where the customer understands that outsourcing is as much a cultural change as a strategic one for their organization,” LaBarge noted.The bottom line is that even in the best of economic times, the decision to outsource should be made based on a careful cost/benefit analysis. “This is not a quick, short-term solution,” said Frazier. “Every OEM must consider their options based on their individual circumstances and goals, and not make a knee-jerk reaction based on what others are doing.”
Advantages of Outsourcing
Outsourcing has many advantages including:
•Allows a business to focus on core activities
•Streamlines a business' operations
•Gives you access to professional capabilities
•Shares the risk
•Piece of mind that the process is in good hands (reliability)
•Do not have to worry about continually introducing new technologies
•Improves service quality
•Frees up human resources
•Frees up cash flow
•Increases the control of your business
•Makes the business more flexible to change (i.e. demand)
Disadvantages of Outsourcing:
•The fear of the service provider ceasing to trade (bankruptcy, etc)
•You may lose control of the process
•Creates potential redundancies
•Other companies may also be using the service provider. Therefore in some cases, the best interests of the service provider may be diluted with other users
•You may lose focus of the customer and concentrate on the product (the outsourced process)
•The loss of talent generated internally
•Employees may react badly to outsourcing and consequently their quality of work may suffer
