Buying More Than Just Manufacturing Expertise in the Outsourcing Equation
A Non-traditional EMS Outsourcing Model Saves Money in the Supply Chain While Streamlining Services
Susan Mucha, President, Powell-Mucha Consulting, Inc.
The classic electronics manufacturing services (EMS) model provides value to a customer by assigning production tasks to multiple vendors. In addition, savings are achieved as customers gain access to specialized technical personnel whose cost of expertise would not fully be consumed by any one customer. Within this standard model, EMS profit typically is generated by a combination of efficient use of capacity, delivery of value-added services and optimized material procurement strategies. However, the model can become inefficient when a single custom component drives the bulk of product cost. In that case, typically there is little cost offset related to material buying power and very little EMS value-add margin contribution. As a result in those types of projects, material markup may be the major source of profit for the EMS provider.
That scenario is the reason that Narragansett Technologies, a manufacturing provider based in North Smithfield, RI, has a division focused on EMS. Its EMS customers aren’t buying contract manufacturing capacity, but instead, cutting cost from their supply chain by purchasing manufacturing services from a critical component supplier.
Narragansett Technologies originally made a name for itself in the digital imaging market as a division of the Philips Components group, designing and manufacturing medical camera tubes and digital imaging modules. During that timeframe, the company even won an Emmy Award for an invention of a product that improved television image quality and helped pave the way for widespread adoption of color broadcasts. Its EMS division was formed when customers buying custom digital imaging cameras started to recognize that having their custom component supplier provide the entire assembly or end product made more sense economically than having a standalone EMS provider purchase a component that could represent as much as 70% of the end-product cost and include very specialized functional test requirements.
Many of this company’s customers also outsource to Tier 1 or Tier 2 EMS providers. The value they see in this specialized sourcing strategy is access to critical imaging technology and the economies of scale present in an operation focused on manufacturing higher-mix, low-to-medium volume imaging products.
Narragansett’s EMS division is focused on using its skills in high-mix, low-volume manufacturing of digital imaging systems and subsystems. The applications and products include medical, biometrics, defense, traffic control and professional imaging. A majority of the business is centered on diagnostic medical imaging subsystems products and their complex assembly and test requirements.
A further difference from the standard EMS business model is that this company focuses on specialized product development, unique manufacturing processes and complex testing and outsourced board-level manufacturing. Its customers gain the advantages of access to the product development, test expertise and infrastructure associated with the complex requirements of high-quality digital imaging as well as the flexibility of having board-level manufacturing done at the facility best suited for the project requirements in terms of price and capabilities.
When Is This Type of Outsourcing Cost Effective?
From a medical device manufacturer’s perspective, the business model opens the door to the comparative question: when is it better to outsource a complete subassembly to an EMS company with resources and knowledge to build a critical product instead of keeping the assembly work in-house or at a general EMS provider? The issues that should be evaluated include:
• Percentage of product cost relating to the technologically complex subassembly
• Project volumes
• Engineering support required for customization of the subassembly to align with desired end-product requirements
• Production infrastructure required to support the technologically complex subassembly
• Post-manufacturing infrastructure and support needed
In the Narragansett business model, both engineering support and production requirements benefit from the economies of scale of associated proprietary production. The company’s EMS projects typically are low volume, high mix. Currently, there are 500-600 unique part numbers with annual quantities ranging from 10-1,200 per year in addition to the thousands of digital cameras in production. While higher production volumes could justify specialized engineering support and production infrastructure, lower-volume, high-mix projects are difficult to cost-effectively produce in the generic EMS environment or OEM’s facility because the required specialized resources would not be fully used by the project or lower volumes may create inefficiencies on the production floor.
For example, a Fortune 100 customer that was manufacturing digital X-ray products came to Narragansett with multiple imaging subassembly units, which were nearing the end of their life cycle. In full production, unit volumes had made sense for this company to manufacture the product in-house. As it neared the end of its product lifecycle, however, unit volumes had dropped to a point that deemed them inefficient to manufacture within the OEM’s operation.
Narragansett has verified and validated all of the imaging subassemblies units in place of the original component. As a result, the customer now has efficient low-volume production support and component management, which will be supported as long as required by that project. From a material handling perspective, process efficiency increases, because the major component supplier is providing an assembly as opposed to simply shipping a component assembled elsewhere.
Another challenge faced by medical OEMs with complex products is that the complexity of the required production and/or test processes can drive the need for highly specialized facility configurations, skilled production personnel or equipment.
In another project example, a company is combining its digital camera with an image intensifier. The end product is a digital X-ray camera that undergoes final assembly at the customer’s facility. While the customer has the production resources to assemble the product, it lacks the required functional test capability for the subassembly. In that phase of the process, image quality is tested through a process known as characterization, which involves use of specialized X-ray equipment in a lead-lined room. The test identifies specific phantoms to determine if image quality conforms in resolution, contrast and distortion. In addition to the costs associated with modifying a facility to include this type of test area, the test equipment costs run in excess of $100,000. In Narragansett’s area of specialization, this type of test capability is fully used for a range of products. The customer gets the advantage of access to the needed test capability without the non-recurring engineering or capital equipment expense that would be associated with developing this capability for a standalone project.
In a different project, which also requires characterization in the functional test phase, a company is manufacturing a biometric device. In this particular case, Narragansett’s proprietary camera product represents 60% of the entire product cost. The customer is saving time and money in product realization, since the major component manufacturer is simply adding some additional value within its camera manufacturing process.
Addressing Challenges of an Extended Model
A Narragansett Imaging camera is shown mounted to an image intensifer. Photo courtesy of Narragansett Technologies.
Key questions to ask include:
• Are systems and processes in place to will drive compliance to medical device manufacturing standards throughout the supply chain?
• Is a system in place to ensure that medical device recordkeeping data are collected at all critical points within the supply chain?
• How will cost reduction be driven?
• How will customer requirements be conveyed to suppliers, and what provisions are in place to ensure that schedule flexibility is preserved in an extended supply chain?
• How is product quality ensured?
For example, Narragansett is certified to both ISO 9001 and ISO 13485, which ensures a framework is present for managing suppliers, maintaining traceability and creating a closed loop feedback system in which any variation in key metrics generates a corrective action. This is particularly important in the medical sector, because medical products have requirements in this area that vary significantly from those in less regulated industries. Narragansett appears to have a number of checks and balances in place, as well as a process focused on minimizing redundancy in services provided and taking cost out of the supply chain.
Potential board-level suppliers are evaluated using a detailed cost model. There is very clear delineation of responsibilities to ensure minimal redundancy between the EMS provider and its supplier support teams. Supplier selection is based on a very strict process of comparing customer requirements with the supplier’s capabilities. Key areas evaluated include projected volumes, quality, complexity, cost and core competencies.
Production is qualified based on each customer’s requirements. The customer still has the same visibility and control of the approved vendor list and production processes as would normally be found in a generic EMS environment.
Lean manufacturing practices are used, and distributors provide bonded inventory support. This provides a means to rapidly address variations in demand with minimal inventory liability for the customer.
A program manager typically has weekly status calls with customers and quarterly review meetings at the customer’s home base. Customers provide annual demand projections with an eight- to 12-week order commitment. The forecast is shared with suppliers in their preferred forecast format, and appropriately sized inventory kanbans are established. The program manager has profit and loss responsibility for the account and coordinates the suppliers based on actual customer demand.
Vendor scorecards are used to monitor supply base performance. Measured metrics include on-time delivery, return rate, flexibility and innovation in problem solving. Customer-specified metrics also may be measured.
Incoming quality is carefully monitored. All assemblies must meet IPC-A-610 workmanship standards. A visual inspection process also is established for each assembly. In determining what attributes to monitor, high-risk components, the variety of packaging styles and previous corrective actions with that supplier are taken into account.
This example demonstrates one model for addressing the challenges of low-volume, high-mix production when the added complexity of highly proprietary technology content is present. No single EMS company ever will cost-effectively provide the best solution for every outsourcing project, and frequently individual EMS providers are not the best solution for every product an OEM manufactures. Segregating the hard-to-source projects for bid by niche EMS providers or critical component suppliers capable of building to the subassembly or final assembly level often is a better choice than forcing these projects on the supplier building the higher-volume products. The key factor in successful use of this type of strategy is careful evaluation of potential niche suppliers relative to required capabilities, internal processes and their ability to support the regulatory requirements associated with medical device manufacturing.