Sam Brusco, Associate Editor01.29.18
Similar to many other areas of technology, a considerable shift is taking place within the contract manufacturing marketplace. Both original equipment manufacturers (OEMs) and electronics manufacturing services (EMS) firms are finding their margins heavily affected by rising hardware commoditization. Consequently, many EMS companies are broadening their range of services to adjust to this shift.
OEMs then have the opportunity to transfer more of their design and development work to EMS partners to reduce total cost, as well as transition from fixed to variable costs. This manufacturing landscape allows OEMs more options than ever for outsourcing design, development, and manufacturing services. EMS companies are providing more services across the board—at one end, more design services for either sub-assemblies or finished devices, and at the other, more testing and prototyping offerings.
OEMs will always partner with the firms offering the highest quality at the most competitive price, but there are many other factors determining the selection of an appropriate EMS provider. Medical devices contain a slew of highly differentiated components, so splitting design responsibilities can be challenging. There are numerous tradeoffs involved in parsing these responsibilities. (Where is the line drawn between each party’s involvement in manufacturing and design? Who’s in charge of quality control and verification? How will the OEM oversee multiple management teams?)
In order to answer some of these questions and better grasp the factors and challenges affecting the medical EMS industry, Medical Product Outsourcing spoke with 10 EMS professionals over the past few weeks. They included:
John Carlson, president of the Health Solutions group at Flex Ltd. Based in San Jose, Calif., the company’s Health Solutions group offers design, engineering, and manufacturing support for the development of medical, drug delivery, and diagnostic technologies.
Audra Gavelis, director of marketing for IEC Electronics, a Newark, N.Y.-based firm specializing in electronics manufacturing services to advanced technology companies that produce life-saving and mission critical products for the medical, industrial, aerospace, and defense sectors.
Charlie Mason, senior VP, Medical Division at Sanmina Corporation, a San Jose, Calif.-based firm that provides end-to-end design, manufacturing, and logistics solutions to OEMs primarily in the communications networks, computing and storage, medical, defense and aerospace, industrial and semiconductor, multimedia, automotive, and clean technology sectors.
Joe McBeth, VP of global supply chain at Jabil, a St. Petersburg, Fla.-based global manufacturing and design services company.
Rick McClain, COO of Milwaukee Electronics, a Milwaukee, Wis.-based firm that provides integrated design and manufacturing services, from electronic design through printed circuit board assembly and beyond.
Susan Mucha, principal, Powell-Mucha Consulting Inc., an El Paso, Texas-based firm that helps companies in the EMS industry and associated supply base improve internal processes, assess potential location choices, and better build their brands.
Suchitra Royroth, VP of operations at Cyient DLM, a Mysore, India-based manufacturing arm of Cyient.
John Sammut, president and CEO of Firstronic, a Grand Rapids, Mich.-based specialty provider of EMS, including turnkey electronic assembly and materials management services, to OEMs in the electronics industry.
Scot Story, VP of sales and marketing of Alternative Manufacturing Inc., a Winthrop, Maine-based firm that provides a wide range of electronics manufacturing and support services from printed circuit board and wire harness production to product assembly, packaging, and distribution to OEMs.
Brian Wyatt, senior VP at Cyient Medical Technology & Healthcare, a Hyderabad, India-based firm that provides value for medtech companies with certified engineering and manufacturing solutions that improve productivity, resource capacity, and supply chain efficiency.
Sam Brusco: What about the EMS provider-OEM relationship has changed over the past decade?
John Carlson: More OEMs are turning to contract manufacturing organizations to help them accelerate growth as well as manage supply chain efficiency and resource or capacity re-allocation. They also seek innovation partners to solve issues related to manufacturability of design, leverage new process technology, and improve cost structure. Over the past several years, our own relationships with OEMs have evolved significantly, with OEMs increasingly coming to Flex for innovation and design collaboration to accelerate organic growth and speed to market. Our own business mix has expanded so much beyond traditional manufacturing that we no longer even consider Flex to be a CMO, but rather “the Sketch to Scale solutions provider that designs and builds intelligent products for a connected world.”
Audra Gavelis: As more medical device companies outsource, they rely more on EMS providers to have process validation expertise with regard to ISO 13485 compliance. They expect an EMS provider to execute a process validation per the protocol and provide technical insights with regard to developing appropriate IQ/OQ/PQ test plans to ensure their product achieves the highest quality performance. There can be thousands of opportunities for error in many complex assemblies due to a large number of components. The EMS provider in this case is responsible for helping define a robust manufacturing process to ensure performance.
Charlie Mason: OEMs used to hand over a finished product to manufacture. Now, EMS companies like Sanmina are involved in the full spectrum of the product life cycle, from design to after sales support. Ten years ago, OEMs brought us technology knowledge. But as medical devices become increasingly complex, OEMs leverage our technology and production expertise.
Joe McBeth: OEMs historically used very specialized EMS providers that might have focused on one domain or manufacturing capability. They often viewed an EMS partner as specializing in either injection molding or electronics manufacturing. In both cases, the sourced capability was mainly, if not solely, the manufacture of components. Today’s EMS firms are no longer necessarily viewed as a single manufacturing service provider. The “S” in “EMS” has come to mean “solutions.” OEMs now recognize manufacturing is only a portion of what “EMS” firms can provide. They also offer product ideation and development, supply chain management, order management, logistics as well as repair and warranty work to medical device OEMs. These solutions were once limited to components of Class I and II devices, but now include manufacturing of Class III devices. This progression follows the path of other industries.
Rick McClain: EMS companies are increasing the amount of expertise they provide their medical customers. Driving this is the growing need for many medical devices to exhibit the convenience found in consumer products. Smaller footprints and the need to communicate with other devices drive unique challenges in product design, PCB layout, and manufacturing requirements. Often, the shortest learning curve is to work with a partner who is already an expert in those areas.
Susan Mucha: The three biggest changes in the medical sector would be the level of shared real-time visibility into production status, the timing of involvement with new products, and the level of trust. Some OEMs and EMS providers had this level of relationship a decade ago, but it is becoming more widespread as a “given” at all levels of the EMS industry because it is the best way to take cost and inefficiency out of the equation.
Suchitra Royroth: Over the last decade, OEM focus has shifted from in-house manufacturing to outsourcing to EMS partners. The scope of work has also changed from traditional assembly work to extending to overall project lifecycle management (PLM). EMS service providers have geared up to provide end-to-end services and enhanced their capabilities in the process, including building up robust test engineering services and a strong vendor base to facilitate localization. The customer can then work with a single point of contact rather than dealing with multiple suppliers and transfer the related supply chain challenges. EMS companies like Cyient offer a Vendor Managed Inventory service, which helps the customer to have ready products while keeping a check on inventory related costs. In short, the EMS provider is now an extended arm of the customer and mirrors all relevant processes.
John Sammut: More OEMs are involved in the component supply chain than previously, including negotiating registered pricing on “cost drivers” and managing some of the key components. In addition, more OEMs expect their EMS provider to supply globally and fill their demand in each region, without having to source to multiple EMS providers to cover the globe.
Scot Story: The work sharing has shifted more toward the EMS provider. We find and welcome that OEMs are involving us with their product development team before the design is fully developed. This gives us the opportunity to provide feedback, component availability trends, and manufacturability considerations.
Brian Wyatt: More than ever, OEMs desire to build a strong relationship with EMS providers involving dedicated centers that mirror the client’s processes and team structure. In this environment, rapid scalability is provided to save time and money, along with services such as product variants, localization, supply chain management, distribution, logistics, customer support, and warranty repair. OEMs assess and manage this relationship more toward qualifications based on the provider’s QMS (quality management systems) certifications (such as ISO 13485 and 14971) and regulatory standards management. All this allows the OEM to focus on other issues such as future product development, marketing, and sales.
Brusco: Why is it important for EMS suppliers to have a product lifecycle management (PLM) focus?
Carlson: The customer needs differ depending on the stage of the life cycle. The ability to produce small clinical volumes, expertise in NPI, and then the ability to scale to full commercial volumes is essential. Supply chain flexibility and response time to changes in product demand can also be significant. Recent examples come to mind where we have been able to meet drastically increased demand because of the strength of our supply chain. As a product ages in its life cycle, the ability to trim cost from the product or conduct value engineering can extend the profitable life of a product by changing its cost structure. All are capabilities that should be considered in selecting a manufacturing partner.
Gavelis: There are many global supply chain challenges associated with electronic components due to the collapse of the number of component suppliers through acquisitions. These acquisitions often result in consolidation of part availability and lead to obsolete parts in the supply chain. Parts identified as obsolete dramatically increases their chance of being counterfeit. As an EMS provider, to avoid these issues it is imperative to provide customers with component engineering services to assist in component selection. However, in cases where it cannot be avoided, it is important to develop a risk mitigation plan. IEC’s analysis and testing lab is ISO 17025 accredited, can provide risk mitigation test plans for counterfeit detection, and can perform the tests on-site.
Mason: Focusing on PLM comes down to understanding the critical nature of the products medical customers bring to market—they impact people’s lives, whether it be saving a life, sustaining a life, or making life easier. Expertise in quality, regulatory, and technical requirements is essential to developing and producing safe and reliable medical devices. Being involved in the early stages of design enhances our PFMEA, validation, traceability implementation, and overall quality output. At the end of the day, early engagement on the input will enhance the output.
McBeth: One of the most interesting topics in supply chain for the healthcare industry is related to the misalignment of product and technology lifecycles. The medical device product lifecycle can be two to five years in development and then 10+ years in production. That is very attractive to a manufacturing company, but let’s add a little more reality. Let’s say this is a connected device. Although potentially only a small portion of the cost of this product is electronics, the semiconductor designed in has a lifecycle about half of that. Being aware of this mismatch does not mean you have an answer. Historically, the answer has been to invest millions of dollars in inventory to last the lifecycle of the product. This, of course, is very risky. A better solution is to map out product releases against component lifecycles. This can be the difference between winning and losing and, in some cases, life or death. The answer is not simply PLM, but rather industry knowledge, PLM, and strong supplier relationships.
McClain: The regulatory environment for medical products can make redesign costly, and medical devices tend to have longer lifecycles than the consumer products influencing component manufacturers’ product line choices. It is critical to choose a manufacturing partner who can make recommendations to help minimize obsolescence risk or provide warning early enough to assess options for addressing components nearing end-of-life.
Mucha: With longer lifecycle medical products, the question isn’t will a part go obsolete. It is when will a part go obsolete? The more warning a company has, the more options they will have for addressing obsolescence without a full redesign. EMS providers with strong supply chain relationships and third-party PLM monitoring software are in a better position to help their customers navigate that challenge.
Royroth: For an EMS supplier, PLM is one of the most important areas for accelerating product deliveries, reducing costs, and ensuring product continuity and sustainability. PLM is an enabling framework to help connect, organize, control, manage, track, consolidate, and centralize all the critical information affecting a product—including change management. A robust PLM framework improves the development and management of the bill of material and purchase of parts to ensure production is not hampered.
Sammut: The biggest areas of obsolescence risk occur near program End of Life and the costs of redesign/validation are exorbitant. This is particularly relevant in the medical segment where products often have longer lifecycles than the consumer products tending to drive component trends. Consequently, it’s critical for OEMs to understand the component lifecycle outlook as early as possible to identify and qualify alternates. In addition, the volume curve can be drastically different as a product line evolves, so it’s critical for the EMS partner to understand the outlook for the product assembly life. This helps the OEM rapidly fulfill demand and reduce obsolescence exposure.
Story: The biggest factor in a successful project is efficiently managing the supply chain. Unanticipated component obsolescence creates significant problems. Consequently, it is important to understand the customer’s anticipated product lifecycle, demand trends, and obsolescence risk. We make a point of strategically monitoring these issues through open communication with our customers and our supply chain partners, plus use of third-party PLM software.
Wyatt: Whether an OEM offers one product line or many, EMS suppliers need to understand and be fully in tune with the product lifecycle. If not, engineering changes could take longer, cost more, and product improvements may never be addressed or suggested. Again, design for manufacturability (DFM) can occur at any point within the product lifecycle; however, it has more value in the early development. The DFM focuses on efficient throughput, cost management, and product reliability. As an example, an EMS electronics engineer can select components during the design phase for a wire harness using fully automated equipment components where only semi-automated equipment is available. Another example is a printed circuit board design that needs to adhere to the products’ housing specifications or dimensions for a box enclosure. Some products have parameters or restrictions on overall size, weight, and shape. The third benefit of a PLM focus is cost reduction for materials and labor—a constant theme for OEMs.
Brusco: What traits are often overlooked in a long-term OEM/EMS provider relationship?
Carlson: The easily overlooked keys to establishing a truly collaborative partnership are a good cultural fit, alignment on strategy, roadmap, and capabilities, and a transparent approach with understanding of the expected outcomes for both parties. Regular strategic meetings that include heads of business units, R&D leaders, and C-suite are ideal. The OEM/CMO relationship can be established at any point in the product lifecycle. The earlier in the product development or evolution process the CMO is involved, the more value they can offer, and the more the OEM and CMO can leverage each other’s strengths.
Gavelis: OEMs have a wide range of experience and maturity when it comes to their validation approach. Some customers have a robust regulatory strategy for overall product validation, but may be unfamiliar with the specific electronic assembly process steps and how to successfully validate them. With our focus on life-saving and mission critical products, we understand the products we make are not just putting together components per an engineering drawing, but rather products that can potentially save someone’s life. Experience with manufacturing a Class III PMA device shows an EMS provider has the expertise and know-how to manufacture medical devices and execute their associated compliance.
Mason: An important aspect sometimes overlooked is the relationship between the OEM and EMS team members. Sometimes we forget at the end of the day it’s the people making the difference between success and failure. Complex medical products have long lifecycles and switching suppliers is very costly. The relationship between the team at the EMS factory and the OEM is long term, and commitment of both parties is critical. There are going to be challenges on a five-year program, so knowing there is real commitment and trust helps everyone work through issues together.
McBeth: Rather than describe what traits can be overlooked, it is better to think about what makes a successful relationship. The most important trait in a healthy relationship is the ability to listen, and leverage each company’s strengths to extract the maximum relationship value. If the expectation of the relationship is one sided—meaning the OEM believes the best path to value is to instruct the EMS on what to do—much of the value potentially gained from the broad portfolio of capabilities an EMS houses will be lost or severely marginalized. Even more damaging could be an EMS company’s inability to listen and deeply investigate the OEM’s true needs. Jabil sees this as the core to success and utilizes a customer value mapping process that drives often unidentified value for the customer. This process is not bound by currently available capabilities—it can even drive new investment streams. This ability to listen, digest, and then jointly attack new value streams allows the relationship to become less about supplier and customer and more about the shared “us.” As in any relationship, there will be conflict. Just imagine how many divorces there would be if there was no ability to manage and resolve conflict. It is no different in the business relationships between OEM and EMS contractor. These relationships are deep and require mature approaches and participants on both sides to stay “married.”
McClain: Ultimately, achieving lowest total cost isn’t about the unit price or annual cost reductions. It really boils down to how well the OEM and EMS company collaborate as challenges arise. We have created a comprehensive solution that includes engineering, PCB layout, prototyping, and manufacturing. We can structure individual customized support options in each of those areas or pull in expertise as needed. That level of support flexibility is becoming more important as medical device applications continue to evolve and expand.
Mucha: The real value of a long-term OEM-EMS provider relationship is the institutional knowledge that develops over time. This is particularly apparent in lower volume, configure-to-order complex box builds where the EMS provider’s ability to fill the gaps in the OEM’s transfer process becomes a significant differentiator in terms of the level of service they can offer. New suppliers will always have a learning curve not present in the long-term relationship, and that is often a significant barrier to entry.
Sammut: “Right-sizing” for the mutual benefit/significance of the partnership is often ignored. This is far more critical than people realize. OEMs don’t benefit from the leverage of their total outsourcing spend if they spread too much of their business around and are a small customer to many EMS providers. Even if they give a significant amount to a few EMS partners—but represent a very small percentage of the suppliers’ revenue—they may not get the same response as those suppliers’ largest volume customers.
Story: Transparency in pricing is critical because it gives both parties the ability to look for legitimate cost reduction areas. A long-term relationship by its nature has an element of trust, which is something we work to cultivate. Transparency in pricing helps create a “trust but verify” environment that supports a strong relationship, even when key players change. For that reason, we begin all our relationships with open book pricing.
Wyatt: The engagement, like any strategic partnership, has to be the right fit. Suppliers must have the initial capability but also the adaptability, scalability, and sustainability to provide the same high-quality output throughout the whole life of the product. As a result, the cost of quality will likely reveal itself along the way. Design for manufacturability (DFM) also facilitates the manufacturing process to reduce costs. DFM practices allow potential problems to be tackled during the design phase, the least costly area of production to address the issues. With a DFM strategy, there are considerations unique to molding that other manufacturing methods do not encounter. Some device makers may forget or lack experience in designing complex parts under a DFM strategy. Robust tooling is also important in early phases, and it is not always on an OEM’s mind. In addition, value-added services like remediation and regulatory solutions make the journey to a cost-efficient component much more feasible for a medical device OEM.
Brusco: How will the EMS industry evolve over the next 5-10 years?
Carlson: As sources of organic growth, regulatory hurdles, and speed-to-market challenges increase, the threat of non-traditional medical companies entering the space with disruptive products also increases. To keep pace with the acceleration of technology evolution, the strategic partnership between the OEM and CMO becomes a competitive advantage and perhaps a strategic necessity. As we have seen in other industries that reach commoditization, the ROI for new products decreases as cycles accelerate. Closer OEM/CMO partnership and more integrated collaboration earlier in the design phase enables faster, more targeted product development. It also facilitates access to scalable operations and effective supply chain management, enabling the OEM to better serve unmet clinical and healthcare needs by quickly creating new devices, systems, and solutions for better patient outcomes.
Mason: We’re seeing more demand for services throughout the product lifecycle—from design to after-sales support to distribution. Customers are also requiring more real-time manufacturing visibility, whether it be components, tests, or quality attributes—all of which is happening with advanced manufacturing execution systems solutions.
McBeth: Today, we are seen as a supply chain and manufacturing partner. But it is logical we will likely be creating our own solutions both in hardware and services. This may include a higher level of IP ownership, the use of analytics to influence product or market decisions, or a completely different business model. Is it possible that OEMs will become brands that no longer design or own the hardware? For that matter, with the vertical plays of CVS, Aetna, and others, will EMS have a completely different customer? Could the payer become the customer? The skillsets and global talent pool within EMS continues to grow. The ability to aggregate spend and technological intelligence across many industries exists in only a handful of players. This aggregation will not lead to one huge generalist, but rather very large focused players capable of leading in technology and not simply accenting a customer’s roadmap. It is hard to predict. But it is clear the ability to efficiently serve the global economy at the speed of technology already exists within the EMS field. Twenty-six years ago, Jabil had two manufacturing locations in the United States, and basically served two industries.
Today, there are 100 locations including two Blue Sky Innovation centers positioned around the globe. Being entrusted to manage the business of the best brands in the world does not leave room for error. To exist as a solution, EMS as an industry and Jabil as a company must invest to lead, not follow.
McClain: OEMs depend on their EMS providers for comprehensive solutions, whether they are tier one global providers or regional EMS companies. I believe our business model providing both transactional support options (the ability to purchase product development services, layout services, or prototypes transactionally) in addition to the option of purchasing the combined services is very aligned with the direction this market is taking. This approach has enabled us to maintain a larger staff and broader expertise levels than if those options were simply support departments linked to volume manufacturing.
Mucha: Tier One companies will continue to reinvent themselves, simply because there are limits to topline growth with a pure EMS model. Regional providers will still be important, because OEMs are realizing proximity has cost advantages in many situations. I think there will be increased consolidation in the mid-tier, predominantly from two factors. First, the change in tax policy has made the U.S. a more cost competitive place to do business and some consolidation will be driven by companies outside the U.S. wanting to add a U.S. footprint. We are also at a point I call “changing of the guard,” where older management teams are evaluating whether it is better to hand off to the next generation or sell the company. But the evolution we will see in the next two to three years is a different, more positive path than the path the U.S. EMS industry would have taken if the tax and regulatory environment had remained unchanged. I have heard a much more optimistic business view from regional U.S. EMS CEOs over the last year.
Royroth: EMS companies have already started to provide design and testing services. While innovation is always a strategic priority, quick NPI (new product introduction) turnaround with cost competitiveness will be a key aspect. Technology upgradation and ability to adapt to the new and emerging component and product technologies—including adaptation to 3D printing and nanotechnology—will also be important. The future manufacturing industry will evolve into digitized virtual factories that can be located in any part of the world and managed from virtually any other part of the world.
Sammut: We’ll see further consolidation of the mid-tier, as there are relatively few mid-tier EMS providers with the ability to provide the global support more OEMs seek. There will also be stronger focus on customer fit. Some EMS companies are victims of the “80/20 rule”—80 percent of their problems are caused by 20 percent of their customer base. Our award-winning business model has been based on strong alignment with each customer. Several years ago, we actually scored our customers in terms of alignment with our business model and helped those who weren’t a fit find other suppliers. The payback has been better responsiveness from supply chain and greater efficiency in production operations, because we’ve eliminated a lot of the chaos driven by a bad fit. We’ve also seen significant growth from the remaining well-aligned customers and those we’ve added over time. The payback for customers is a more responsive, competitively-priced EMS partner because much of the inefficiency or waste that can occur in poorly aligned business relationships doesn’t exist. The better the fit, the more an EMS company, each customer, and the supply chain can strategize on the best way to achieve mutual goals.
Story: We will continue to see more and more collaboration in OEM-EMS relationships in all industry tiers. OEMs are looking for partners who can fill gaps in their team and EMS services will continue to evolve to efficiently address that. Case-in-point, we opened a technology center in Boston to co-locate with product development teams in that area’s technology corridor.
Wyatt: EMS suppliers will need to stay on top of both IoT and additive manufacturing. Both of these areas will continue to change and adaptability will be key to building product value. Cyient believes investing in these combined solutions will keep us at the forefront of the future growth of medical technology markets.
OEMs then have the opportunity to transfer more of their design and development work to EMS partners to reduce total cost, as well as transition from fixed to variable costs. This manufacturing landscape allows OEMs more options than ever for outsourcing design, development, and manufacturing services. EMS companies are providing more services across the board—at one end, more design services for either sub-assemblies or finished devices, and at the other, more testing and prototyping offerings.
OEMs will always partner with the firms offering the highest quality at the most competitive price, but there are many other factors determining the selection of an appropriate EMS provider. Medical devices contain a slew of highly differentiated components, so splitting design responsibilities can be challenging. There are numerous tradeoffs involved in parsing these responsibilities. (Where is the line drawn between each party’s involvement in manufacturing and design? Who’s in charge of quality control and verification? How will the OEM oversee multiple management teams?)
In order to answer some of these questions and better grasp the factors and challenges affecting the medical EMS industry, Medical Product Outsourcing spoke with 10 EMS professionals over the past few weeks. They included:
John Carlson, president of the Health Solutions group at Flex Ltd. Based in San Jose, Calif., the company’s Health Solutions group offers design, engineering, and manufacturing support for the development of medical, drug delivery, and diagnostic technologies.
Audra Gavelis, director of marketing for IEC Electronics, a Newark, N.Y.-based firm specializing in electronics manufacturing services to advanced technology companies that produce life-saving and mission critical products for the medical, industrial, aerospace, and defense sectors.
Charlie Mason, senior VP, Medical Division at Sanmina Corporation, a San Jose, Calif.-based firm that provides end-to-end design, manufacturing, and logistics solutions to OEMs primarily in the communications networks, computing and storage, medical, defense and aerospace, industrial and semiconductor, multimedia, automotive, and clean technology sectors.
Joe McBeth, VP of global supply chain at Jabil, a St. Petersburg, Fla.-based global manufacturing and design services company.
Rick McClain, COO of Milwaukee Electronics, a Milwaukee, Wis.-based firm that provides integrated design and manufacturing services, from electronic design through printed circuit board assembly and beyond.
Susan Mucha, principal, Powell-Mucha Consulting Inc., an El Paso, Texas-based firm that helps companies in the EMS industry and associated supply base improve internal processes, assess potential location choices, and better build their brands.
Suchitra Royroth, VP of operations at Cyient DLM, a Mysore, India-based manufacturing arm of Cyient.
John Sammut, president and CEO of Firstronic, a Grand Rapids, Mich.-based specialty provider of EMS, including turnkey electronic assembly and materials management services, to OEMs in the electronics industry.
Scot Story, VP of sales and marketing of Alternative Manufacturing Inc., a Winthrop, Maine-based firm that provides a wide range of electronics manufacturing and support services from printed circuit board and wire harness production to product assembly, packaging, and distribution to OEMs.
Brian Wyatt, senior VP at Cyient Medical Technology & Healthcare, a Hyderabad, India-based firm that provides value for medtech companies with certified engineering and manufacturing solutions that improve productivity, resource capacity, and supply chain efficiency.
Sam Brusco: What about the EMS provider-OEM relationship has changed over the past decade?
John Carlson: More OEMs are turning to contract manufacturing organizations to help them accelerate growth as well as manage supply chain efficiency and resource or capacity re-allocation. They also seek innovation partners to solve issues related to manufacturability of design, leverage new process technology, and improve cost structure. Over the past several years, our own relationships with OEMs have evolved significantly, with OEMs increasingly coming to Flex for innovation and design collaboration to accelerate organic growth and speed to market. Our own business mix has expanded so much beyond traditional manufacturing that we no longer even consider Flex to be a CMO, but rather “the Sketch to Scale solutions provider that designs and builds intelligent products for a connected world.”
Audra Gavelis: As more medical device companies outsource, they rely more on EMS providers to have process validation expertise with regard to ISO 13485 compliance. They expect an EMS provider to execute a process validation per the protocol and provide technical insights with regard to developing appropriate IQ/OQ/PQ test plans to ensure their product achieves the highest quality performance. There can be thousands of opportunities for error in many complex assemblies due to a large number of components. The EMS provider in this case is responsible for helping define a robust manufacturing process to ensure performance.
Charlie Mason: OEMs used to hand over a finished product to manufacture. Now, EMS companies like Sanmina are involved in the full spectrum of the product life cycle, from design to after sales support. Ten years ago, OEMs brought us technology knowledge. But as medical devices become increasingly complex, OEMs leverage our technology and production expertise.
Joe McBeth: OEMs historically used very specialized EMS providers that might have focused on one domain or manufacturing capability. They often viewed an EMS partner as specializing in either injection molding or electronics manufacturing. In both cases, the sourced capability was mainly, if not solely, the manufacture of components. Today’s EMS firms are no longer necessarily viewed as a single manufacturing service provider. The “S” in “EMS” has come to mean “solutions.” OEMs now recognize manufacturing is only a portion of what “EMS” firms can provide. They also offer product ideation and development, supply chain management, order management, logistics as well as repair and warranty work to medical device OEMs. These solutions were once limited to components of Class I and II devices, but now include manufacturing of Class III devices. This progression follows the path of other industries.
Rick McClain: EMS companies are increasing the amount of expertise they provide their medical customers. Driving this is the growing need for many medical devices to exhibit the convenience found in consumer products. Smaller footprints and the need to communicate with other devices drive unique challenges in product design, PCB layout, and manufacturing requirements. Often, the shortest learning curve is to work with a partner who is already an expert in those areas.
Susan Mucha: The three biggest changes in the medical sector would be the level of shared real-time visibility into production status, the timing of involvement with new products, and the level of trust. Some OEMs and EMS providers had this level of relationship a decade ago, but it is becoming more widespread as a “given” at all levels of the EMS industry because it is the best way to take cost and inefficiency out of the equation.
Suchitra Royroth: Over the last decade, OEM focus has shifted from in-house manufacturing to outsourcing to EMS partners. The scope of work has also changed from traditional assembly work to extending to overall project lifecycle management (PLM). EMS service providers have geared up to provide end-to-end services and enhanced their capabilities in the process, including building up robust test engineering services and a strong vendor base to facilitate localization. The customer can then work with a single point of contact rather than dealing with multiple suppliers and transfer the related supply chain challenges. EMS companies like Cyient offer a Vendor Managed Inventory service, which helps the customer to have ready products while keeping a check on inventory related costs. In short, the EMS provider is now an extended arm of the customer and mirrors all relevant processes.
John Sammut: More OEMs are involved in the component supply chain than previously, including negotiating registered pricing on “cost drivers” and managing some of the key components. In addition, more OEMs expect their EMS provider to supply globally and fill their demand in each region, without having to source to multiple EMS providers to cover the globe.
Scot Story: The work sharing has shifted more toward the EMS provider. We find and welcome that OEMs are involving us with their product development team before the design is fully developed. This gives us the opportunity to provide feedback, component availability trends, and manufacturability considerations.
Brian Wyatt: More than ever, OEMs desire to build a strong relationship with EMS providers involving dedicated centers that mirror the client’s processes and team structure. In this environment, rapid scalability is provided to save time and money, along with services such as product variants, localization, supply chain management, distribution, logistics, customer support, and warranty repair. OEMs assess and manage this relationship more toward qualifications based on the provider’s QMS (quality management systems) certifications (such as ISO 13485 and 14971) and regulatory standards management. All this allows the OEM to focus on other issues such as future product development, marketing, and sales.
Brusco: Why is it important for EMS suppliers to have a product lifecycle management (PLM) focus?
Carlson: The customer needs differ depending on the stage of the life cycle. The ability to produce small clinical volumes, expertise in NPI, and then the ability to scale to full commercial volumes is essential. Supply chain flexibility and response time to changes in product demand can also be significant. Recent examples come to mind where we have been able to meet drastically increased demand because of the strength of our supply chain. As a product ages in its life cycle, the ability to trim cost from the product or conduct value engineering can extend the profitable life of a product by changing its cost structure. All are capabilities that should be considered in selecting a manufacturing partner.
Gavelis: There are many global supply chain challenges associated with electronic components due to the collapse of the number of component suppliers through acquisitions. These acquisitions often result in consolidation of part availability and lead to obsolete parts in the supply chain. Parts identified as obsolete dramatically increases their chance of being counterfeit. As an EMS provider, to avoid these issues it is imperative to provide customers with component engineering services to assist in component selection. However, in cases where it cannot be avoided, it is important to develop a risk mitigation plan. IEC’s analysis and testing lab is ISO 17025 accredited, can provide risk mitigation test plans for counterfeit detection, and can perform the tests on-site.
Mason: Focusing on PLM comes down to understanding the critical nature of the products medical customers bring to market—they impact people’s lives, whether it be saving a life, sustaining a life, or making life easier. Expertise in quality, regulatory, and technical requirements is essential to developing and producing safe and reliable medical devices. Being involved in the early stages of design enhances our PFMEA, validation, traceability implementation, and overall quality output. At the end of the day, early engagement on the input will enhance the output.
McBeth: One of the most interesting topics in supply chain for the healthcare industry is related to the misalignment of product and technology lifecycles. The medical device product lifecycle can be two to five years in development and then 10+ years in production. That is very attractive to a manufacturing company, but let’s add a little more reality. Let’s say this is a connected device. Although potentially only a small portion of the cost of this product is electronics, the semiconductor designed in has a lifecycle about half of that. Being aware of this mismatch does not mean you have an answer. Historically, the answer has been to invest millions of dollars in inventory to last the lifecycle of the product. This, of course, is very risky. A better solution is to map out product releases against component lifecycles. This can be the difference between winning and losing and, in some cases, life or death. The answer is not simply PLM, but rather industry knowledge, PLM, and strong supplier relationships.
McClain: The regulatory environment for medical products can make redesign costly, and medical devices tend to have longer lifecycles than the consumer products influencing component manufacturers’ product line choices. It is critical to choose a manufacturing partner who can make recommendations to help minimize obsolescence risk or provide warning early enough to assess options for addressing components nearing end-of-life.
Mucha: With longer lifecycle medical products, the question isn’t will a part go obsolete. It is when will a part go obsolete? The more warning a company has, the more options they will have for addressing obsolescence without a full redesign. EMS providers with strong supply chain relationships and third-party PLM monitoring software are in a better position to help their customers navigate that challenge.
Royroth: For an EMS supplier, PLM is one of the most important areas for accelerating product deliveries, reducing costs, and ensuring product continuity and sustainability. PLM is an enabling framework to help connect, organize, control, manage, track, consolidate, and centralize all the critical information affecting a product—including change management. A robust PLM framework improves the development and management of the bill of material and purchase of parts to ensure production is not hampered.
Sammut: The biggest areas of obsolescence risk occur near program End of Life and the costs of redesign/validation are exorbitant. This is particularly relevant in the medical segment where products often have longer lifecycles than the consumer products tending to drive component trends. Consequently, it’s critical for OEMs to understand the component lifecycle outlook as early as possible to identify and qualify alternates. In addition, the volume curve can be drastically different as a product line evolves, so it’s critical for the EMS partner to understand the outlook for the product assembly life. This helps the OEM rapidly fulfill demand and reduce obsolescence exposure.
Story: The biggest factor in a successful project is efficiently managing the supply chain. Unanticipated component obsolescence creates significant problems. Consequently, it is important to understand the customer’s anticipated product lifecycle, demand trends, and obsolescence risk. We make a point of strategically monitoring these issues through open communication with our customers and our supply chain partners, plus use of third-party PLM software.
Wyatt: Whether an OEM offers one product line or many, EMS suppliers need to understand and be fully in tune with the product lifecycle. If not, engineering changes could take longer, cost more, and product improvements may never be addressed or suggested. Again, design for manufacturability (DFM) can occur at any point within the product lifecycle; however, it has more value in the early development. The DFM focuses on efficient throughput, cost management, and product reliability. As an example, an EMS electronics engineer can select components during the design phase for a wire harness using fully automated equipment components where only semi-automated equipment is available. Another example is a printed circuit board design that needs to adhere to the products’ housing specifications or dimensions for a box enclosure. Some products have parameters or restrictions on overall size, weight, and shape. The third benefit of a PLM focus is cost reduction for materials and labor—a constant theme for OEMs.
Brusco: What traits are often overlooked in a long-term OEM/EMS provider relationship?
Carlson: The easily overlooked keys to establishing a truly collaborative partnership are a good cultural fit, alignment on strategy, roadmap, and capabilities, and a transparent approach with understanding of the expected outcomes for both parties. Regular strategic meetings that include heads of business units, R&D leaders, and C-suite are ideal. The OEM/CMO relationship can be established at any point in the product lifecycle. The earlier in the product development or evolution process the CMO is involved, the more value they can offer, and the more the OEM and CMO can leverage each other’s strengths.
Gavelis: OEMs have a wide range of experience and maturity when it comes to their validation approach. Some customers have a robust regulatory strategy for overall product validation, but may be unfamiliar with the specific electronic assembly process steps and how to successfully validate them. With our focus on life-saving and mission critical products, we understand the products we make are not just putting together components per an engineering drawing, but rather products that can potentially save someone’s life. Experience with manufacturing a Class III PMA device shows an EMS provider has the expertise and know-how to manufacture medical devices and execute their associated compliance.
Mason: An important aspect sometimes overlooked is the relationship between the OEM and EMS team members. Sometimes we forget at the end of the day it’s the people making the difference between success and failure. Complex medical products have long lifecycles and switching suppliers is very costly. The relationship between the team at the EMS factory and the OEM is long term, and commitment of both parties is critical. There are going to be challenges on a five-year program, so knowing there is real commitment and trust helps everyone work through issues together.
McBeth: Rather than describe what traits can be overlooked, it is better to think about what makes a successful relationship. The most important trait in a healthy relationship is the ability to listen, and leverage each company’s strengths to extract the maximum relationship value. If the expectation of the relationship is one sided—meaning the OEM believes the best path to value is to instruct the EMS on what to do—much of the value potentially gained from the broad portfolio of capabilities an EMS houses will be lost or severely marginalized. Even more damaging could be an EMS company’s inability to listen and deeply investigate the OEM’s true needs. Jabil sees this as the core to success and utilizes a customer value mapping process that drives often unidentified value for the customer. This process is not bound by currently available capabilities—it can even drive new investment streams. This ability to listen, digest, and then jointly attack new value streams allows the relationship to become less about supplier and customer and more about the shared “us.” As in any relationship, there will be conflict. Just imagine how many divorces there would be if there was no ability to manage and resolve conflict. It is no different in the business relationships between OEM and EMS contractor. These relationships are deep and require mature approaches and participants on both sides to stay “married.”
McClain: Ultimately, achieving lowest total cost isn’t about the unit price or annual cost reductions. It really boils down to how well the OEM and EMS company collaborate as challenges arise. We have created a comprehensive solution that includes engineering, PCB layout, prototyping, and manufacturing. We can structure individual customized support options in each of those areas or pull in expertise as needed. That level of support flexibility is becoming more important as medical device applications continue to evolve and expand.
Mucha: The real value of a long-term OEM-EMS provider relationship is the institutional knowledge that develops over time. This is particularly apparent in lower volume, configure-to-order complex box builds where the EMS provider’s ability to fill the gaps in the OEM’s transfer process becomes a significant differentiator in terms of the level of service they can offer. New suppliers will always have a learning curve not present in the long-term relationship, and that is often a significant barrier to entry.
Sammut: “Right-sizing” for the mutual benefit/significance of the partnership is often ignored. This is far more critical than people realize. OEMs don’t benefit from the leverage of their total outsourcing spend if they spread too much of their business around and are a small customer to many EMS providers. Even if they give a significant amount to a few EMS partners—but represent a very small percentage of the suppliers’ revenue—they may not get the same response as those suppliers’ largest volume customers.
Story: Transparency in pricing is critical because it gives both parties the ability to look for legitimate cost reduction areas. A long-term relationship by its nature has an element of trust, which is something we work to cultivate. Transparency in pricing helps create a “trust but verify” environment that supports a strong relationship, even when key players change. For that reason, we begin all our relationships with open book pricing.
Wyatt: The engagement, like any strategic partnership, has to be the right fit. Suppliers must have the initial capability but also the adaptability, scalability, and sustainability to provide the same high-quality output throughout the whole life of the product. As a result, the cost of quality will likely reveal itself along the way. Design for manufacturability (DFM) also facilitates the manufacturing process to reduce costs. DFM practices allow potential problems to be tackled during the design phase, the least costly area of production to address the issues. With a DFM strategy, there are considerations unique to molding that other manufacturing methods do not encounter. Some device makers may forget or lack experience in designing complex parts under a DFM strategy. Robust tooling is also important in early phases, and it is not always on an OEM’s mind. In addition, value-added services like remediation and regulatory solutions make the journey to a cost-efficient component much more feasible for a medical device OEM.
Brusco: How will the EMS industry evolve over the next 5-10 years?
Carlson: As sources of organic growth, regulatory hurdles, and speed-to-market challenges increase, the threat of non-traditional medical companies entering the space with disruptive products also increases. To keep pace with the acceleration of technology evolution, the strategic partnership between the OEM and CMO becomes a competitive advantage and perhaps a strategic necessity. As we have seen in other industries that reach commoditization, the ROI for new products decreases as cycles accelerate. Closer OEM/CMO partnership and more integrated collaboration earlier in the design phase enables faster, more targeted product development. It also facilitates access to scalable operations and effective supply chain management, enabling the OEM to better serve unmet clinical and healthcare needs by quickly creating new devices, systems, and solutions for better patient outcomes.
Mason: We’re seeing more demand for services throughout the product lifecycle—from design to after-sales support to distribution. Customers are also requiring more real-time manufacturing visibility, whether it be components, tests, or quality attributes—all of which is happening with advanced manufacturing execution systems solutions.
McBeth: Today, we are seen as a supply chain and manufacturing partner. But it is logical we will likely be creating our own solutions both in hardware and services. This may include a higher level of IP ownership, the use of analytics to influence product or market decisions, or a completely different business model. Is it possible that OEMs will become brands that no longer design or own the hardware? For that matter, with the vertical plays of CVS, Aetna, and others, will EMS have a completely different customer? Could the payer become the customer? The skillsets and global talent pool within EMS continues to grow. The ability to aggregate spend and technological intelligence across many industries exists in only a handful of players. This aggregation will not lead to one huge generalist, but rather very large focused players capable of leading in technology and not simply accenting a customer’s roadmap. It is hard to predict. But it is clear the ability to efficiently serve the global economy at the speed of technology already exists within the EMS field. Twenty-six years ago, Jabil had two manufacturing locations in the United States, and basically served two industries.
Today, there are 100 locations including two Blue Sky Innovation centers positioned around the globe. Being entrusted to manage the business of the best brands in the world does not leave room for error. To exist as a solution, EMS as an industry and Jabil as a company must invest to lead, not follow.
McClain: OEMs depend on their EMS providers for comprehensive solutions, whether they are tier one global providers or regional EMS companies. I believe our business model providing both transactional support options (the ability to purchase product development services, layout services, or prototypes transactionally) in addition to the option of purchasing the combined services is very aligned with the direction this market is taking. This approach has enabled us to maintain a larger staff and broader expertise levels than if those options were simply support departments linked to volume manufacturing.
Mucha: Tier One companies will continue to reinvent themselves, simply because there are limits to topline growth with a pure EMS model. Regional providers will still be important, because OEMs are realizing proximity has cost advantages in many situations. I think there will be increased consolidation in the mid-tier, predominantly from two factors. First, the change in tax policy has made the U.S. a more cost competitive place to do business and some consolidation will be driven by companies outside the U.S. wanting to add a U.S. footprint. We are also at a point I call “changing of the guard,” where older management teams are evaluating whether it is better to hand off to the next generation or sell the company. But the evolution we will see in the next two to three years is a different, more positive path than the path the U.S. EMS industry would have taken if the tax and regulatory environment had remained unchanged. I have heard a much more optimistic business view from regional U.S. EMS CEOs over the last year.
Royroth: EMS companies have already started to provide design and testing services. While innovation is always a strategic priority, quick NPI (new product introduction) turnaround with cost competitiveness will be a key aspect. Technology upgradation and ability to adapt to the new and emerging component and product technologies—including adaptation to 3D printing and nanotechnology—will also be important. The future manufacturing industry will evolve into digitized virtual factories that can be located in any part of the world and managed from virtually any other part of the world.
Sammut: We’ll see further consolidation of the mid-tier, as there are relatively few mid-tier EMS providers with the ability to provide the global support more OEMs seek. There will also be stronger focus on customer fit. Some EMS companies are victims of the “80/20 rule”—80 percent of their problems are caused by 20 percent of their customer base. Our award-winning business model has been based on strong alignment with each customer. Several years ago, we actually scored our customers in terms of alignment with our business model and helped those who weren’t a fit find other suppliers. The payback has been better responsiveness from supply chain and greater efficiency in production operations, because we’ve eliminated a lot of the chaos driven by a bad fit. We’ve also seen significant growth from the remaining well-aligned customers and those we’ve added over time. The payback for customers is a more responsive, competitively-priced EMS partner because much of the inefficiency or waste that can occur in poorly aligned business relationships doesn’t exist. The better the fit, the more an EMS company, each customer, and the supply chain can strategize on the best way to achieve mutual goals.
Story: We will continue to see more and more collaboration in OEM-EMS relationships in all industry tiers. OEMs are looking for partners who can fill gaps in their team and EMS services will continue to evolve to efficiently address that. Case-in-point, we opened a technology center in Boston to co-locate with product development teams in that area’s technology corridor.
Wyatt: EMS suppliers will need to stay on top of both IoT and additive manufacturing. Both of these areas will continue to change and adaptability will be key to building product value. Cyient believes investing in these combined solutions will keep us at the forefront of the future growth of medical technology markets.