Partnering with a contract manufacturer to help them add their capabilities can help you avoid single-source lock in.
As a contract electronics manufacturer (CEM) in the low-mid volume, high-mix space (translation: a wide variety of products for niche markets), we sometimes encounter clients with requests for assembly technologies that we may not (yet) have the capability to support. I thought it would be useful to give some insight into the considerations behind new capability development at a contract manufacturing facility.
New technologies are always on our radar. We want to monitor the constantly emerging innovations to be ready if or when it makes sense to adopt them. But in our business, margins are tight and cost is always a top concern as customers strive to offer innovative products at a price point the market will bear. To keep our costs down, every development of a new capability is based on a business case. In this, we consider a variety of factors, including:
- Cost reduction – Can the technology reduce our costs to manufacture or test?
- Cash flows and present value – What is the present value of the investment? What pros and cons are associated with an investment?
- Incentives – Are programs available to help with the acquisition, such as grants or low-cost financing?
- Sales growth – Is there sufficient customer demand to support the ongoing investment in maintaining the machine and staff to operate it?
Alongside new capability development, we also occasionally decommission capabilities if, over time, the business case for a capability no longer makes sense. The software licensing, equipment calibration, training, and equipment service may represent a significant annual cost that may not be supported by customer demand at a fair price.
In some cases, though, we acquire necessary technical equipment through partnership with a customer. This may occur because their requirements are unique or unusual. Sometimes, we will purchase a critical (to the customer's needs) piece of equipment with a commitment from the customer for a minimum production volume. But other times, the customer purchases and consigns the equipment to us. When equipment is consigned, we maintain the equipment and use it for that customer’s products.
Sometimes the customer consigning the equipment can recover some of their cost by allowing us to also use their equipment for other customers, with a fee per use. In other cases, if the customer’s ongoing sales volume is sufficient, we may ultimately purchase the equipment from them outright.
So when you evaluate a CEM’s capabilities, it’s useful to keep the options for technology acquisition in mind. Rather than being married to a single provider due to their technology capabilities, taking a partnership approach with a second provider may make sense and will expand your options for a CEM.
George Henning is president of OCM Manufacturing.