Is Bigger Always Better in Contract Manufacturing?
Bigger is always better, right? Especially in manufacturing, where it's hard not to be impressed by massive production facilities with lots of staff and resources. But in reality all those resources are dedicated to the success of the customers who are paying for them. The resources devoted to you will be in proportion to how much you spend.
Should you Super-Size, or Right-Size?
The best rule of thumb is try to be about 10% of the revenue of the plant that builds for you. Below 5% and you're risking inattention, above 40% and your risking continuity. Here are three common myths that can lead to finding yourself Super Sized instead of Right Sized.
Myth 1: Larger Contract Manufacturers Get Better Materials Pricing
This very common myth stems from a basic misunderstanding of how electronic components are priced. Component suppliers price their products based on the OEM, not the EMS supplier. In effect, all savvy EMS companies receive very similar pricing for any given OEM, and pricing is good only for that OEM. If an EMS company uses prices for one OEM to support a different OEM, the component suppliers may step in, as is the case in Xilinx v. Flextronics, a pending lawsuit. There are examples of EMS suppliers who buy the largest quantities of materials receiving better pricing, usually low-value commodity items. The bigger question is whether or not that pricing will be shared with your project. Large customers at large EMS providers may see the benefits of such clout, but smaller customers, particularly those with higher mix product, are unlikely to see those benefits. Scrubbing a costed bill of materials with a contractor right-sized for your project is likely to deliver equal or better pricing.
Myth 2: A Contract Manufacturer with a Global Network of Facilities Is a Better Choice in the Long Run
The common thinking behind this myth is that NPI can be conducted in one plant (usually close to R&D) and be "seamlessly" sent to a different plant for volume production (usually offshore). This myth stems from a basic misconception about how EMS companies are structured. They are not one big happy family, they are a collection of individual plants with individual capabilities and priorities that are under common ownership. In order for this strategy to work the OEM must be an important priority for each individual plant that is serving it. With few exceptions, the best vendor selection strategy is to select the best plant for long tern production and work with it in the NPI stage. Provided this plant has the capabilities you need and is the correct size/scale for your spend, it doesn't matter if it is owned by a large conglomerate or operates independently.
Myth 3: Engaging with a Tier 1 is Prestigious
This one is partially true, but even when it is the benefit is short lived. You might do a wonderful job presenting your company and attract the attention of Flex/Jabil/Sanmina to an undersized opportunity, usually on the promise of future growth. This may win the praise of the C-Suite, who like to tout to investors the "backing" of a Tier 1. Occasionally your customers may want to know who your EMS is, and here again a Tier 1 engagement can win praise. This warm glow may feel great, until there's trouble. If you have performance issues with your EMS no one will care anymore how big and beautiful their facilities are. They will only care about performance and responsiveness, and the best way to command performance and responsiveness is being with the right-sized facility.
