GUIDE TO OUTSOURCING: EDITOR'S PAGE
Choosing global electronics manufacturing services (EMS) suppliers and then managing the programs for cost efficiency can be a complicated process. This is the conclusion of a detailed study of hundreds of cases across several industries, including medical. The study was conducted by Charlie Barnhart & Associates for the company’s Leading Indicators monthly report. According to Barnhart & Associates (http://charliebarnhart.com), the study revealed the following three fallacies about electronics outsourcing:
- Fallacy: Global outsourcing of electronics is a strategy that will save money. Fact: Not always. The study found that outsourcing is only a tool. “Only the most skilled practitioners are able to leverage this tool to competitive advantage on a total cost of ownership (TCO) basis,” it says. The research showed that some OEMs spend more on internal costs to manage the outsourcing relationship than the cost of the services themselves.
- Fallacy: Centralizing spend in a low-labor-cost geography will reduce the total cost of outsourcing. Fact: Fully burdened labor rates and risk factors vary widely in the more than 20 geographies tracked by Barnhart’s research. The research found that some OEMs in some industries are returning to a regional approach to save total costs.
- Fallacy: It is necessary to build electronics in China to penetrate the market there. Fact: According to the study, a review of publicly traded electronics companies that have actively pursued the Chinese market reveals that this strategy has not come to fruition. The risks and costs of manufacturing in certain geographies outweigh the rewards.
A key factor in assessing an EMS supplier, of course, is the cost of outsourcing versus the cost of keeping manufacturing in-house. According to Barnhart’s report, the average cost of labor for EMS in most global geographies continues to rise at a rate equal to or slightly above the currency adjusted local inflationary index.
The report says that the exceptions to this are the United States, Mexico, and India, where “the fully burdened cost of labor for both printed circuit board assembly and box build were down marginally on improved absorption.” The report noted that the largest increases in the cost of electronic value-added services occurred in Western Europe and China. It says that both of these trends are expected to continue in 2008.
The report also notes that the overall situation in China in terms of risk and usable capacity continues to deteriorate. “Given the high concentration of outsourcing in this single geography, we have begun advising our clients to accelerate analysis and integration of alternative solutions,” says Barnhart.
Sherrie Conroy for the Editors