A Plan for Picking an EMS Partner

Medical Device & Diagnostic Industry MagazineMDDI Article Index Originally Published MDDI August 2005Guide To Outsourcing

William Leventon

August 1, 2005

15 Min Read
A Plan for Picking an EMS Partner

Medical Device & Diagnostic Industry Magazine
MDDI Article Index

Originally Published MDDI August 2005

Guide To Outsourcing

Industry experts help you zero in on the right provider of electronics manufacturing services.

William Leventon

OEMs may want to consider the percentage of products the supplier builds that are medical.

Is choosing a firm to handle electronics manufacturing services (EMS) different from choosing other types of manufacturing partners? Paul Hanson thinks so.

“It's a more stringent evaluation process,” says Hanson, vice president of operations for Frantz Medical Development Ltd. (Mentor, OH), a medical device OEM and contract manufacturer. Why? Once you pick an EMS provider, he explains, “you don't want to have to change right away. If you pick the wrong label guy or nut-and-bolt guy, you can change pretty quickly. If you pick the wrong EMS guy, you've got a long qualification and problem period to work through when you change to someone else.”

To boost your odds of making the right choice, read on for advice from Hanson and six executives from contract EMS firms. Their advice covers the selection process from start to finish, along with ways to avoid some common mistakes that firms often make when selecting an EMS partner. The experts also weigh in on key outsourcing topics such as pricing pitfalls and Asian alternatives. A sidebar on page S-46 outlines some key factors to consider when outsourcing electronics.

First Steps

For OEMs, EMS outsourcing can result in a significant reduction in a product's cost. But outsourcing shouldn't be an OEM's first cost-cutting move, says Hal Kent, vice president of engineering at Medconx Inc. (Santa Clara, CA). Medconx provides EMS to makers of disposable medical devices. According to Kent, outsourcing should be preceded by several design cycles that wring excess costs out of a product. Processes such as design for manufacturing and design for assembly can save OEMs much more money than outsourcing EMS work, he claims. Once the product has matured to the point where these design savings have been realized, “that's a great time to consider outsourcing,” he explains.

Medconx used expertise gained in prior medical product projects to improve upon a traditional connector with hand-soldered components (left) by creating one using automated component soldering technology (right).

When it's time for an OEM to choose an EMS outsourcing partner, a common mistake is failing to narrow the field of potential partners to a manageable number, says IPC (Bannockburn, IL). The global trade association for companies in the electronic interconnect industry has published a guide called “How to Begin the Process of Selecting an EMS Provider.” (The guide is available at the organization's Web site, www.ipc.org.) According to the guide, trying to evaluate a large number of EMS companies can be an expensive proposition. In addition, EMS firms may not invest much time and effort in a contest involving many candidates. In those situations, they may conclude that they only have a small chance of winning the business.

But how can OEMs narrow the field of potential EMS partners? Get recommendations from people you know for three to five firms that can meet your needs, Hanson advises. When he looks for contract manufacturing partners, Hanson places great weight on ISO certification. When manufacturers comply with ISO standards, “that tells us they've got a good quality system in place,” he says.

Another way to narrow the field of EMS companies, notes Gerry Waldron, is to compare their size with the size of your outsourcing requirements. Waldron is director of sales and marketing for Libra Industries Inc. (Mentor, OH), a contract EMS provider that counts Frantz Medical among its clients. “You don't want to be too small” in relation to your partner, Waldron advises. “You want your job to be a reasonable percentage of its business.”

Why? Relatively small outsourcing jobs “just don't get a lot of time and attention from multi-billion-dollar companies,” says Robert Thatcher, senior vice president of sales and marketing for TriVirix (Durham, NC). TriVirix provides EMS to the medical device industry. “You don't want to be in a position where your business is playing second-fiddle to the business of much larger customers. Everybody will say that doesn't happen, but in reality, it does.”

By contrast, Thatcher notes, you don't want an EMS partner that's too small, either. A very small player may not be able to provide services that enable OEMs to eliminate EMS-related inventory costs from their balance sheets.

A Libra employee assembles a circuit board.

Although no range applies to all cases, most OEMs will probably avoid size-related problems if their business makes up 5–15% of their EMS provider's total, says Richard Nazarian, president of Minnetronix Inc. (St. Paul, MN), an EMS firm that works with medical device companies. But besides dollar volume, Nazarian adds, OEMs should look at how their business fits in from a unit-volume standpoint. A $5-million-per-year job might be a good dollar-volume fit for an EMS provider. But such a job could require the manufacture of 200 units or 10,000 units. An EMS provider accustomed to orders of 10,000 units a year from its customers might not be comfortable with an order for 200 units a year, Nazarian notes.

A preliminary assessment of possible EMS providers might also include the amount of electronic and electromechanical work they do. If only 5% of their total business falls into those categories, “that's probably a red flag,” Thatcher says.

Medical Expertise

Another crucial matter is medical expertise. “A lot of EMS providers don't understand the medical device market,” Kent says. “They think of themselves as good at building ‘stuff.' But they may not be good at building stuff within the requirements of the medical device market.”

According to Thatcher, the most important question OEMs should be asking about a potential EMS partner is whether the company understands and abides by the regulatory requirements that FDA imposes on the medical industry. That means OEMs must check to see whether the EMS company has FDA-registered facilities.

Beyond that, Thatcher adds, OEMs might want to consider what percentage of the products built in a plant are medical versus nonmedical. Nazarian is unequivocal on the issue. “Commercial products don't undergo the kind of investigation, verification, validation, and scrutiny that medical devices do. So you need people who focus on medical devices. They need to understand the nature of medical device development and manufacturing. And not only the consequences of errors, but part obsolescence and requalification. Issues like these have a completely different set of ramifications in the medical device world than they do in the world of commercial products.”

To reduce the risk inherent in making a new product, Nazarian also advises OEMs to choose EMS partners with experience in jobs similar to their own. EMS firms can probably handle your product if they're building a comparable product in comparable quantities or have done so in the recent past, he says. Another way for OEMs to reduce outsourcing risk is to make sure prospective EMS providers have a clean track record. “You don't want someone who's gotten warning letters from FDA for noncompliance,” Nazarian says. If an EMS firm has received such letters, he adds, the information is available for the asking from FDA.

Offshore Issues

Tested electromechanical subassemblies from Minnetronix await system integration and final quality control testing.

Some medical OEMs looking for an EMS provider will want to limit the candidates to those offering access to offshore production facilities—either their own or those of an offshore partner. To decide whether offshoring is right for their job, OEMs should consider a number of factors. One major factor is production volume: according to the IPC guide, offshore manufacturers thrive on high-volume jobs. But before you move a job offshore, be sure that your production volumes will stay high. Your offshore manufacturer may drop you if your volume drops below a certain point.

Perhaps the main ingredient in the offshoring decision is the amount of labor in the product's total cost. If labor makes up 50% or more of the cost of a product, going offshore will yield major cost benefits, Thatcher maintains. But on average, he says, labor accounts for only about 10% of the cost of most electronics products made by TriVirix. That amount is significantly less than the cost of materials. When materials costs dwarf those of labor, he contends, it doesn't make sense to take on the significant logistical and management costs of offshoring a product.

In a typical scenario, a U.S. OEM will choose a U.S.-based EMS provider to make a product in the early stages of its life when design modifications may be required. Only when the product design becomes stable will offshoring be considered. “That's the most successful way to do it,” says Michael Curran, president of Micro Industries Corp. (Westerville, OH), an EMS firm that works with companies in a number of industries. “Unless you have engineering resources in Asia, it's an extremely difficult task to bring a product up from scratch in Asia.”

Scrutiny and More Scrutiny

The criteria discussed so far should help you shorten your list of EMS candidates to a few finalists. At this point, the remaining candidates can be subjected to a few more tests. One is a check of references, or clients who are willing and able to talk about the caliber of an EMS firm's work. According to the IPC guide, most EMS providers won't give out reference names in the early stages of a selection process. (Understandably, they don't want to subject clients to a flood of calls from their prospective customers.) But the firms will usually provide references once the process is limited to a few finalists.

When sizing up an EMS provider, “there's nothing like talking to other clients if they're willing to talk to you,” Nazarian says. But, he adds, remember that the EMS firms themselves are providing the references, so you're likely to hear mostly good things from them.

Besides talking to clients of the EMS firm, it's also useful to evaluate examples of their work. According to Curran, potential customers want to see products made by Micro Industries that are similar to their own products. “One product may not have all the characteristics they're looking for,” he says. “But we may be able to show them a variety of different products we've made that meet all the requirements of their application.” Rather than actually showing samples, Curran usually refers prospective clients to Micro Industries products that are on the market.

When trying to pick one EMS firm from a small group of qualified candidates, perhaps the most helpful step an OEM can take is to send out a cross-functional team to evaluate each of the finalists. “In the best selection process we ever saw, the OEM brought in about 20 people who came from every department—purchasing, production control, manufacturing engineering, test engineering,” recalls Steve Pudles, president of EMS firm Nu Visions Manufacturing LLC (Springfield, MA). When the group fanned out, “each person looked specifically at the area where he would have to work with his counterparts at our company.”

Micro Industries performs printed circuit board surface-mount production.

OEMs don't have to send out 20-person teams, adds Pudles, who also serves as chairman of the IPC's EMS Management Council, which produced the EMS-provider selection guide. But he strongly endorses the idea of sending out a cross-functional team that can evaluate every aspect of a contractor's operations.

In addition to technical people, Hanson thinks the team should include people who can assess the business aspects of the contractor's operation. Important business-related issues include the stability of the company, how it's being run, and whether it's for sale. When an OEM starts working with a contractor, “more often than not, it's probably those kinds of issues, rather than technical issues, that will get [the OEM] into trouble,” he says.

Focus on People

At the same time they're checking out business and technical operations, members of the team can determine whether they feel comfortable working with their counterparts at the other company. The level of comfort people have with their counterparts can make or break the relationship between an OEM and an EMS firm, Pudles maintains. His advice: “If you don't see a good working relationship developing with a person—or if you don't feel that you want to spend time with a person—don't do business with that person. In a meeting that lasts an hour or two, you're not going to find out everything about people's lives or how they do business. But I think you can really get a sense of the type of people they are right up front.”

In sizing up the people, it's important to determine whether or not they're being open about how they do business, Thatcher notes. “A lot of EMS providers talk about open accounting and open-book transactions,” he says. “But when it comes right down to it, they're not willing to share information like supplier or component pricing.”

To help you judge their openness, Thatcher suggests asking potential EMS partners what they'll do to guarantee that you'll get cost reductions over time. “If a company hems and haws about that or isn't willing to make commitments on future cost reductions, that should be a yellow flag for the OEM,” he says.

Besides their openness, people on the contractor's staff must also be judged on their experience and expertise. “We look for an EMS provider with people who have a good understanding of the marketplace and when components might become obsolete,” Hanson says. Obsolescence is a big issue, because the resulting changes can trigger a difficult approval process. “We don't want to get into a situation where we're told: ‘In three months, you've got to qualify a new component,'” Hanson notes.

But OEMs must also assess the compatibility of their firms with potential EMS partners. For one thing, Curran advises, make sure you and the contractor have the same business objectives. In addition, look for compatibility in the production methods of the companies. For example,

he says, “we do a lot of work with medical device companies on a kanban basis.” Kanban is a lean-manufacturing term relating to the efficient signaling of production needs. “But for a lot of EMS providers,” Curran says, “it's not practical to run in a kanban environment.”

Potential Pitfalls

Obviously, the process of evaluating potential EMS partners is a complicated one. But don't make it more complicated than it has to be by collecting too much data. “The data you need shouldn't be any different from the data you would need to manage your own shop in-house,” Pudles says. “But a lot of OEMs ask for things that they would never even ask about their own in-house facilities. It takes a lot of time to acquire data that are never used.”

Another common mistake is the development of cost estimates that lack key items. For example, Kent points to a case in which an OEM's product is being manufactured at an EMS facility in China. When a problem arises, the OEM has to send a team of engineers to China to solve it. Although this is almost certain to happen during the course of such a project, Kent says, the expense of sending personnel out of the country on manufacturing management trips is almost never considered when developing cost estimates.

It is also important to consider shipping. In many cases, standard shipping rates are assumed when cost estimates are developed, Kent says. “But then there's a design change or problem with a part, and you end up making courier services rich.”
Other outsourcing mistakes happen when OEMs assign too much importance to cost. According to Nazarian, some OEMs start the EMS outsourcing process with the mistaken assumption that any contract firm can handle their job. OEMs should not conclude that the job should simply go to the lowest bidder.

As head of a firm that handles EMS jobs in other fields besides medical, Pudles believes that medical device manufacturers probably shop strictly on price less often than OEMs in other industries. “I'm not saying that they pay more for things than they should,” he says. “But they understand that the low bidder may not be able to comply with their requirements.”

So what role should price play in the selection process? “If you visit three or four EMS companies and determine that all the companies meet the requirements for your job, then you can [focus] on price” to help you make the choice, Pudles says.

Waldron has seen OEMs go about the selection process in a very objective and systematic way. They have selected criteria to use in judging EMS contenders, weighed the criteria according to their importance to the firm, and finally come up with scores for each of the contenders. But in those cases, he doesn't believe the final decisions were based simply on the scores yielded by the process.

Hanson notes that scoring systems can be useful primarily in ruling out some of the contenders. To make the final choice from among those that remain, he relies on a more subjective analysis: “I try to assess the people I'm dealing with—their background and experience, whether I think they'll be honest with me. If two or three companies are very close (which happens a lot of times), then the deciding factor for me is the comfort level I have with the people.”

Copyright ©2005 Medical Device & Diagnostic Industry

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