Seven Things to Know before Selecting an EMS Provider

GUIDE TO OUTSOURCING

Selecting an electronics manufacturing services (EMS) partner for any application is a decision fraught with risk. Those risks are magnified for medical OEMs as they balance the need for consistent quality and conformance to product and regulatory requirements with the equally critical need for speed in getting new products to market. Given the level of investment required to support the development of new products and technologies through the regulatory process, medical device manufacturers typically focus on product design, technological innovation, and access to the market to maximize their opportunity for success.

Expending resources—both human and financial—on infrastructure to support a strong manufacturing operation can dilute focus from a company's core competencies. Just as design partners can serve as a source for technological innovation, the selection of a competent EMS provider can serve as a source for business, manufacturing, and operational innovation and efficiency that can be leveraged to the OEM's advantage. The key is in selecting a manufacturing partner that can create a seamless and efficient extension of the operation while conforming to the stringent requirements imposed upon a medical OEM.

Each year, OEMs spend billions of dollars outsourcing electronics production, and a large part of these expenditures is wasted when faulty vendor selection processes fail to include several key elements that dictate project success.

Because medical device manufacturers operate in a restrictive regulated environment, effective vendor selection becomes even more critical. Failure to properly manage the effect of part obsolescence (often as a result of the industrywide movement to RoHS compliance) on an agency-approved product is one example of additional challenges that medical device manufacturers need to take into consideration. Other challenges include having the ability to track components to specific manufacturing lots or end-product serial numbers and maintaining a quality system that will withstand the rigors of an FDA audit.

Given this scenario, why are medical OEMs increasing the rate at which they employ outsourcing strategies, including outsourcing electronics manufacturing? Outsourcing to an EMS provider is more effective than developing and maintaining internal capabilities. Typically, medical device manufacturers realize a competitive advantage through the introduction of innovative technologies. A decision not to outsource electronics production causes the reallocation of financial and human resources to activities that do not increase an OEM's competitive advantage.

Developing the latest technology into marketable products often requires access to advanced manufacturing techniques and processes, requiring a significant investment in equipment and personnel. Examples include the transition to fine-pitch components, such as 0201 and mBGA packages or conversion to RoHS products, both of which require a significant investment in capital equipment. Most medical device manufacturers build in low volumes, so from a product cost perspective, there is limited opportunity to gain price concessions from component suppliers. Outsourcing to an EMS provider, however, leverages the vendor's buying power achieved through the accumulation of demand from multiple customers.

There are seven key principles, referred to as laws in this article, that can help result in a successful relationship with an EMS provider.

The First Law: Know Your Outsourcing Strategy

It's virtually impossible to evaluate EMS suppliers if you haven't first identified an outsourcing strategy. What is the starting point? What is your migration plan?

Medical OEMs, especially companies that are protective of their technology, view their manufacturing operations as a necessity to achieving the level of quality that is required. Often new to outsourcing, they begin by selecting low-level, commodity-based services such as printed circuit board (PCB) assembly and cable assembly.

It is quite common for OEMs to provide some or all raw material. Doing so enables them to maintain greater control over the material planning and acquisition process and minimizes the risk associated with a vendor-managed pipeline. Medical OEMs typically require that no parts be substituted without prior approval. Part substitution is a fairly regular practice for EMS suppliers. By providing their own parts, medical OEMs would ensure that that no substitutions take place. Also, if raw material is consigned, an OEM eliminates the risk associated with allowing the vendor to manage the supply chain, which could disrupt production if the firm's ordering practices or policies were faulty.

Such consignment is often a short-term strategy to deplete the OEM's raw material inventory, evolving into a partial or full turnkey model in which the supplier controls the acquisition of material. If consignment is a long-term strategy, then depending upon product technology and complexity, an OEM might be well served by using a smaller, local EMS provider.

Low-level production can be a starting point for OEMs that plan to outsource high-level products as full turnkey (in which a supplier acquires the material and manages the pipeline). High-level products include assemblies that incorporate low-level commodities plus sheet metal and molded enclosures, for example. Many medical OEMs prefer to keep final assembly and system-level test capabilities in-house, maintaining control of those functions before the product ships to the end customer. With this strategy, OEMs should select a vertically integrated EMS provider.

Such a provider should be able to deliver a functionally tested assembly that can be quickly integrated into the final product. (A vertically integrated firm can produce multiple services, such as PCB assemblies, interconnect assemblies, box build, etc., more efficiently and more cost-effectively than several different firms.) A vertical-integration approach compresses the supply chain and eliminates margin stack-up (multiple profit layers). Administrative services such as order processing, raw material acquisition, and production planning are more critical in this model and should become a focused part of the evaluation process.

One critical element that must be considered in every outsourcing strategy is process integrity. Process integrity refers to documented procedures that clearly define the methods to be used, the performance expected, the means to measure that performance, and a metrics system to communicate performance. Most OEMs require every subcontractor of fabricated parts (such as PCB assemblies, cable harnesses, precision machined components, molded plastic parts, etc.) to maintain well-documented manufacturing processes and control mechanisms for monitoring those processes.

As medical device manufacturers' outsourcing strategies evolve, EMS providers are often tapped to provide high-level assemblies incorporating nonelectronic fabricated parts (such as precision machined parts). High-level assemblies typically constitute low-level assemblies (cable assemblies, PCBs, etc.) packaged in enclosures (sheet metal or plastic) and are potentially tested as a discrete unit. For example, a medical laser might consist of the main console and a handpiece. The console contains cables, boards, etc. integrated to constitute a high-level assembly.

An OEM might authorize its EMS provider to deviate from an approved supplier list for those fabricated items, expecting to gain leverage through the EMS provider's supply chain. Whether the EMS provider is expected to honor the approved supplier list or is allowed to deviate from it, it is vital that both parties employ a system that will ensure performance consistency across all commodities.

Process integrity applies to other elements of the operation as well, including order entry, material acquisition and acceptance, and supply-chain management. Although these elements exist in all types of outsourcing, they can be particularly problematic for an EMS provider. As an integrator of other suppliers' components, an EMS provider's success is completely dependent upon the success of the supply chain. As such, administrative systems are just as important as product and process systems. Product-related factors (supply chain, process control, etc.) should be documented in the form of detailed manufacturing instructions, quality control plans, and test protocols that are validated during the first article and preproduction stages of the outsourcing project.

Process integrity means that mechanisms exist to monitor performance criteria and to identify areas that are trending in the wrong direction before they escalate to nonconformance. The challenge is maintaining process integrity while fostering an environment of innovation that won't stifle improvements. Maintaining integrity can only be achieved within a system that identifies opportunities for improvement but requires customer approval before they are implemented.

The Second Law: The Supplier's Business Profile and Capabilities Must Match Your Own

An OEM creates a successful outsourcing plan by aligning with a contract manufacturer that maps and scales well to its own requirements. There are thousands of EMS suppliers worldwide. The first step toward developing a successful strategy is to select an EMS provider with a business profile similar to the company's profile. Such a profile is often defined in terms of product mix (the number of assembly part numbers to be outsourced) and product volume.

The EMS industry is typically divided into two primary segments. In the first segment, low-mix, high-volume contract manufacturers are geared up to produce large quantities of the same unit. Typically, they don't have the infrastructure to handle varied and complex products, and much of the production takes place in low-cost regions such as China. These manufacturers are set up to run large volumes of products (e.g., cell phones and consumer electronics) at the lowest cost.

High-mix, low-volume contract manufacturers tend to make a wide variety of highly complex products (e.g., medical devices, industrial automation, analytical instruments) in small batches. The very nature of this model requires considerably more-sophisticated infrastructure to support device industry requirements, especially as they relate to regulatory and quality issues. A number of medical industry standards serve as baselines for operational expectations within EMS providers, including 21 CFR Part 820, IPC-A-610, and IPC-A-620.^1–3

After defining your present and future requirements, ensure that the EMS provider's product and process technologies map to your own. Walk the company's floor. Do you see products like yours? Look for evidence that the EMS provider can support the types of technologies that are required today and anticipated in the future. For example, the company may require simple through-hole PCBs now, but it may be developing more-complex products that will incorporate surface-mount technology. It is important to know whether future products may be subject to the new lead-free processing regulations. If so, it is essential that the EMS provider offers these technologies and has made the investment in the necessary capital equipment (such as lead-free–compatible reflow ovens).

Evaluate prospective suppliers in three key areas: administrative capabilities, product and process capability, and engineering change order (ECO) capability. Administrative capabilities include how suppliers process orders, acquire raw material, and plan production. Will their administrative capabilities fulfill outsourcing requirements? For example, how frequently do they do a materials requirement plan (MRP)? Will that frequency capture your production schedules' rate of change? Do they have a mechanism to identify misalignment between your need dates and their ship dates? When will this misalignment be communicated to you?

Remember that EMS providers purchase components and material from an extensive supply base. An average, medium-complexity PCB assembly could consist of more than 300 line items on a bill of material. Managing the flow of that raw material so that it is in sync with demand requires an effective MRP and scheduling system. Without such a system, the sheer volume of transactions can be overwhelming.

The second critical factor is product and process capability—the ability to build the exact type of product you need. Do your PCB assemblies contain mBGAs? Then the supplier should have the appropriate equipment to properly place this type of component and should have x-ray capability for inspection. Are no-lead components in your future? Then the reflow oven should be no-lead–certified compatible, capable of running at higher temperatures (40°–50°C) to accommodate lead-free components.

Consider copper cable assemblies, a commodity that is viewed as low technology but can cause pipeline problems. Because it requires more labor time to build, assembling copper cable can be one of the most difficult processes to manage, from both the scheduling and the process control standpoints. For example, a complex PCB might require only one hour of labor (most of the PCB is assembled via automated equipment). Complex cable assemblies, however, may require more than 30 hours of manual labor. If both the PCB and the cables are integrated in a high-level assembly, the copper cable would be considered as having the higher labor content.

A contract manufacturer that positions itself as a supplier of cable and wire harness assemblies, building 6-in. power supply harnesses consisting of five wires and two connectors, is not likely to possess the expertise and process capabilities required to build a large harness consisting of 2000 connection points and spanning 8 ft in length. The technology may look the same, but the supplier's product and process capability is unlikely to be right for the second application described.

The third key process is ECO capability. Medical OEMs are often hesitant to change their designs—and for good reason. Some changes may require regulatory review and approval, a procedure that can be both time-consuming and difficult. But when an ECO is required, it touches the supplier's operation in virtually every area—production, inventory, engineering, and quality. When an OEM hands a supplier a change order, the supplier must do the following:

Ask prospective service providers to walk you through their ECO process. Make them show you how they do it and how long it takes. Look at their controls. Obtain sufficient evidence that indicates that the process of product change is conducted in a controlled fashion.

The Third Law: There Must Be a Personality Fit

A supplier's culture and personality should fit well with your own to ensure a strong working relationship. EMS providers come in all shapes and sizes, from the very small, local mom-and-pop shops that might provide interconnect or PCB assembly services (often on a material consignment basis) to billion-dollar multinational corporations with design capabilities and sourcing expertise. Most medical device manufacturers' requirements fall somewhere in between. To make the right choice, consider the nature of your outsourcing approach. Are you looking for a tactical relationship in which you place the order and the supplier simply processes it? Or do you want more of a strategic association, one in which you're asking for additional assistance and value from a supplier to help you move forward.

For OEMs that desire a tactical relationship, the focus should be on chemistry with the vendor's program manager and front-line operators—the people who will handle the company's key transactions (engineering, quoting, change orders, schedules). In the EMS industry, the primary relationship will be with a program manager who serves as the OEM's advocate within the supplier's organization.

Program management in the EMS industry has evolved in two different directions. The first direction relies on a business-centric individual, focusing on nontechnical administrative issues (such as material pipelines, scheduling, liabilities, cost reduction efforts, etc.) and accessing technical resources as required to support each customer's requirements.

The second direction relies on a technical-centric individual, often an engineer, focusing on the design and manufacturing aspects of the relationship. Decide which method works best for your company and make it a prerequisite for engagement. In some instances, if the account is significant enough, both a business-oriented program manager and a technical project manager may be assigned to support the OEM's requirements. To service a customer in this fashion, the EMS provider would need to have significant resources.

For OEMs that require a more-strategic relationship, the focus must be on the contract manufacturer's management team as well. They will be running what-if scenarios, developing administrative as well as technical process improvements, and offering feedback. OEMs must trust their program managers' experience and accept their counsel to get the most from such a partnership.

The Fourth Law: Flexibility—The Must-Have for High-Mix, Low-Volume Products

High-complexity, high-mix, and low-volume electronics manufacturing does not run smoothly. Production is in fits and starts. Products may need frequent reconfiguration. So, supplier flexibility is a prerequisite for OEMs that are outsourcing this type of work. A vendor's ability to rapidly flex production levels and quickly reallocate resources is essential. But managing the production schedule is only half the battle when it comes to sourcing complex electronic products. Supply-chain management is a critical element to success.

Many EMS providers can manipulate their capacity to achieve maximum flexibility. But capacity availability is useless without an adequate supply of raw material. When one considers that an average high-level assembly bill of material consisting of copper interconnects, PCB assemblies, and other components can easily exceed 1000 unique line items, and with component lead times often in excess of 12 weeks, EMS providers have had to create flexible material pipelines that can stretch and shrink with the demand cycles. By establishing a monthly run rate for the end product, profiling the lead time of all components, establishing a cycle time for delivery of parts upon receipt of order, and determining the amount of upside flexibility to be achieved, an EMS provider should be able to define the OEM's maximum liability for the material pipeline.

An OEM must understand how much flexibility it requires. Does business volume fluctuate? Are products introduced in shorter and shorter cycles? Are systems highly configurable?

The nature of the EMS industry is such that a significant change in demand, either up or down, requires that the message be communicated to potentially hundreds of component suppliers. Recognize that flexibility beyond a certain level typically comes at a cost. Low cost typically means lower overhead and production efficiencies are achieved through higher volumes. Increased flexibility often requires higher overhead to manage and execute the higher rate of change.

The Fifth Law: Enterprise Resource Planning Is a Key Capability

Enterprise resource planning (ERP) is a critical element in the selection of any outsourcing partner, but this is especially true for selecting an EMS provider. Because the majority of an EMS provider's cost (and the customer's liability) is tied up in material, and EMS bills of material are likely to be large, how that material is managed becomes a critical element to success. An EMS provider cannot properly manage the material pipeline without a highly automated ERP system.

Because of the critical application of their products, medical device manufacturers often require component level tracking and traceability to either the EMS provider's manufacturing lot or to the specific serial number of the assembly. Given the number of unique electronic components that constitute the average PCB, this can be a considerable challenge for a supplier.

Compliance with this requirement starts with an ERP system that can document the lot number for each component receipt as well as the allocation of that component lot to a specific manufacturing work order. An additional level of detail can be achieved at the point of component application to the PCB.

The Sixth Law: Understand Your New Product Introduction Strategy

Given the critical nature of most applications, medical devices are expected to perform consistently and reliably, often to a higher standard than other, nonmedical products (with the exception of avionics and military). Since most medical OEMs are hesitant to change product structures once regulatory approval is received, eliminating variation at the time of product development is essential, as variations in either material or manufacturing processes can lead to unexpected results.

EMS providers gain leverage with electronics distributors by virtue of the accumulation of demand across multiple customers. Through the new product introduction process, a qualified EMS provider can review the OEM's bill of material and suggest alternative equivalent parts that may reduce cost, reduce lead time, and minimize the OEM's exposure and liability once the product is released for production.

Additionally, an EMS provider will also evaluate the manufacturability of the product. What may seem like an insignificant change can lead to dramatic improvements in throughput and yields. For example, moving components away from the edges of a PCB can eliminate the need for custom fixtures and can minimize the exposure to damage during transportation throughout the process.

A robust new product introduction process that establishes such critical parameters as reflow oven profiles, automated optical inspection system settings, and functional test protocols lays the foundation for consistency and minimizes the process changes that are associated with learning curves.

The Seventh Law: Buy on Total Acquisition Cost, Not Just Price

When buying EMS services, the selling price is important, but it should be just a starting point in calculating the true cost of contract manufacturing. Rather, OEMs should focus on the total acquisition cost.

Given the number of potential suppliers, there is never a shortage of willing participants when an OEM wants to shop pricing. But when a careful analysis is conducted, only a small subset are realistically viable suppliers, especially if geographic location is an important factor in the decision-making process.

As with any service-related industry, the selling price does not necessarily tell the whole story. When buying a service, most of the activities occur well below the water line. Most EMS providers commit to delivering product when it is needed. The window for error is much smaller for a turnkey EMS provider than for other types of outsourcing. That's where total acquisition cost comes in.

Total acquisition cost represents the total cost of doing business with a supplier. Theoretically, if all goes as planned, the selling price makes up the total cost. Total acquisition cost is commonly made up of variable costs. When a supplier delivery is late, it might require increased expediting from the OEM's purchasing department and overtime from its production line. These costs add to the price. If a defective product is not discovered until functional testing, then it may require disassembly, repair, reassembly, and retest. The costs associated with these extra activities are also part of the total acquisition cost. And of course, if the problems are significant enough to affect the OEM's relationship with its customers, then the costs could include the loss of future revenue.

Best-practice OEMs have systems that can analyze the total acquisition cost and use it to evaluate EMS suppliers as well as other types of contract manufacturers. These systems assign value to intangibles, such as the ease of working with a vendor. An OEM assessing an outsourcer must have a way to measure the other elements of the relationship that will add cost.

For example, an OEM has a system that measures total acquisition cost by weighting supplier attributes. Two suppliers are on the preferred list. Supplier A is approved at a higher level than Supplier B because of performance. For the same job, Supplier A comes in at $10 per unit, and Supplier B bids $9. But the OEM adds $2 per unit to Supplier B's price because Supplier B doesn't deliver on time, quality isn't as high, and flexibility isn't as good. So now Supplier B's cost is $11 per unit. Based upon that comparison, Supplier A will probably get the job.

Conclusion

Choosing an EMS partner for medical devices is a strategic process. A successful long-term relationship will pay lasting dividends in lower costs, higher productivity, greater creativity, and increased speed to market. But the stakes can be high. Bouncing from supplier to supplier can be an expensive and time-consuming process. When you use these principles as a checklist in your supplier evaluation and selection process, however, your EMS supplier can become an integral link in your supply chain.

Ed Evangelista is coowner and vice president of new business development at Federal Electronics (Cranston, RI). He can contacted at [email protected].

References

1. Code of Federal Regulations, 21 CFR 820.

2. IPC-A-610, “Acceptability of Electronic Assemblies” (Bannockburn, IL: IPC—Association Connecting Electronics Industries, February 2005).

3. IPC-A-620, “Requirements & Acceptance for Cable and Wire Harness Assemblies” (Eden Prairie, MN: Wire Harness Manufacturers Association, July 2006).

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