Economies of Scale: Electronics Manufacturing Services Bring Balance

Medical Device & Diagnostic Industry Magazine
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An MD&DI August 1999 Column

Outsourcing electronics manufacturing reduces operating costs and enables companies to focus resources on designing and marketing devices.

The evolution of electronics manufacturing services (EMS) from only high-volume applications such as board stuffing to more diverse service-oriented manufacturing has made this alternative viable for more medical device companies. Whether OEMs are redirecting internal support structures for specific product lines or eliminating redundancies between contracted and internal resources, moving some or all manufacturing outside can strengthen a company's competitive advantage by bringing focus to its core competencies of designing and marketing devices. Reengineering, limits on human and capital resources, and financial constraints are leading OEMs to analyze these core competencies and look outside for electronics manufacturing.

A multichambered convection oven is used for soldering memory PC boards during the final step in the SMT assembly process. Photo courtesy of DA-Tech Corp.

Evaluating outsourcing options and deciding when—and then which—electronics manufacturing service to use begins with an examination of the company's own internal strengths. Each device company must determine what criteria to use to identify a contract manufacturer that can become a seamless extension of the OEM. This article explores the options available from EMS providers and examines how an OEM can determine whether a service provider can respond to its specific needs.

"Contract manufacturers can develop economies of scale that device manufacturers can't, and can therefore provide cost savings that the OEM can't achieve on its own," says Phil DiVita, cofounder and director of Da-Tech Corp. (Ivyland, PA). "Because contract manufacturers buy more electronic materials [than OEMs], they have more power with suppliers. Because they have many electronics customers, they simply have more purchasing power. They function in a way that device manufacturers can't, such as having five or six surface mount lines that run continuously. They reduce risk to the manufacturer because they take on the risk of managing materials and work-in-progress or finished goods and can therefore schedule the flow of subassemblies and finished goods to take just-in-time orders," he explains.

According to DiVita, there are several reasons why it is economical for device companies to outsource electronics manufacturing. "They reduce risk and increase cash available to focus on their core competencies of designing and marketing rather than investing in training staff and developing new operations. Given all the forces—environmental, regulatory, economic, social, and industrial (the power of the buyers and suppliers)—that act on management, outsourcing provides a way to build competitive advantages related to costs and quality," DiVita says.

Medical manufacturers that hit a fork in the road must define their strengths and decide where to focus their resources. "Many device companies choose an EMS because manufacturing is our core competency," says Brian Tracey, vice president of corporate development for EFTC (Denver). Outsourcing frees up internal resources for more critical projects or activities. As a company's product line expands, outsourcing curbs the need to continually expand product development and manufacturing capabilities. Moving manufacturing to an EMS provider reduces operating costs and provides more flexibility (Table I).

Most device companies outsource electronics manufacturing to bring their products to market more quickly and cost-effectively. OEMs sometimes have small product development staffs that are at capacity, so outsourcing is necessary. Manufacturing capacity is also often the driver. The OEM either has no manufacturing capability or its production floor is at capacity. Says Russ Gray, vice president of operations and product development for UMM Electronics (Indianapolis), "In the case of start-up companies, an EMS can be well into the first phases of the project before the customer could hire and bring up to speed their first engineer."

"Because surface mount technology (SMT) manufacturing requires intensive capital investment, OEMs may get a product to market more cost-effectively by going outside. An EMS supplier can run multiple products down the same line, thereby achieving a higher rate of equipment utilization and a lower overall cost per assembly produced. In this example the cost to the OEM is based on its use of the production line. If OEMs choose to keep the manufacture in-house with only partial utilization of their production assets, they incur significant costs associated with equipment underutilization," says Frank Mokry, vice president of sales and marketing at K*Tec Electronics (Sugarland, TX).

An EMS supplier's primary function is to make electronics products. Device manufacturers design and market devices, but aren't always experts in manufacturing. And today's electronics products are integrating many advanced technologies such as new, smaller package types to achieve higher-speed data transmission. "In order for OEMs to make [electronics], they must invest in sophisticated equipment and infrastructure. The overhead for an EMS is much lower because it can use the same machines for multiple customers, says Manny Lee, president and chief executive officer of Excelsior Manufacturing (San Jose).

Many EMS providers are now set up to manufacture functionally tested, finished devices. If an EMS can assume that operational responsibility, says DiVita, device companies can better leverage assets through the use of conceptual engineering, cost-reduction analysis, design for manufacturability and testability (DFM/DFT), or even product launch programs.

To help determine whether an EMS pro-vider is a good match, it is recommended that OEMs develop a matrix that includes not only cost, but also process technology capabilities, quality requirements, engineering capabilities, project team structure, and other services. "It is particularly important to know whether an EMS provider focuses on high-mix, low-volume production or low-mix, high-volume programs," adds Ty Griffin, senior manager of quote services at EFTC.

"Be prepared. Conduct a thorough survey of potential EMS suppliers. Let them know expectations up front. It is also critical to understand their fundamental philosophy. The best way to do this is to meet the head of the organization," says Lee. "Device manufacturers must find an EMS that will manufacture a product that meets the intention of the design by the manufacturer, not only in quality but also in delivery. Not every company is identical."

PROJECT MANAGEMENT: WHO HAS CONTROL?

System development involves the EMS from the initial concept stage through to development and commercialization of the product. Turnkey production enables the EMS to assume responsibility for building a product that has already been designed and is ready for production. Stepping in at this stage enables them to assume production of end-of-life products as well, freeing manufacturing capacity at the OEM for a next-generation product. Even for device companies that have the resources to design a product in-house, EMS providers can offer advice early in the design stages that can reduce manufacturing costs. And, in many cases, the device company retains rights to technology developed jointly with the EMS. "Device companies must look for an EMS with an active and documented risk management process, covering project management plus product and process design," says UMM Electronics' Gray.

Device manufacturers outsource many next-generation products at UMM, for example. However, the company also works with customers to provide manufacturing and minor design changes on end-of-life products. This frees the customer's production area for new product launches and maintains the cash inflow from the mature product. "They are able to take advantage of both their cash cow and their shooting star revenues," explains Gray.

Prototype development by the UMM Electronics model shop.

Although outsourcing to an EMS means sharing the responsibility of a key element of product development, device companies can maintain manufacturing control. Many EMS providers use manufacturing resources planning (MRP) to enable them to track the manufacturing process. Some offer an intranet that the device company can access 24 hours a day. It is important to determine the level of contact necessary.

UMM uses a change notification protocol process to ensure that OEMs retain control of the manufacturing process (Table II). This process requires that the OEM is informed of and approves all significant changes prior to their implementation. Some companies, such as Sparton Electronics (Brooksville, FL), use an enterprise resource planning (ERP) system that provides real-time shop-floor tracking to monitor quality yields and generates customized systems reports. Da-Tech has also recently implemented a new information management system. "The manufacturing resource planning system allows access to what is being manufactured and tracks a job from beginning to end. We are planning to allow customers to access this information directly," says DiVita.

With the advent of the Internet, EMS companies are able to use this technology to develop a more seamless, real-time connection with customers. Says K*Tec's Mokry, "We track the manufacturing process down to the component level—and provide our customers unfiltered access to this data, so that we and the OEM can more closely and accurately monitor the manufacturing process. Using K*Tec's proprietary intranet software, with access through the Internet, we provide our customers detailed visibility into how we manufacture their PCBA and box-build products—from detailed work instructions down to specific AVL information at the component level. This access is password protected (and outside the system firewall for security reasons), allowing visibility to the information by the customers from the convenience of their offices." Also available through the company's intranet are its DFM/DFT guidelines and company quality manual. "This allows customers immediate access to information that enables them to make design decisions in an informed manner that will help ensure the product is manufacturable, testable, and at the highest quality levels possible when released for production within our factory," says Mokry.

The intranet, he adds, makes the manufacturing process visible to the OEM and ensures a high degree of product traceability and accountability. "OEMs can view from their desktop any history that may exist on a PCBA or box-build assembly K*Tec produced for them. This access to real-time information empowers the customers with the ability to get an answer when they need it—24 hours a day, 7 days a week. There's no longer the need to call a manufacturing engineer or program manager to obtain manufacturing data. We have provided the means for the OEMs to obtain the information they need—when they need it," explains Mokry.

K*Tec also tailors the intranet site with any customer-specific needs or requests. For example, data can be output in whatever format a customer requires for internal use—Pareto reports, bar charts, pie charts, or any other report formats they specify. Information is updated in real time. "If an OEM's field salesperson needs to be able to commit to a number of assemblies to secure a sale, the salesperson can log onto the intranet site, see what is in process and finished goods, and provide the customer with a firm commitment to secure an order on the spot. We are able to provide virtual manufacturing capabilities to an OEM partner that has no internal manufacturing capabilities," Mokry says.

"If a customer needs a product by a certain date, but encounters delays in design, we will try to condense our process to make up for the loss of time. When we make a product, we always manufacture a prototype. We provide all DFM and DFT reports to the OEM and use the information to come as close as possible to the ideal manufacturing situation. We look at the prototypes to jointly develop documents to use for full production. Finally, we conduct tests upon completion of the product to determine how the product is behaving compared to the specifications, says Excelsior's Lee.

CONCURRENT ENGINEERING

Working with the EMS provider from the conceptual design stage is one way to reduce manufacturing costs. Concurrent engineering is essential to meet today's product quality and cost targets, says UMM's Gray. "The manufacturing process for the product must be designed concurrently with the product. The issue here is the successful transition of a product from design and development to the production flow. Without concurrent engineering, this transition period can add costly delays to a customer's product launch."

Involving the EMS early in design review allows for analysis of the interconnect technologies and manufacturing processes required to produce a product compared to the manufacturing options available from the EMS. This enables the EMS to optimize the design to reduce time-to-market constraints associated with the manufacturing of the product. Concurrent engineering methods, as opposed to sequential design and development, says Mokry, enable the OEM to get the maximum benefit from the contract manufacturer. "If the EMS is working DFM/DFT issues at the earliest possible design stage with the OEM, the contract manufacturer will be in a much better position to offer valuable suggestions to positively impact cost and delivery than if it were involved after the design is completed," Mokry says.

"It is difficult to go backwards from a design that has ignored manufacturability. The medical device marketer may not be familiar with the tools and standards for, say, surface-mount technology. Concurrent engineering and implementing DFM concepts enable definition of the product that ties in issues you would only see down the road," says DiVita.

DESIGN FOR MANUFACTURABILITY AND TESTABILITY

DFM and DFT concepts are designed to address manufacturing and testing issues when the product is being designed to achieve the most cost-effective production. Plexus, for example, focuses technical resources to analyze product designs and recommend revisions that will improve manufacturability and testability. According to the company, these design- for-excellence techniques include solutions as early in the design phase as possible, often as part of the prototype analysis. When used in the manufacturing phase, such techniques can improve performance, reduce costs, or provide information for future designs.

When implemented at the design stage, DFM and DFT can help OEMs design out costs that might otherwise be incurred during manufacturing. DFM ensures quick time to market and more robust, manufacturable designs. "It's a standardized approach tailored to the parameters of the manufacturing equipment utilized to produce the assemblies," says Mokry. "DFM/DFT is an important activity that can result in significantly improved yields and quality of new products or product redesigns. This can shave weeks or even months off the time it takes to get a product through the new product introduction stage."

"These techniques allow an EMS to offer additional value by providing recommendations for designs to improve manufacturability and testability. It enables the OEM to change the design to align with the overall test platform. Bringing it more in line with the infrastructure of the EMS ultimately takes costs out of the process," says Tracey of EFTC. "For medical device companies, the criticality of such devices often means that if a part fails, it is a big problem."

"Early in the process," says Gray, "the OEM must specify the required product quality, reliability, and cost targets for the EMS. Knowing up front the expectations of the OEM enables a competent EMS to create a design that is manufacturable."

"DFM means that we review the design and make recommendations in order to develop a product that is more manufacturable. With DFM, the very reliability of the product quality level reduces costs to the OEM," says DiVita.