Concentrating more production spend with preferred suppliers, helping OEM customers manage supply chain risk, and investing in IT systems and tools to manage critical data for OEMs are some of the key strategies that electronics manufacturing services (EMS) provider Sanmina employs.
Those supply chain initiatives are critical as more OEMs outsource more manufacturing and other functions such as logistics, strategic sourcing of commodity components, and repair services. Such activities used to be handled by OEMs when companies were vertically integrated. However, as OEMs outsourced manufacturing, they also turned to their EMS partners for more services including direct fulfillment to OEM customers, purchasing commodity components from suppliers and aftermarket services such as reverse logistics and repair.
The EMS business is a lot different than it was 20 years ago, according to Tom Pendergrass, vice president of customer supply chains for Sanmina, based in San Jose, Calif. Sanmina, which buys about $4 billion of components and other production materials annually, builds systems for about 500 OEM customers in the computer, communications, automotive, medical, and defense and aerospace industries. It has about $6.2 billion in annual sales.
In the past, OEM customers often would just outsource printed board assembly, and only when the OEM did not have the manufacturing capacity to meet demand for its systems and products.
“In the early days of EMS, the vast majority of EMS business was in computing and telecommunications,” says Pendergrass. He said those are still large segments for Sanmina and other EMS providers, but other industries are outsourcing more, including industrial, medical, and aviation among others.
New Capabilities Needed
As a result, “we've had to acquire different capabilities,” says Pendergrass. For instance, with medical OEM customers, “we had to acquire the ability to meet medical quality and audit standards and that involves putting in part traceability” to make sure the part was genuine, he said.
Another change is that in the past most OEMs had internal manufacturing even if they outsourced. But today OEM customers have little internal manufacturing or none at all and rely on EMS providers to manufacture most of their products and systems.
OEMs also rely on EMS providers to handle the purchasing of standard components such as capacitors, resistors, and connectors. In the past, Sanmina would buy such parts from suppliers from OEMs’ approved vendor list (AVL). However, today Sanmina handles strategic sourcing of such parts including cost negotiations.
“OEMs tend to focus their procurement people on what they would consider their crown jewels or key components, which are the proprietary sorts of components such as application-specific integrated circuits (ASICs) or high-end optical modules, anything that has some level of proprietary technology," says Pendergrass. “However, we also have some customers that want to manage none of their components,” he adds.
Pendergrass said Sanmina provides its preferred supplier lists to customers’ engineers so “they’re designing in the preferred suppliers” that Sanmina has qualified. Sanmina has about 150 preferred suppliers that have achieved that status because of superior performance over the years. Preferred suppliers are awarded the bulk of business from Sanmina for certain commodities.
Preferred suppliers are leaders in technology, cost, quality, and delivery and meet Sanmina's requirements concerning corporate social responsibility, says Pendergrass. They also support the supplier-managed inventory programs for Sanmina.
With supplier-managed inventory, a supplier owns and manages inventory at a location close to a Sanmina plant often through a third-party logistics provider (3PL). Some preferred suppliers run in-plant stores at a Sanmina facility. The suppliers own the inventory until it is used in production. With another program—vendor-consigned inventory—Sanmina manages the supplier-owned inventory in the plant.
“The amount of spend with preferred suppliers has been increasing quite a bit,” says Pendergrass. “Quarter over quarter over the last three years we've been really pushing hard to grow the spend” with preferred suppliers, he adds.
Managing Supply Chain Risk
As OEMs rely on Sanmina to produce equipment and manage relationships with suppliers, they’re also looking to the EMS provider to manage the data involved in building a product or system and helping the OEM manage supply chain risk.
For instance, when a disaster strikes somewhere in the world and disrupts production of electronic components, Sanmina can identify the parts and suppliers that are impacted and provide that information to its customers to help them manage the crisis.
Pendergrass said every part that Sanmina purchases is in its One IT proprietary system. If an earthquake or flood shuts down production of components at a factory in a certain region, the system can quickly identify which parts are at risk, if they have single or multiple sources, and if the parts are built in other regions of the world, he said.
“We can quickly call customers and tell them what the issues are and present the customers with some solutions such as an alternate source” for a part that has been impacted by the disaster, says Pendergrass. Another option may be for Sanmina to do a “risk buy” for the part for the customer and hold extra inventory of the component into the part is produced again.
OEM customers also expect Sanmina to assist with other risks such as end-of-life or obsolete parts by providing timely information about parts that have been discontinued.
“We often get engineering change notices from component manufacturers that have discontinued a part or moved production to another facility,” says Prendergast. Such information is critical to OEMs that use the part in one or more systems.
Sanmina manages other data for customers other than EOL information. “There are a lot of data requirements out there for us to manage. It is huge,” says Prendergast. Such information includes product drawings, work instructions, regulations and test requirements, components used in products, approved vendors, what parts are used in which applications, pricing information, minimum order requirements, quality data, and lead times, among others.
“The OEM world differs dramatically as far as their sophistication and complexity in managing data,” he says. “Some have systems that are that are on par with the systems that we have. And some are barely even running MRP. Some of the OEMs can’t manage all the data that we manage.”
Sanmina also provides market intelligence data to its OEM customers every quarter. The reports analyze capacity, quality, delivery, and lead-time trends.
“As capacity gets tighter, obviously lead times go up and we want to make sure we adjust to the changes,” says Pendergrass.
The need to manage data for customers will grow as OEMs outsource more of their manufacturing. This is especially true with startups. “They tend not have the systems in place and are rely on us to do it for them,” he says.
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