An Alternative Approach to Vertical Integration in Manufacturing

Estimated reading time: 5 minutes

Figure 2: High complexity wire harnesses from MC integrated partners being staged for next step assembly.

The expansive EMS corporate campuses we see in China today are the hyper-outgrowth of this vertical integration. In cities such as Shenzhen, vast industrial areas, walled-off and secured from the public eye dominate the landscape. Supporting employee populations larger than most cities in the United States, these manufacturing entities are the apex of vertical integration in the EMS world.

Figure 3: Fan assembly being integrated in enclosure from MC integrated partner.

Despite the bad press received over the poor working conditions of these mega-factories, the manufacturing model seems to be working particularly for high-volume consumer products where the repetitive manufacturing nature of the product and the ability to dedicate capital machinery to single product minimizes set up costs long term. Plus, the ability to stack margins on the multiple layers of the product bill-of-materials (BOM) enhances the overall profitability of the company and is less transparent to the end customer.

Figure 4: Enclosures and harnesses in queue at MC waiting final integration.

Vertical Integration in Low-Volume EMS

When you apply the same model to lower-volume manufacturing, directionally the results become much more problematic. The profitability equation for any capital-intensive manufacturing machinery is utilization and set-up minimization.

Figure 5: Supermarket at MC with enclosures waiting for pull by final assembly.

As EMS companies brought in vertical integration, the need to optimize the utilization of their newly gained machinery often outweighed the needs to support the required service level of the customer. Obviously, the practice of meeting customer’s needs unprofitably is a solution that is doomed for long- term failure for a business. Adding to this is the often-heard statement within these vertically integrated EMS companies: "My internal manufacturing teams that feed me components are my worst suppliers. You would think I have greater leverage since we wear the same badge but in reality, they are more driven by their own P&L and since I am a captive customer, they know I cannot fire them."

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