What Does an OEM Really Gain from Outsourcing their Manufacturing?

Estimated reading time: 3 minutes

Original equipment manufacturers (OEMs) have outsourced their manufacturing to electronics manufacturing services (EMS) providers for decades.

Many of the world’s most valuable hardware companies have handed over responsibility for procurement, assembly, test and logistics so they can focus on what really adds value to their business and their customers.

For them, physically producing the hardware no longer features on this list. So, outsourcing works as a strategy, right?

But what does an OEM really gain when they make the move from an in-house manufacturing operation to an outsourced one? In this article, we look at two key benefits OEMs stand to gain once they relinquish control and hand over their production responsibility to an EMS provider.

Growth

Embarking on an outsource strategy enables business leaders to focus on product development, marketing and sales. Free from the day-to-day shop floor distraction they can spend more time listening to what their customers really want. In turn, they can focus on designing new products which continue to meet their ever changing demands. Or develop new services and ways of working which enhance the customers experience when buying the product or using the service.

The sales team are no longer constrained by internal capacity or have to fear being caught out by over promising and under delivering. When they close a sale they will have the confidence that it can be delivered, without putting undue stress and strain on other areas of the business. This, in turn, helps create a greater sense of trust between the end customer and OEM, resulting in further orders being placed.

And whereas before the OEM may have had to look at ways of cutting costs to boost profits, they now simply need to focus on selling more units than they have done so before. Sounds simple, and of course there are other factors to consider, but if the OEM can sell another 5 or 10 additional units per month, whilst retaining the same level of overheads, that’s additional profit each month they haven’t previously enjoyed. And if they also manage to reduce some of their overheads as well, then that’s even better!

Quite often OEMs focus their attention on cost cutting exercises to help improve profit levels. Unfortunately, sometimes they cut too deep and then struggle to resource effectively and keep up with demand when things pick up. But increases in profit don’t necessarily have to be about cutting costs. Selling more of the same can achieve an equally positive result.

Flexibility

In order to grow an OEM must remain agile. They need to get new products out to market before the competition. They must be able to react to unknown demand patterns and deliver products within an ever decreasing timescale. Amazon Prime now deliver certain orders in just a few hours—how long until this becomes the norm for us all? OEMs have to remain one step ahead of their customers and evolve their products and services as market conditions change or they face going down in history as yet another company slow to respond which then missed out.  

Unfortunately, the amount of time, resource, investment and board room attention a manufacturing operation requires hinders how flexible an OEM can truly be. For example, if the engineering team are constantly out on the shop floor firefighting to get existing products through the production process they will struggle to find time designing new ones and getting them out into the market place. And unless the OEM is prepared to eat up cash and build “just in case” stock for when peaks in demand occur, they will have to constantly juggle having enough product to fulfil orders and keeping their FD happy. Unfortunately, experience suggests that both of these are difficult to achieve. And it’s almost guaranteed that just when you think a customer won’t have demand for an ageing product variant you no longer keep in stock, they try and order it. In bulk.

Although this article touches on two key benefits of outsourcing, in truth there are many more. It’s fair to say though that the extent of such benefits are only realized when a clear strategy is in place, with buy in from the top. Short term outsourcing projects usually end up costing the OEM more in the long run. And those that struggle to relinquish full control or do so over a prolonged period of time will have mediocre results.

But of course, such an important decision requires a great deal of trust and research. With over 240 UK EMS companies offering (what appear on the surface) to be similar services, it’s important OEMs take time to explore their options and find the right partner for them.