Five Issues Troubling EMS Companies

Estimated reading time: 2 minutes

The role of electronics manufacturing services (EMS) companies is very often misunderstood. Some perspectives, however, are helpful in framing the question of what’s on their minds, especially in the current global environment.

EMS companies build products but they are not really “product” companies. While they may provide design services, the designs are still owned by their customers. As a result, they do not have the right to select or change components. In most cases, the EMS company will still be responsible for purchasing these components which are typically 70–90% of their cost to produce the end products. They also do not determine what volumes should be built.

At the same time, they are in an extremely competitive market, with over 1,000 EMS companies in North America alone. Large, publicly-traded EMS companies report gross margins in the high single digits. Smaller and niche EMS companies typically have slightly higher margins but are generally more constrained by working capital availability. In either case, to make this work in a sustainable, profitable manner, they must be able to manage materials and add value to create products as efficiently as possible. They need to convert component inventory to cash; to achieve this, it’s essential to have dependable supply chains and a trained labor force.

Consequences of the Past Two Years
Anyone who has been in the electronics industry for any length of time knows that the past two years have seen an unprecedented combination of labor shortages, supply constraints, demand surges, and global disruptions. In the past, EMS companies and their customers could typically escalate within their established supply chains and reasonably mitigate significant constraints to a manageable level. This has not been the case over the past couple of years. Trusting that the original part from the established supply chain would ultimately be available with enough effort and leverage has just not worked.

As a result, EMS companies have been forced to push component issues back to their customers more often than ever before. When the parts are available in secondary markets or from brokers, they are viewed as having higher counterfeit risks and are often at extremely high relative costs. If the secondary market is not an option, the burden typically falls on the customer to explore alternate designs. These are usually last resorts and can create high-risk product transitions. Ultimately, all these issues are pushed back to customers for risk signoff and financial support, or an EMS company may not be able to survive the financial consequences.

The availability of a trained workforce, especially on the production floor, has also been challenging, especially as demand has grown. When parts are available, many EMS companies have not had enough wage workforce available to recover quickly.

The result? Even the most historically efficient EMS operations are being continuously disrupted and too many materials are occupying space, if not cash. Customer relationships, cash flow, and EMS profits have all been under duress.

To continue reading this article where Mark outlines the five issues plaguing EMS companies, click here or download your copy of the March issue of SMT007 Magazine.