The Changing Dynamics of EMS/ODM Industry

The terms ODM (Original Design Manufacturing) and EMS (Electronics Manufacturing Services) are related to the manufacturing industry. EMS vendors include companies such as Foxconn, Flextronics, Jabil and Sanmina, and ODM vendors refer to companies like Compak, Quanta, Wistron and Inventec. An ODM mainly provides originally designed products and thus, saving the EMS customers significant non-recurring engineering (NRE) costs associated with product development. Advantage of EMS is that the purchasers order predesigned and fabricated products and save considerably on self manufacturing setups and various costs.

Recently both are in an expansion spree of their core disciplines and capabilities. OEM’s outsourcing objectives are prioritised in the new business model and OEM executives need to pay more attention to each vendor’s latest capabilities and performance to find a good match for rapid expansion. Rapidly obliterating differences and racing for competitive advantage over each other, many EMS providers such as Flextronics and Foxconn (Hon Hai Precision Industry) have anteed their R&D abilities while reversibly ODMs are expanding their services to match as competitors with EMS providers. The EMS / ODM sector dynamics are rapidly changing because of opening up of newer markets and new players (vendors) in the market. EMS executives must understand the potential of ODM partners’ latest capabilities and business strategies, core strengths, as well as historical performance.

Profit margins for both EMS and ODM vendors show a declining trend over the years, with many incumbent incurring losses leading to mergers and acquisitions to stay afloat. Therefore, an ODM needs to evaluate the EMS vendor’s financial credentials carefully prior to the final selection to ensure EMS vendors have the financial backing to take on the ODM’s business.

 However strategists believe that EMSs should not focus obsessively on pricing and cost reductions. They insist in developing a long-term streamlined symbiotic association for stabilising their EMS / ODM relationships.  Total cost structure for the EMS can be calculated on cost of purchasing, transporting, warehousing and distributing raw materials, semi-finished, and finished goods.

Geographic distribution affects logistic requirements of an EMS which can gain additional savings if its ODM vendor having manufacturing sites and supply chain capability is accessible to local regions for the EMS easily. An EMS can also gain additional savings if its ODM vendor has capabilities for build-to-order (BTO), configure-to-order (CTO) and can drop ship product directly to the EMS’s end customers.

EMS focus on cost improvements from their ODM partners over time may lead to initial ramping of product volume shipments and improvements in production processes. Quality management is important when manufacturing is outsourced and very critical as the product design and quality specifications are defined by ODM. EMSs must understand ODM products are meant to be generic. This allows the ODM to reuse his design for many different EMS customers.

However due to competitive pricing strategies, ODMs specify only minimum requirements. This, by no means indicates that ODM product designs are inferior. For this reason, EMS vendors might have to shell out dear bucks for additional quality assurance safeguards to help ensure only higher quality of the products released for customer delivery.

In order to develop successful EMS / ODM relations, EMS must understand that both parties must be held accountable for determining a proper internal organizational structure and staffing to ensure smooth outsourcing operations. Primary initiative in achieving this goal is to establish functional work teams; define clear roles and responsibilities for them and open up channels of communication for efficient project status update, reviews and a resolution of contingency issues that need to be managed on the go. Thus in the EMS/ODM game, having updated strategy and knowledge advantage is the only way to achieve competitive advantage.