Once a product has been outsourced, you may well have very little hands on involvement, so it’s vital that your EMS partner has the right supply chain in place.
Whether they are supplying on a ‘just in time’ basis from stock, or with a longer lead time, will depend upon the supply chain model agreed by both parties.
Once a service level to the OEM has been set, the efficiency of the supply chain should be examined.
The effectiveness of this arrangement will be influenced by the speed and accuracy of demand and information signals flowing down the supply chain from the OEM to the EMS provider and then onto their suppliers.
It will also be impacted by the speed and efficiency with which materials flow up the supply chain back to the end customer.
Demand planning and forecasting
Buyers also need accurate forecasting information to do their jobs effectively.
Most EMS providers use some form of Materials Requirement Planning (MRP) system to break down the customers’ orders and forecasts into a requirements schedule.
The accuracy of the forecast can be vital in helping a contract manufacturer meet customer demand. A reliable forecast will also help to ensure they can confidently build flexibility into the manufacturing build schedule.
Standard assignments involving long term forecasts are much easier to manage. For the process to work effectively, however, the OEM needs to be clear on its timelines - and this information may not always be forthcoming.
If a client wants a product produced at short notice and components with long lead times are involved, it is good practice for a contract manufacturer to have either finished or component stock that it can pull on.
The service level agreement between the OEM and their assembly partner will largely determine the finished goods stocking policy.
To calculate this policy, many contract electronics manufacturers use a supply chain ratio called the P:D ratio (Production Cycle: Demand Requirement).
The P:D ratio allows for comparison between the demand or market lead time expectation for a particular product and the production lead time (including component material lead times).
So, if the OEM requires a lead time from its EMS partner that is less than the production lead time, then stock with material underwriting within the supply chain will probably be required.
If the ratio is reversed, where the demand lead time is higher than the production lead time, then it is possible to supply without stocks being held in the supply chain.
Many OEMs will be wary of committing to stock upfront given the capital expenditure involved.
A knowledgeable outsourcing partner will understand the critical parts, in terms of long lead times, and will work with the customer to ensure component stock is available at the right time.
By investing in these components, the partner will be able to meet its targets and reduce the OEM’s stock liability at the same time.
The best contract manufacturers apply intelligent stock profiling systems or methods to make these calculations.
Customer forecasts, lead times and market intelligence data are typical of the information that is considered in the stock holding calculation. This figure can then be used to determine inventory and ordering policies.
The inventory policy covers the amount of stock that the EMS provider is prepared to hold on site on behalf of all of its clients, and in turn feeds directly into the ordering policy.
If your EMS partner is smart it will order high value parts frequently, and will schedule them to arrive just in time to fulfil firm orders, so that it can avoid holding too much inventory. It will also order low value parts – such as fasteners – on a much less frequent basis.
Low value parts typically only account for a small percentage of a provider’s inventory, so it makes sense to order them in bulk only two or three times a year to avoid additional transactional costs.
It’s also good practice to continuously monitor inventory and ordering policies to improve data knowledge and supply chain operations and to reduce liability. Some assembly providers will adopt sophisticated statistical approaches to improve their policies. Where requirements are not consistent, for example, standard deviation of demand can be useful in helping to spot trends.
Most EMS partners will have some form of contract in place to ensure that schedules and performance from suppliers are met.
At a minimum, a simple but effective supply contract would include agreement on pricing, lead times, batch quantities and any stock commitments.