A Guide to Supply Chain Management

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.

Inventory policy

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.

Unanticipated events such as military incidents and natural disasters can cause chaos for a supply chain.

Sharp rises in the price of essential commodities like oil and copper can also have an adverse effect on the price of components.

Even anticipated events such as Chinese New Year, Thanksgiving Day and Christmas can cause disruption to production schedules if contingency plans are not put in place at an early date.

It’s advisable for your EMS partner’s procurement team to have access to market intelligence to mitigate against the effects of these events.

They should also be monitoring the robustness of the supplier base in terms of financial stability, changes of ownership and business strategies that might create uncertainty.

Regulations

Reputable outsourcing partners will do everything in their power to keep customers abreast of the latest industry regulation. As well as regular changes to existing legislation, new rules and regulations are often not far away.

Production of electronic equipment in Europe is governed by two key European Union (EU) directives – the Restriction of Hazardous Substance Directive (RoHS) and Registration, Evaluation, Authorisation and Restriction of Chemicals (REACH) which is intended to protect people from the misuse of chemical substances.

RoHS is aimed at preventing the use of hazardous materials in the manufacture of various types of electrical equipment.

Along with many other companies, contract electronics manufacturers are required to abide by the Waste Electrical and Electronics Directive (WEEE Directive) which sets collection, recycling and recovery targets for electrical goods.

Your assembly partner should be cognisant of current and proposed legislation, for example the latest conflict minerals legislation.

Since 2010, American companies have been required to audit their supply chains to ensure that they are not using conflict minerals – particularly coltan, gold, tin and tungsten – from the eastern provinces of the Democratic Republic of Congo (DRC) and surrounding areas.

The Organisation for Economic Co-operation and Development (OECD) has published guidance on the subject and the EU is currently drafting legislation that will cover the use of tin, tantalum, tungsten and gold from conflict zones.

These regulations are subject to constant change and revision. For example, every few months new chemicals are added to the list of prohibited substances covered by REACH.

A responsible EMS provider will keep track of regulations on an ongoing basis and will have processes in place to take action when needed.

It will scrutinise an OEM’s bill of materials before production to ensure that all of the parts are compliant with the latest regulations and will provide guidance if any items need to be modified or replaced.

If a regulatory change is about to be enacted, an EMS provider will also take appropriate measures to ensure that production continues unimpeded and the customer is kept well informed.

New parts sourced from existing suppliers - and existing parts sourced from new suppliers - should be subject to two key verification processes to ensure that the part is produced to the correct requirements and that the supplier has the right capabilities to make the part.

Before a part is put into production, it should go through one final phase – inspection and verification.

Every reputable assembly partner will carry out some form of first article inspection when it receives a part from a supplier for the first time, to check the specifications of the part and ensure it meets the customer’s requirements.

It’s also good practice to carry out a second, more thorough, inspection once the assembly partner has received a batch of goods.

If certain parts of the batch appear suspect, they may wish to increase the level of inspection. For electronic components, spurious parts can enter the supply chain, most commonly through the grey market.

Sub-standard parts may look exactly like the genuine article. They may even pass a range of simple tests. However a smart EMS provider will not be satisfied until it has verified the authenticity of the part and pushed it to its highest tolerances using a variety of high magnification microscopes, electrical testing and state of the art X-ray machines.

No OEM wants to introduce products into the market with faulty parts. And the cost of replacing these items can be prohibitively high.

By working with an assembly partner that has advanced counterfeit avoidance techniques, the OEM can neutralise this risk before it becomes an issue.

There is one other threat that all contract electronics manufacturers need to take seriously - cybersecurity.

Hackers and cybercriminals are increasingly taking advantage of security loopholes to try and create financial gain from unsuspecting companies.

Every assembly provider would be wise to check their supplier correspondence on a regular basis and to be wary of any unusual activity or any changes that appear even slightly suspicious.