A Plan for Picking an EMS Partner Industry experts help you zero in on the right provider of electronics manufacturing services. William Leventon Is choosing a firm to handle electronics manufacturing services (EMS) different from choosing other types of manufacturing partners? Paul Hanson thinks so. “It’s a more stringent evaluation process,” says Hanson, vice president of operations for Frantz Medical Development Ltd. (Mentor, OH), a medical device OEM and contract manufacturer. Why? Once you pick an EMS provider, he explains, “you don’t want to have to change right away. If you pick the wrong label guy or nut-and-bolt guy, you can change pretty quickly. If you pick the wrong EMS guy, you’ve got a long qualification and problem period to work through when you change to someone else.” To boost your odds of making the right choice, read on for expert advice from Hanson and six executives from contract EMS firms. Their advice covers the selection process from start to finish and alerts you to some common mistakes firms like yours make when selecting an EMS partner. The experts also weigh in on key outsourcing topics such as pricing pitfalls and Asian alternatives. First Steps For OEMs, EMS outsourcing can result in a significant reduction in the cost of a product. But outsourcing shouldn't be the OEM’s first cost-cutting move, says Hal Kent, vice president of engineering at Medconx Inc. (Santa Clara, CA), an EMS provider for makers of disposable medical devices. According to Kent, outsourcing should be preceded by several design cycles that wring excess costs out of a product. Processes such as design for manufacturing and design for assembly can save OEMs much more money than outsourcing EMS work, he claims. Once the product has matured to the point where these design savings have been realized, “that’s a great time to consider outsourcing,” he says. When it’s time for the OEM to choose an EMS outsourcing partner, a common mistake is failing to narrow the field of potential partners to a manageable number. So says “How to Begin the Process of Selecting an EMS Provider,” a new guide from IPC, a global trade association for companies in the electronic interconnect industry. (The guide is available at the organization’s Web site, www.ipc.org.) According to the guide, trying to evaluate a large number of EMS companies can be an expensive proposition for the OEM. In addition, EMS firms may not invest much time and effort in a contest involving many candidates, concluding that they only have a small chance of winning the business. On the other hand, the guide notes, a contest involving three or four EMS providers should be taken seriously by the candidates, who will probably be motivated to prepare detailed proposals and compete hard for the OEM’s business. A smaller field will also give the OEM more time to get to know each contractor. But how can OEMs narrow the field of potential EMS partners? Get recommendations from people you know on three to five firms that can meet your needs, Hanson advises. When looking for contract manufacturing partners himself, Hanson places great weight on ISO registration. When manufacturers are in compliance with ISO standards, “that tells us they’ve got a good quality system in place,” he says. Another way to narrow the field of EMS companies is to compare their size to the size of your outsourcing requirements, notes Gerry Waldron, director of sales and marketing for Libra Industries Inc. (Mentor, OH), a contract EMS provider that counts Frantz Medical among its clients. “You don’t want to be too small” in relation to your partner, Waldron advises. “You want your job to be a reasonable percentage of their business.” Why? Relatively small outsourcing jobs “just don’t get a lot of time and attention from multi-billion-dollar companies,” says Robert Thatcher, senior vice president of sales and marketing for TriVirix (Durham, NC), an EMS firm for the medical device industry. “You don’t want to be in a position where your business is getting second-fiddle position to the business of much larger customers. Everybody will say that doesn’t happen. But in reality, it does.” On the other hand, Thatcher notes, you don’t want an EMS partner that’s too small, either. A very small player may not be able to provide services that allow OEMs to eliminate EMS-related inventory costs from their balance sheets. As a result, “the OEMs won’t be getting the full financial benefit of outsourcing,” he says. While no range applies to all cases, most OEMs will probably avoid size-related problems if their business makes up 5-15 percent of their EMS provider’s total, says Richard Nazarian, president of Minnetronix Inc. (St. Paul, MN), an EMS firm that works with medical device companies. But besides dollar volume, Nazarian adds, OEMs should look at how their business fits in from a unit-volume standpoint. A $5 million-a-year job might be a good dollar-volume fit for an EMS provider. But such a job could require the manufacture of 200 units or 10,000 units. An EMS provider accustomed to orders of 10,000 units a year might not be comfortable with an order of 200 units a year, Nazarian notes.   A preliminary assessment of possible EMS providers might also include the amount of electronic/electromechanical work they do. If only 5 percent of their total business is electronic or electromechanical, “that’s probably a red flag,” Thatcher says. Medical Expertise Then there’s the crucial matter of medical expertise. “A lot of EMS providers don’t understand the medical device market,” Kent says. “They think of themselves as good at building ‘stuff.’ But they may not be good at building stuff within the requirements of the medical device market.” According to Thatcher, the No. 1 question OEMs should be asking about a potential EMS partner is whether the company understands and abides by the regulatory requirements that the FDA imposes on the medical industry. That means they must check to see if the EMS company has FDA-registered facilities. Beyond that, Thatcher adds, OEMs might want to consider what percentage of the products built in a plant are medical versus non-medical. “If a company is building Xboxes in the morning and medical devices in the afternoon, there’s more of a risk that the systems won’t comply as well or as consistently for the medical part of the business,” he says. Nazarian is unequivocal on the issue. “Commercial products don’t undergo the kind of investigation, verification, validation, and scrutiny that medical devices do. So you need people who focus on medical devices, who live for medical devices. They need to understand the nature of medical device development and manufacturing. And not only the consequences of errors, but part obsolescence and re-qualification. Issues like these have a completely different set of ramifications in the medical device world than they do in the world of commercial products.” To reduce the risk inherent in making a new product, Nazarian also advises OEMs to choose EMS partners with experience in jobs similar to their own. EMS firms can probably handle your product if they’re building a comparable product in comparable quantities, he says. Another way for OEMs to reduce outsourcing risk is to make sure prospective EMS providers have a clean track record. “You don’t want someone who’s gotten warning letters from the FDA for noncompliance,” Nazarian says. If an EMS firm has received such letters, he adds, the information is available for the asking from the FDA. Offshore Issues Some medical OEMs looking for an EMS provider will want to limit the candidates to those offering access to offshore production facilities — either their own or those of an offshore partner. To decide whether “offshoring” is right for their job, OEMs should consider a number of factors. One major factor is production volume. According to the IPC guide, offshore manufacturers thrive on high-volume jobs. But before you move a job offshore, be sure that your production volumes will stay high, because your offshore manufacturer may drop you if your volume drops below a certain point. Perhaps the main ingredient in the offshoring decision is the amount of labor in the total product cost. If labor makes up 50 percent or more of the cost of a product, going offshore will yield major cost benefits, Thatcher maintains. But on average, he says, labor accounts for only about 10 percent of the cost of most EMS products made by TriVirix, significantly less than the cost of materials. When materials costs dwarf those of labor, he contends, it doesn’t make sense to take on the significant logistical and management costs of offshoring a product. In a typical scenario, an American OEM will choose a U.S.-based EMS provider to make a product in the early stages of its life, during which numerous design modifications may be required. Only when the product design becomes mature and stable will offshoring be considered. “That’s the most successful way to do it,” says Michael Curran, president of Micro Industries Corp. (Westerville, OH), an EMS firm that works with companies in a number of industries. “Unless you have engineering resources in Asia, it’s an extremely difficult task to bring a product up from scratch in Asia.” More Tests The criteria discussed so far should help you shorten your list of EMS candidates to a few finalists. At this point, the remaining candidates can be subjected to a few more tests. One is a check of references — clients who are willing and able to talk about the caliber of an EMS firm’s work. According to the IPC guide, most EMS providers won’t give out reference names in the early stages of a selection process. (Understandably, they don’t want to subject clients to a flood of calls from their prospective customers.) But the firms will usually provide references once the process reaches the point where OEMs are giving serious consideration to several finalists. When sizing up an EMS provider, “there’s nothing like talking to another client if they’re willing to talk to you,” Nazarian says. But he adds a caveat: Remember that the EMS firms themselves are providing the references, so you’ re likely to hear mostly good things from them. Besides talking to clients of the EMS firm, it’s also useful to evaluate examples of their work. According to Curran, potential customers want to see products made by Micro Industries that are similar to their own products. “One product may not have all the characteristics they’re looking for,” he says. “But we may be able to show them a variety of different products we’ve made that meet all the requirements of their application.” Rather than actually showing samples, Curran usually refers prospective clients to Micro Industries products that are on the market. When trying to pick one EMS firm from a small group of qualified candidates, perhaps the most helpful step an OEM can take is to send out a cross-functional team to evaluate each of the finalists. “In the best selection process we ever saw, the OEM brought in about 20 people that came from every department — purchasing, production control, manufacturing engineering, test engineering,” recalls Steve Pudles, president of EMS firm Nu Visions Manufacturing LLC (Springfield, MA). When the group fanned out, “each person looked specifically at the area where he would have to work with his counterparts at our company.” OEMs don’t have to send out 20-person teams, adds Pudles, chairman of the IPC’s EMS Management Council, which produced the EMS-provider selection guide. But he strongly endorses the idea of sending out a cross-functional team that can evaluate every aspect of a contractor’s operations. In addition to technical people, Hanson thinks the team should include people who can assess the “business aspects” of the contractor’s operation. Important business-related issues include the stability of the company, how it’s being run, and whether it’s for sale. When an OEM starts working with a contractor, “more often than not, it’s probably those kinds of issues rather than technical issues that will get [the OEM] into trouble,” he says. Focus on People At the same time they’re checking out business and technical operations, members of the team can determine whether or not they feel comfortable working with their counterparts at the other company. The level of comfort people have with their counterparts can make or break the relationship between the OEM and an EMS firm, Pudles maintains. His advice: “If you don’t see a good working relationship developing with a person — or if you don’t feel that you want to spend time with a person — don’t do business with that person. In a meeting that lasts an hour or two, you’re not going to find out everything about people’s lives or how they do business. But I think you can really get a sense of the type of people they are right upfront.” In sizing up the people, it’s important to determine whether or not they’re being open about how they do business, Thatcher notes. “A lot of EMS providers talk about open accounting and open-book transactions,” he says. “But when it comes right down to it, they’re not willing to share information like supplier or component pricing. They’re probably thinking: ‘If we don’t tell people what we’re doing to save money, we can keep all the savings.’” To help you judge their openness, Thatcher suggests asking potential EMS partners what they’ll do to guarantee that you’ll get cost reductions over time. “If a company hems and haws about that or isn’t willing to make commitments on future cost reductions, that should be a yellow flag for the OEM,” he says. Besides their openness, people on the contractor’s staff must also be judged on their experience and expertise. “We look for an EMS provider with people who have a good understanding of the marketplace and when components might become obsolete,” Hanson says. Obsolescence is a big issue, because the resulting changes can trigger a difficult approval process. Thus, “We don’t want to get into a situation where we’re told: ‘In three months, you’ve got to qualify a new component,’” Hanson notes. He won’t get such unpleasant surprises from Libra, where component engineers monitor and manage obsolescence issues, Waldron says. In evaluations of prospective EMS partners, Nazarian says, OEMs should place great weight on the technical and managerial skills of the people employed by the firms. “This is a service business, and what we bring to the table are people with know-how,” he says. “So you have to evaluate the people at each company. Interview them as if you were considering hiring them as employees. Ask yourself if you would turn your manufacturing plant over to them — because that’s what you’ll be doing.” But these people work for companies that have policies and procedures, so OEMs must also assess the compatibility of their firms and potential EMS partners. For one thing, Curran advises, make sure you and the contractor have the same business objectives. In addition, look for compatibility in the production methods of the companies. For example, he says, “we do a lot of work with medical device companies on a kanban basis. [A lean manufacturing term, kanban relates to the efficient signaling of production needs.] But for a lot of EMS providers, it's not practical to run in a kanban environment.” Another crucial area is how the contractor handles problems. “When something goes wrong — and I have yet to run a product for an OEM where something didn’t go wrong at some point — the EMS provider is going to have to deal with it,” Curran says. So OEMs must look carefully at the contractor’s process and make an assessment of (1) whether or not the firm can successfully identify a problem and (2) what resources the firm has that will help the OEM find the solution. “When we run into a problem, we try to provide the OEM with a solution — or at least provide alternate solutions for him to evaluate,” Curran says. Potential Pitfalls Obviously, the process of evaluating potential EMS partners is a complicated one. But don’t make it more complicated than it has to be by collecting too much data. “The data you need shouldn’t be any different from the data you would need to manage your own shop in-house,” Pudles says. “But a lot of OEMs ask for things that they would never even ask about their own in-house facilities. It takes a lot of time to acquire that data, but it’s never used.” Another common mistake is the development of cost estimates that lack key items. For example, Kent points to a case where an OEM’s product is being manufactured at an EMS facility in China. When a problem arises, the OEM has to send a team of engineers to China to solve it. Though this is almost certain to happen during the course of such a project, Kent says, the expense of sending personnel out of the country on manufacturing management trips is almost never considered when developing cost estimates. Or consider shipping. In many cases, standard shipping rates are assumed when cost estimates are developed, Kent says. “But then there’s a design change or problem with a part, and you end up making FedEx or DHL rich.” Other outsourcing mistakes result when OEMs assign too much importance to cost. According to Nazarian, some OEMs start the EMS outsourcing process with the mistaken assumption that any contract firm can handle their job. This leads to the conclusion that the job should simply go to the lowest bidder. As head of a firm that handles EMS jobs in other fields besides medical, Pudles believes that medical device manufacturers probably shop strictly on price less often than OEMs in other industries. “I’m not saying that they pay more for things than they should,” he says. “But they understand that the low bidder may not be able to comply with their requirements.” So what role should price play in the selection process? “If you visit three or four EMS companies and determine that all the companies meet the requirements for your job, then you can [focus] on price” to help you make the choice, Pudles says. Waldron has seen OEMs go about the selection process in a very objective and systematic way — selecting criteria to use in judging EMS contenders, weighting the criteria according to their importance to the firm, and finally coming up with scores for each of the contenders. But in those cases, he doesn’t believe the final decisions were based simply on the scores yielded by the process. Hanson thinks scoring systems can be useful primarily in ruling out some of the contenders. To make the final choice from among those that remain, he relies on a more subjective analysis: “I try to assess the people I’m dealing with — their background and experience, whether I think they’ll be honest with me. If two or three companies are very close (which happens a lot of times), then the deciding factor for me is the comfort level I have with the people.” This article was published in Medical Device & Diagnostic Industry magazine.