Providing strategic advice and market insights for optimizing manufacturing relationships and achieving profitable environmental strategies to clients in the Americas, EMEA, and Asia since 1987.by Anne Feith, TFI Senior Analyst
Few brand-owner companies (OEMs) enjoy the influence of industry giants like HP, Ericsson, or Sony, who can easily convince their large manufacturing suppliers to try something new. Most of our OEM clients are in the mid-size range, where normally it’s a struggle to get large suppliers to accelerate time to market, reduce cost of goods sold, and soften risks through innovative new practices. We recommend these steps for operations executives to maximize their muscle with larger manufacturing suppliers:
(1) Avoid choosing manufacturing suppliers whose revenues exceed twice your revenues. You’re more likely to get prioritized attention. But find the right balance – it’s risky to depend on a contract manufacturer for whom your products account for >30% of their revenues.
(2) As an alternative to using large Original Design Manufacturers (ODMs), choose a local design firm and contract manufacturer who work well together. If you don’t know design firms that specialize in your area, ask TFI. In fact, many smaller CMs are adding design services to provide a design-through-manufacturing solution for OEM customers.
(3) If you must use a large ODM, use creative measures to reserve more of its bandwidth. My colleague Dave Kichar describes a time that he inherited an OEM company model that was stuck using ODMs in Taiwan (because of the design), and managed to overcome being a small fish in big pond. “It used to be that I had to fly over there and sit on the factory floor to see that our products were shipped,” Dave says. Then he sought out what made the ODM tick. He proposed to have his company’s products manufactured the first month of each quarter — to avoid larger customers’ end-of-quarter crunch, negotiated for extended payment terms, and got his CEO’s approval to take product shipments each quarter’s first month. “Yes, it was a little bit of a risk,” says Dave, “but you can circumvent risk or at least soften the blow.”
Dave adds, “For many OEMs, the ODM model can be dangerous — you lose your leverage and there is a chance that your IP (or a close version of it) could spread out in other global markets.” But he notes the perks of creatively meeting the needs of the ODM. “By changing our strategy, the ODM was more open to working with us.”
On the Supply Side
Here’s a flip-side thought based on TFI’s experience serving both the OEM and contract manufacturers since 1987: Suppliers that cultivate relationships with small / midsize companies increase their opportunities and build their customer base. Having a strong base can protect the supplier from large customers’ “pull out’s” as well as get in with “rising stars” on the ground floor. Suppliers that take a chance on these prospectively big customers gain in the long run. Understanding the needs of both companies, and developing strategies together is a win for all – remember, HP, Ericsson, and Sony did not always have their current weight.
What have you tried to get gorilla-sized leverage with your manufacturing suppliers? Which of the above suggestions do you agree with or not?
Tags: ODMs, smaller OEMs, supply chain leverage
Having worked with and for very large and very small companies, I can tell you that size does not always get you preferred customer status. There are many things a small customer can do that will endear them to a supplier irrespective of dollar volume. Supplier Relationship Management is as much an art as science. B to B transactions are still managed by people. People do business with people they like and trust.
There are many ways to become a preferred, important, and strategic customer besides dollar spend.
I cannot agree more with point #1 above.. The depth of the relationship between customer and supplier is always vital to the success of the partnership.. That’s what really makes the difference – and large differences in size can lead to large mismatches in cultural fit and alignment of values. For example, a billion dollar enterprise is unlikely to appreciate the requirements of a sub $100M customer. It is also important to be a “Top 10″ customer to get mindshare and focus – but without being more than 25-30% of a supplier’s business.
The recommendations are quite true for the ‘norm’ and typical EMS models and approach toward business relationships. Having been a part of a very successful micro-tier EMS provider, prior to joining Zollner (who? you might say!), I have experienced the inverse — the unfortunate situation of supporting and playing a role in the success of our customer and their growth, only to be ‘outgrown’, losing the business. However, there is a very successful solution to the ‘little fish in a big pond’ situation. I joined Zollner Electronics 2 years ago due to the unique strategy of a Tier 1 EMS ($1B USD +). The regional focus and Strategic Business Unit structure enables the global organization to perform like a complex network of micro-Tier and Tier 3 EMS provider with the leverage of a billion dollar entity. Our model addresses the very topics and issues most smaller companies face. Zollner was founded (1965) and continues to support LVHM requirements and services over 500 customers worldwide. As we are #2 in Europe, our expansion in the USA continues with our new Silicon Valley facility officially opening in Nov. 2011. There is a solution for the ‘little guy’ and we are happy to discuss how we can help.
Quite a few of our EMS companies found it easier to buy in bulk instead of buying the components already packaged on Tape and Reel. Accurate Carriers USA can put your components on Tape and Reel for you and help solve the time wait.
We are happy to discuss how we can help the same as many EMS Companies and Electronic Companies have done.
Anne,
This is an important issue — how to get your needs met as a small/mid-size company in a power-imbalance situation with a large manufacturing supplier. The suggestion to work with a local designer and a contract manufacturer is an useful strategy, especially because it may be a more flexible arrangement and bring new ideas or technology to the table. In fact, there seems to be a trend for the design function, in particular, to be becoming more distributed through a number of small, local, and nimble design firms.
I also liked your description of Dave Kichar’s experience in exploring a more creative solution to the manufacturing situation he was confronted with. By looking for alternatives that wouldn’t be limited by the existing constraints, he seemed to find a win-win solution for himself and for the manufacturer.
I agree with Tom Valliere’s comment above that business relationships often go beyond size or dollar amount, depending on the values and perspective of the business you’re working with. In fact, an approach of respect and transparency has often worked well for me in a variety of business relationships. Pam Wiseman has a great point about the difference in size being an indicator of a fundamental difference in values. As well, Gene’s comment reminds us of the fluidity of business relationships and economic realities.