Posted by Jon Gilbert and Pamela J. Gordon

It was a novel idea in the late 1980s, when TFI started consulting to the electronics contract manufacturing industry: Have your contract manufacturers assemble the boards, conduct final assembly and test, then ship the product not back to you but instead directly to the end-customer (or to customer-distribution points). You save the cost of having your products make an unnecessary trip and the product gets into the hands of the customer more quickly.

In those days, cost reduction and “time to market” were the two primary drivers for OEMs having their contract manufacturers ship products directly to customers. Today, there are two additional drivers—(1) the cost of transportation is rising sharply once again after more than 30 years of declines in real, inflation-adjusted pricing — largely due to the price of oil having nearly doubled in the last 3 years, and (2) companies everywhere are trying to reduce their carbon footprint—half of which, in some cases, is attributable to product movement around the world.

Direct-ship practices can be spotted all over the world. This week in Israel I toured contract-manufacturer Nistec Group’s new facility in the north—Nistec Zafon—and noticed built, tested, and boxed telecom products addressed to the end customer in Sri Lanka. Many OEMs never actually see their finished products, and why would they want to do so when they choose a trustworthy manufacturing supplier with clear requirements for quality, testing, and shipping?

Yet, we still come across OEMs who either continue to choose to “touch” their products between the contract manufacturer and the customer, or who wish to reduce time, money, and carbon footprint through direct ship but cannot find the right contract manufacturer and/or 3PLs in the right locations to execute direct ship well.

For some networks, an intermediate stop may still make sense, especially if country-specific customization requirements are highly complex. Additionally, for OEMs who are using manufacturing sites far from demand, combining shipments and moving in bulk may be more efficient. This allows for lower-cost ocean shipping on the long haul. Final distribution via air is only used for only the last, and much shorter leg of the route.

So we’d like to know, TFI community: If you work for an OEM that is not deploying direct ship from the contract manufacturer or ODM—either by the manufacturers’ own transit or by carriers—why not? If you work for a contract manufacturer, why do some of your OEM customers not have you ship finished, tested product directly to customers? What excellent alternatives have you found?

Posted by Pamela Gordon, August 29th, 2008

Filed to Environment, Logistics, Outsourcing

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