The document discusses common reasons why relationships between OEMs (original equipment manufacturers) and EMS (electronics manufacturing services) providers often fail. It identifies 10 key issues: 1) OEMs micro-managing EMS providers and trying to replicate their own processes instead of leveraging the EMS model, 2) EMS providers overselling their capabilities and scrambling to deliver, 3) lack of clarity or confusion around agreements and responsibilities, 4) misaligned metrics where OEMs and EMS providers incentivize different goals, 5) and other issues that can strain the relationship if not addressed. The document argues that addressing these issues through open communication, clear expectations, and aligned incentives can help optimize OEM

1. The Top 10 Reason Why OEM/EMS Relationships Fail – Part 1
By Matt Ryan: CEO, Riverwood Solutions.
The EMS industry has undergone numerous evolutions and transformations in its
more than three decade history. From its roots as an outsourced labor and shared
capital equipment model, the industry has undergone various changes. But the real
and predictable maturation of the industry truly began with the explosive growth and
rampant consolidation of the industry that occurred in the mid 1990s. With the
recent financial crisis and the worst manufacturing contraction the world has seen in
26 years fully upon us, the rate of consolidation in the EMS industry will accelerate
into a final stage, with the resultant trifurcation providing OEMs with a set of choices
that look and behave very differently.
Today OEMs can select their EMS partner from just a handful of clear Tier 1 players,
differentiated by their revenue and purchasing power in the billions, a global
footprint, and complete range of supply chain services. OEMs can also choose from a
much longer but rapidly shrinking list of Tier 2 regional players characterized by solid
capabilities, but without the scale and lacking the scope of a complete suite of supply
chain offerings that characterize the Tier 1 providers. Lastly, OEMs can select one of
the hundreds of small and generally un-scalable niche players operating in the
various innovation centers and manufacturing centers around the world.
It has been the steady acceleration of outsourcing, and the adoption of manufacturing
outsourcing in most product industries, that has fueled the EMS growth and the
industry’s maturation. Most OEMs and Brand Owning Enterprises have long since
recognized the need to focus their human and physical capital on what they do best –
product and market development. OEMs know what it is that differentiates them in
their chosen markets, and they embrace the benefits of working with EMS partners to
create the right supply chain solutions to support their business model. So it stands
to reason one could assume that; (i) OEM/EMS relationships now fully understand
their engagement models; (ii) their partnerships are optimized and fine tuned to the
specific demands of the OEM’s business model; and (iii) the parties execute together
in the most efficacious manner. Today in the world of a mature EMS industry, OEMs
and EMS providers fully leverage each others’ business models, and each takes full
advantage of all the tremendous benefits a symbiotic outsource relationship can
deliver…………..or do they?
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2. Are any of the foregoing assumptions broadly true? If the OEM/EMS partnership is
now a model fully understood and leveraged for mutual benefit, then why do the
parties so often express dissatisfaction with one another, whether in public or behind
closed doors? Why do relationships that once looked so promising either operate in
the doldrums or dissolve completely in the very expensive equivalent of a supply
chain divorce? What role does the EMS provider play in this dissatisfaction? How
might the OEM be contributing to the relationship breakdown? What other factors
intervene to make what seems like a perfect model of synergies and tightly defined
core competencies perform below the expectations of both parties, and cause
considerable overhead inefficiencies, organizational stress, and finger pointing?
The issues are as varied and complex as the industries, companies, and individuals
involved in the myriad of OEM/EMS relations. While no single issue in isolation is
likely to poison an otherwise healthy supply relationship, a combination of seemingly
small straws can weigh heavily on the back of a camel that is rarely as healthy as it
seems.
In working with my partners and colleagues at Riverwood Solutions, discussing
outsourcing with a number of our OEM clients and their EMS providers, I have
compiled a top ten list of the sort of issues that can, and often do sour an EMS supply
relationship.
Top 10 OEM/EMS Relationship Issues
#10. Micro-Management and Replicating the In-Sourced Model. Many OEMs
and many operating executives at OEMs come from a heritage of a captive, in-
sourced manufacturing model. And although the process of running a good factory is
basically the same regardless of whose factory it is, running the highly efficient
shared resources model at the heart of the EMS business is in fact quite different
from running a dedicated, captive operation. All too often OEMs choose to outsource
production, but then micro-manage the EMS provider and work very diligently
towards having the EMS provider replicate exactly the processes, systems,
infrastructure, metrics, and methodologies previously used by the OEM. Modifying
the EMS provider’s existing operating procedures too dramatically causes
inefficiencies within the system as it reduces the economies of scale that accrue to
the EMS provider by doing the same types of activities the same way a million times
a day. And while the EMS provider makes procedural accommodations on some
issues, the OEM team managing the supplier often becomes frustrated because they
do not understand why the EMS provider will not just “do it our way.”
The decision to outsource is no longer just about cheap labor and trading fixed costs
for shared variable costs – it is about a way of doing business and not just “doing it
our way”. As EMS providers become the predominant manufacturers of the world,
OEMs must loosen the reigns a bit and allow the suppliers to do their job – which is to
aggregate various types of activity volume across a huge number of transactions and
customers in order to take cost out of the system for all participants. The default
position of the OEM’s outsourcing team needs to be one of process standardization
with the EMS provider’s processes whenever practicable. There will always be
exceptions, but it is important to understand when data and process requests are
driven by comfort and convenience, and when they are driven by true and immovable
requirements.
Some potential solutions for the issues of micro management include:
70 Willow Road , Suite 100, Menlo Park, CA 94025 www.rwsops.com Phone 1.650.618.7340

3. (1) The parties must work together diligently and early to understand and
document the truly idiosyncratic issues of the specific OEM product.
(2) The EMS provider and OEM’s senior management need to communicate and
educate the OEM team on the broad benefits of outsourcing, and how these
benefits can be eroded by undue process and procedural customization.
(3) All of the involved parties must actively seek to understand the difference
between conveniences and preferences, and hard fast requirements based on
real needs.
#9. The Oversell and Scramble. As a general rule, industries characterized by 2%
margins are typically not deep in excess resources – and the EMS industry is no
exception. When low margin industries seek to serve customers with high service
expectation, some conflict is bound to arise. For years the EMS industry has been
somewhat characterized by an “oversell the capability” and “scramble to execute”
mentality. This is in part driven by the razor thin margins in the industry that
prevent companies from maintaining excess resources within the organization. But
this issue is also driven by EMS players’ desire to expand their service offerings,
expand their market reach into different segments, or expand their geographic
footprints. Every new EMS initiative requires a first customer, and being the first
customer in a new technology, geography, or service offering is not necessarily a bad
thing – unless of course you were led to believe you were the 20th customer.
When considering placing a piece of business with an EMS provider, make sure that
your investigation involves more than just slide-ware and speeches. Get out into the
organization, meet the team, and spend a little time on the factory floor. Ask for a
few customer references and talk to your peers at other companies. If your program
is going to be a guinea pig for a new EMS initiative, its important to know that
upfront, understand the potential ramifications and manage to the desired outcome.
#8 Deal Confusion. This is a problem that is incredibly prevalent. The OEM’s
General and Financial management do not get into the details of the deal or contract
struck with the EMS provider. They assume that the deal they struck to outsource
their unique products is a utopian business model, one that provides no supply chain
liability while having infinite schedule flexibility and near zero lead times. When
unexpected upside demand occurs, but is not shipped in the same week, or
unexpected cancellations occur and an E & O bill arrives from the supplier – emotions
start to run high.
This is a problem that we see all too often, and one that can be addressed with
simple solutions:
(1) The OEM and EMS provider must see the supply contract as more than a legal
formality and view it as an outline of the key operating parameters of the
relationship.
(2) OEMs need to spend less time, and less money “selecting” an EMS provider,
and more time and management attention on the process of engaging their
EMS provider.
(3) Both parties need to work together to develop a comprehensive set of Rules of
Engagement that define in great detail the data flow, performance
expectations, timetables, responses, and escalation paths to be followed in
executing the business.
70 Willow Road , Suite 100, Menlo Park, CA 94025 www.rwsops.com Phone 1.650.618.7340

4. #7. Metric Misalignment. The EMS provider drives its team according to key
performance metrics A, B & C, while the OEM is driving its team that manages that
EMS to maximize metrics X, Y & Z.
With ultra-low operating margins, EMS providers require a fairly high asset velocity in
order to make the business model attractive enough to investors to bring in new
capital. So the key operating metrics that drive most EMS providers focus on issues
surrounding the return earned on assets, invested capital and equity, and on the
components of cash conversion such as inventory turns and A/R. These metrics are
often times seemingly at odds with some of the key operating metrics that most
OEMs tend to focus on, namely product lead times and on-time delivery.
So the EMS focuses on metrics A, B, and C, measuring and reporting them in twenty
different ways, and providing incentives throughout their organization consistent with
optimizing these metrics. The OEM does exactly the same, but with different and
seemingly conflicting metrics X, Y and Z. This misalignment between the two teams
on what’s important drives many a fruitless conversation at all the various interface
points between the two companies, creating the perception of an inevitable win-lose
situation.
Although the nature of the EMS model is such that perfect goal alignment between
the OEM and EMS provider will always remain out of reach, there has to be some
metric commonality developed at the operational core that allows the two teams to
focus as one. It is critically important to openly discuss and truly understand what is
important to both parties and agree upon a core metric set for the combined team.
Understand that what gets measured gets done and what gets bonused gets
prioritized.
Stay tuned for Part 2.
70 Willow Road , Suite 100, Menlo Park, CA 94025 www.rwsops.com Phone 1.650.618.7340