EMS On the Move

As material supplies loosen, the winners and losers will change.

The biggest trend I’ve seen in the electronics manufacturing services (EMS) industry this year is that OEM customers are starting to move. Materials availability has improved enough that OEMs are starting to move from EMS companies or regions they consider problematic, plus source new projects. The dynamics of this type of market are different from a normal EMS account acquisition cycle for two reasons. First, the past three years represented the worst material constraints that this market has ever experienced. Second, the labor shortages driven by Covid have created service issues on top of the material availability issues.

If past is prologue (and in the EMS industry it usually is), OEMs will change their sourcing behavior. They will be more secretive about intent to change suppliers and they will make decisions faster. EMS companies that adapt to this situation will have a banner year in acquiring new customers. EMS companies that have been underperforming or fail to speed up their responsiveness on inquiries and quotes will lose existing business and opportunities for new business.

While this situation provides the opportunity to close accounts in as few as six months versus the typical nine-to-12 month sales cycle, it also carries more risk. Given that OEMs don’t want to tell an existing supplier they are moving until they move, the probability is high that the documentation used in the initial bid-for-bid quote is outdated. Be sure that any quotes reference the documentation revision number used for the quote and include terms that permit requote and price adjustment if the purchase order reflects a later documentation revision.

The next area of risk involves inventory. Every EMS company is carrying above-average inventory levels right now. Some of that inventory may have been procured through brokers. It is likely that OEMs that are moving projects to a new EMS provider will want that EMS provider to purchase their inventory, and it may not be possible to inspect that inventory until the business has been awarded. The EMS provider losing the business will likely want to transfer any material it considers a liability, either in terms of excess or questionable age/handling. This makes it very important to have internal discussions about risk to ensure your company is contractually protected. Questions that need to be addressed in that discussion include:

• Is your company willing to buy that inventory from the existing supplier or do you expect your customer to purchase and consign it?
• If inventory is consigned, what markup and shrinkage factor terms will you apply?
• What method will be used to verify the count of components being transferred?
• What method will be used to preserve the provenance of broker parts?
• What contractual protections will you have relative to rejecting poorly stored parts?
• What contractual protections will you have for material-related defects arising from transferred inventory?
• What level of inventory versus forecast are you willing to carry? How will you contractually ensure that transferred inventory will be consumed in the time period represented by the agreed-upon forecast?

Understanding the answers to those questions can ensure expectations can be set early in an unusually short sales process. Waiting until the deal is about to close to have the conversation often creates a situation where the OEM buyer is upset because the material resolution they planned is different from the risk the EMS provider is ready to accept. Conversely, initiating the conversation early in the sales process from the perspective of how you handle existing inventory transfer is a less stressful way to discuss the risks and reach an acceptable agreement.

EMS providers at risk of losing business also need to internally develop a plan.

• What customers are at highest risk of loss?
• Are any customers acting in unexpected ways relative to forecasts or commitments?
• Have any buyers become difficult to contact or reluctant to discuss new projects?
• Are there “new faces” at a vulnerable customer and are adequate relationships being built with them?
• Are there options for keeping vulnerable business that have not yet been explored?
• What contractual protections are in place for customer termination for convenience?
• Is there uncovered material liability risk in any vulnerable customer?
• What contractual protections are in place for customer-approved purchases of broker parts that may be unattractive for transfer?
• What financial impact will loss of vulnerable customers have internally?

It can be difficult to talk about projected customer losses. No one wants to admit a service failure has created a vulnerability. However, internally discussing likely vulnerable customers, the possible ways to improve service to decrease vulnerability and the revised budget scenario if vulnerable customers are lost can help mitigate impact. You can’t correct vulnerabilities if you aren’t assessing them.

This is shaping up to be the year of transition to normal industry patterns. Similar cycles in the past have always included a period of fast project transfers, however. Preparation will open the door to more opportunity.

Susan Mucha is president of Powell-Mucha Consulting Inc. (powell-muchaconsulting.com), a consulting firm providing strategic planning, training and market positioning support to EMS companies and author of Find It. Book It. Grow It. A Robust Process for Account Acquisition in Electronics Manufacturing Service.; smucha@powell-muchaconsulting.com.