The Modern Value Proposition for EMS Providers

By Logan Wamsley

There was a time where the role of EMS providers was fairly narrow and defined. In cooperation with their OEM partners, they took primary responsibility for the assembly and/or production of the OEM’s intellectual property (IP). Supply chains rarely went beyond two or three tiers, and sourcing electronic inventory from component manufacturers or authorized distributors was a relatively simple process for EMS providers to navigate.

As supply chains continued to develop and embrace a more globalized mentality, their sheer complexity and scale went far beyond what classic management strategies could handle. Rising product demands, in conjunction with a shrinking of the number of suppliers by about half in the last twenty years, have placed additional burdens on EMS providers to not only produce greater quantities of more intricate designs, but take a wider array of responsibilities in order to solidify relationships with OEM partners. As competition stiffens, the business landscape necessitates an “arms race” of services in order to both retain and attract businesses.

Unfortunately, this also has a significant effect on a profit margin that was already exceedingly narrow. Foxconn, for example, one of the leading EMS providers for Apple who manufactures up to 70% of their iPhone line, operates on a profit margin well into the single digits — a striking figure compared to the 40% margins with which Apple operates. Recently, Foxconn has resorted to some drastic measures to increase their margins, including selling their own equipment for manufacturing and component testing, and manufacturing their own components in-house. For other EMS providers who are not as large or located in areas like China with relatively inexpensive labor costs, these kinds of strategies are far outside the realm of possibility.

Instead, modern EMS providers are going to have to find more innovative ways to improve their value proposition, all while preserving their profit margins as much as possible. This is where the benefits of a Partstat Inventory Ownership Solution can prove invaluable.

An Inventory Ownership Solution removes one of the biggest hurdles OEM partners face: unexpected upfront inventory purchases. Here is how it works: When an immediate purchase of critical inventory is necessary — as a result of obsolescence or market conditions — Partstat will step in and purchase all of the inventory on the OEM’s behalf. For the OEM, this is attractive because it provides them with extended payment terms that go a long way towards preserving their working capital. By offering this feature as a value-add to their value proposition, EMS providers around the world have been able to stand out in a crowded marketplace and attract the attention of OEMs.

Additionally, the Inventory Ownership Solution can be used on inventory already owned by the EMS provider, as well — usually purchased on the OEM’s behalf. This seamlessly removes payment responsibility to the OEM under manageable payment terms, while instantly converting all of the EMS provider’s inventory into cash that can immediately be used in whatever way will produce the greatest economic return.

It is services like these, in additional to technological innovation, that will be most valuable to OEMs looking to implement contract manufacturing into their supply chain — and EMS providers must be in tune to these trends and continually expand their value proposition to account for them. This could very well mean the difference between short- and long-term growth that lasts many product cycles.