In today’s soft economy, the benefits of outsourcing are becoming clearer to many manufacturers.
Since the outsourcing trend intensified in the past few years, companies have said it has enhanced economies of scale, time to market and what one industry expert described as design to fulfillment.
Solectron, Flextronics, SCI-Sanmina, Infineon and Jabil have experienced increased activity as major and second-tier original equipment manufacturers increasingly are contracting out a variety of manufacturing work.
Nokia Corp. is one of few companies with minimal outsourcing experience. “We tend to do our manufacturing in-house,” said Laurie Armstrong, spokeswoman for the Finnish vendor.
Lucent Technologies Inc., L.M. Ericsson and Nortel Networks Ltd. say they have penned several outsourcing deals with the contract electronic manufacturers. Both companies have cut budgets, including shutting down plants and laying off thousands, making outsourcing economically imperative. Cisco Systems and Wavecom also outsource products.
“Industry realized that instead of building factories, it made sense to outsource,” said Bruce Gustafson, senior manager of global strategy for wireless at Nortel.
The OEMs pay attention to their strengths and leave the rest to the CEMs, which have acquired greater expertise in the outsourced work.
Ericsson says it uses outsourcing to free tied-up capital and reduce the need for investments, to gain greater flexibility, which will lower costs over time and to minimize the risk of working below capacity, according to Michelle French, senior manager of media and analyst relations at the company.
“Ericsson focuses on its core businesses and lets other specialized companies handle areas that are their core competencies,” she said. Ericsson’s partners are Flextronics, Infineon, TietoEnator, Teleca and Wipro.
In order to maintain the integrity of their products, OEMs design products for manufacturing ability, which means that the product designs are checked for bugs and customized in their factories or centers before turning them to contract manufacturers. They also benefit from the technological specialties of the CEMs.
Gustafson said contract manufacturers have economies of scale when buying components like capacitors and transistors in huge volumes inexpensively and using them for the systems of up to three or four companies the size of Nortel.
“It makes the market bigger,” said David McCartney, vice president of marketing at Wavecom. He said that his company, which makes modules for handsets, upgraded their products to plug and play through outsourcing.
“You can take a GSM module and support a CDMA module,” he said.
An OEM’s main challenge of the business model is leveraging the relationship with its outsourcing partners, commented Steve Sherman, vice president of manufacturing strategy at Lucent.
Outsourcing is improving into what he described as cradle-to-grave fulfillment, which will allow outsourcing companies to design and manufacture as well as to package and ship products to the customers, leading to inventory control.
“It will become more and more prevalent,” McCartney said.
Sherman and Gustafson said Lucent takes advantage of its contract manufacturers’ channels around the world.
“We leverage their global footprints,” said Sherman.
