Shaun Ashmead, Managing Director of Axiom Manufacturing Services talks to Electronics Weekly about moving production off-shore, the economics of outsourcing and tackling a skills shortage.

What issues should companies consider when deciding whether to move production off-shore?

Increased pressures from globalisation, competition, prices and shareholder expectations has forced many companies to consider not only outsourcing but outsourcing to a low cost region like Eastern Europe or China, which naturally leaves them free to concentrate on their core competencies and to develop new products.

There is no denying that outsourcing has proved profitable for many routine jobs and high volume work. However, for the foreseeable future, most high-value, high technology work is better placed where close interaction among companies can be facilitated by close physical proximity, personal contact, tight collaboration, language and shared cultural experiences.

If requirements are not accurately communicated to outsourced operations, changes become increasingly difficult to manage, especially when that operation is overseas and in a different time zone.  When the EMS supplier is in another country there isn't the opportunity to thrash any issues or problems out face-to-face.

Of course it can be argued that the cultural, language and regulatory implications of operating overseas can be overcome. However, the choices of where to go, with whom, and what to outsource are more complex, especially where business processes are being handed over. The never ending debate over intellectual property will also continue to cause issues for some industries.

Companies that have taken the decision to outsource purely on a cost basis, and have failed to see the added value services offered in the UK, will be those in the end who will pay the higher price, as customer and shareholder expectations are not met.

Have the economics of using off-shore outsourcing changed in the last few years?

Challenges for OEM’s continue to be cost reduction, supply chain flexibility and the ability to react quickly to market demands and changes. 

The key is in finding partners that can deliver the best overall total cost of acquisition, not just cheap labour, within a reasonable distance to your market.

The last 30 years has seen a major growth in world trade and for many OEM’s the demand from customers for lower prices has meant that they have had to seek cheaper places, such as China to manufacture.  However, in the current economic climate we are witnessing a surge in associated costs and we believe that we will start to see reverse globalisation and a move for OEM’s to manufacture in the country that they actually sell.

As higher energy costs translate into higher product costs, we estimate that roughly for every 10% rise in oil prices there will be a 4-5% increase in product costs for those goods which carry a high transport cost.

Not only that, but add on the increase in wage costs in the low cost geographies as cost savings for the OEMs are realised by the offshore companies, and we anticipate that the low cost differential will eventually diminish. 

How will the effects of the credit-crunch & dip in the UK economy affect the manufacturing sector?

There are many conflicting stories circulating about whether manufacturing is in decline or holding steady.  What is obvious is that the knock on effect of oil prices will affect all kinds of businesses, not just those operating in the manufacturing sector.  While not every sector will be affected in the same way, it’s a fact of life that our factories and machines need power.  There is no doubt that this is a challenging time for manufacturing but it is also important that we do not talk the industry into a recession.

The credit-crunch means that money will be in tight supply, supplier costs will be on the rise, consumer price inflation could prompt wage inflation and exacerbate the skills shortage. If companies find that they can no longer absorb continuous cost increases they may ultimately have to raise their prices.

There is no doubt that this is a challenging time for many companies that are looking for ways to try to stay on top of higher energy and raw material costs. Organisations will need to start considering a number of factors, including, the energy efficiency of equipment, processes, transport and location.

Outsourcing is a great example of an effective business strategy in many cases which not only frees up resources within the business, it allows companies to utilise the expertise of others and save money.

Are there steps which companies can take to make their designs more cost effective when moving in to production?

Involving the manufacturer early on is paramount. If OEMs and CEMs share common values and a working culture they can build the trust needed to share R&D.

A substantial amount of a product’s cost is fixed by the design, and so in many cases the best place to find large cost reductions is through improving a design or getting it right with manufacturing, procurement and test in mind.

By implementing design for excellence methodologies, which basically involves the incorporation of several considerations, such as manufacturability, procurement, test and the environment, into the design or redesign of products, OEMs can see the benefit of involving manufacturers at an earlier stage.

The outcome is usually a better designed product with more readily available parts, therefore reducing the risk of obsolescence and lead times, that is functionally efficient, easier to assemble and test. It also, offers significantly reduced component and assembly costs, along with improved quality, reliability and a shorter time to market.

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Additionally, by thoroughly understanding previous quality issues, this can help to prevent future problems when designing new and innovative products for the future.  Indeed if manufacturing, quality and post production service staff are involved in the early stages any potential problems can be eliminated.

Do you see a skills shortage and if so how are to tackling it locally?

Many UK companies are proud to be playing their part in the recovery of the manufacturing industry and many companies have no intention of exporting jobs.  We are extremely concerned over the UK skills shortage and seek to address this with the work we do in the local community.

For Axiom, this means starting at grass roots level and collaborating with local schools both on an ongoing basis and specifically for events such as National Science Week, by helping to develop the curriculum and teaching children about the realities of industry and the workplace. 

We run regular events which cover aspects of the National Curriculum Attainment Targets for Physical Procedures, Materials and their Properties, which allows the children to take a hands-on approach from a scientific perspective and gives the children a chance to explore and extend their knowledge of science in general.

In addition, we sponsor modern apprenticeships and work with organisations like the Wales Manufacturing Forum and the Wales Electronics Forum to seek ways in which we can collaborate with other interested parties to address these important issues.

It is important we communicate regularly with young people as they may well be Axiom’s next generation of employees. As a company we really value our links with the local community and would encourage other companies to get involved with any similar initiatives.
 
See also: Q5 - Interviews with electronics industry leadersRead all the Electronics Weekly Q5 interviews. From ARM's chairman, Sir Robin Saxby, to touchscreen technology firm Zytronic's MD, Mark Cambridge, the business leaders share their particular insights on the UK electronics industry.