Manufacturers rethink outsourcing, says Plexus, president EMEA

Ronnie Darroch

Ronnie Darroch

Over the past few years, original equipment manufacturers (OEMs) have continued to face pressure to drive down costs in an economy (especially in developed countries) with little to no growth in end-markets. This prolonged economic malaise is leading some companies to take a fresh look at their manufacturing strategy, resulting in many increasing their level of outsourcing or even exiting manufacturing altogether, writes Ronnie Darroch, Plexus regional president in EMEA.

As an electronic manufacturing service (EMS) provider we continually assess the main drivers of growth within the industry. Whilst the industry is impacted by the wider macro economy, it does not rely solely on increases in gross domestic product (GDP) growth to grow top line revenue. It could be argued that lower GDP growth can be of benefit to EMS providers as OEMs undertake strategic reviews and decide to outsource manufacturing to an EMS provider.

The key drivers for growth are:

• an increasing rate of outsourcing adoption across multiple industry sectors

• an increase in the breadth and depth of services provided by EMS companies

• OEM to EMS divestitures

• global trends e.g. the increasing demand for clean energy

Outsourcing all or a portion of their manufacturing allows an OEM to convert internal fixed costs to external variable costs, leaving it more able to deal with changes in end market demand, particularly during periods of economic instability. This can create a win-win for both companies with growth opportunities for the EMS provider and the OEM left to focus on its core competencies.

Across Europe as a whole, we have seen changes in the EMS landscape due mainly to acquisitions and exits. Further consolidation is likely during 2014.

The move towards in-region manufacturing continues to gain momentum, largely due to increasing recognition that considering total landed cost or total cost of ownership (TCO) is better than just unit cost. For example, while lower labour rates in China may present a cost advantage this could be eroded when adding in factors such as freight, duty and cost of working capital to provide total landed cost.

A desire to improve time to market also impacts the decision on where products are manufactured, with shorter transport times enabling shorter lead times and greater flexibility. We anticipate that the trend to consider total landed costs will continue.

Some market sectors have shown strong growth over the last 12 months – healthcare/life sciences and commercial aerospace. We expect that outsourcing of product development, manufacturing and after-market services will continue to grow in these sectors as the level of outsourcing increases.

The prospects for EMS providers in the UK and Europe are encouraging. We believe companies like Plexus, with the ability to offer end-to-end solutions from conceptual design through to sustaining/aftermarket-services, will continue to grow and prosper. With significant investments in Europe over the last few years we are well positioned in Europe and look forward to building on the success of 2013.

 

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