Outsourcing goes the distance

Nov. 1, 2005
Factors are driving defense primes toward deeper relationships with electronics manufacturing services, but what are the risks and rewards, and how do you choose the best provider to meet your needs?

Factors are driving defense primes toward deeper relationships with electronics manufacturing services, but what are the risks and rewards, and how do you choose the best provider to meet your needs?

By Tom Lovelock

Aerospace and defense prime contractors have long derived benefits from outsourcing the manufacture of boards and subassemblies to electronics manufacturing service (EMS) providers-recognizing that such partnerships drive efficiencies, reduce costs, and increase flexibility within their operations.

In today’s economic environment, however, resources are stretched to the limit, and the need to incorporate advanced electronics into products and systems to improve performance, reduce operating costs, and extend the life expectancy of existing and future platforms are pressing. This is driving many aerospace and defense primes to seek further benefits from EMS outsourcing relationships. For this reason, many primes are now looking beyond the task-based approach, to a deeper and more strategic level of outsourcing.

According to recent market reports from Gartner and Electronic Trends Publishing (ETP), outsourcing is on the rise among defense primes. Both research companies forecast steady growth in spending by defense companies, in terms of engaging in relationships with specialist contract manufacturers or EMS providers. According to ETP, this spending is forecast to grow from $3.6 billion in 2002 to $4.2 billion by 2007.

Several factors lie behind this projected growth. First, defense companies, similar to original equipment manufacturers (OEMs) in the electronics sector, are coming to the realization that the benefits of task-based outsourcing are reaching a plateau, and that EMS suppliers offer resources and expertise to help achieve efficiencies and cost benefits.

Defense primes, moreover, are stretching their internal resources to the limit. In fact, some are dealing with as much as a third more business than they were only 18 months ago. Many of these companies simply do not have the resources internally to respond to this demand.

Finally, the move toward network-centric communications and the need for advanced electronics, sophisticated data systems, and communications networks, are driving primes to seek partners with expertise in information technology, communications, and optoelectronics. Such capability is becoming critical as the armed forces strive to bond sensors and strike platforms together to develop advanced C41SR (command, control, communications, computers, intelligence, surveillance and reconnaissance systems), which will enable joint forces to respond collectively, rapidly, and decisively to any situation.

The benefits

The drivers of outsourcing are clear, but what are the key benefits of deeper outsourcing engagements for aerospace and defense companies?

It is generally accepted that, over time, the outsourcing business model not only yields an average of 10 to 15 per cent cost savings, but the outsourcing business model also frees aerospace and defense primes to focus on their core competencies in product development and program management; they can leave their EMS partners to use their technology and manufacturing expertise to generate quality product and meet tight turnaround times.

Engaging with an EMS company can give primes access to a broad range of services such as design, prototyping, sophisticated test systems, printed circuit assembly (PCA), system build, and after-market services-all in close proximity to their own facilities. Customers also can leverage the buying power, scalability, access to new technology, lean/six-sigma-quality culture, and supply-chain expertise that some of the top-tier EMS players provide.


In addition to these benefits, however, are some risks and challenges. Loss of control is one commonly cited pitfall, as is the potential for an EMS provider to fail to deliver within the required timescale.

Another, and perhaps more pressing challenge, can be the cost of managing the supplier relationship. Such costs can be significant and can quickly wipe out the primary cost savings originally identified when considering the outsourcing business model. The need for supplier management may also end up occupying the time of the very individuals-engineers, program and procurement managers-that were supposed to have been freed up by the outsourcing arrangement.

While these risks cannot be ignored, they can, for the most part, be greatly mitigated by the careful selection of an outsourcing partner, and by engaging with an EMS provider, not solely based on price, but by considering the total cost of managing the relationship.

Given the high degree of collaboration entailed in a deeper outsourcing relationship, choosing the right EMS provider becomes crucial to the success of the outsourcing business model.

To capture optimal value in the outsourcing arrangement, defense primes should look for an EMS provider that possesses several characteristics. The first characteristic should be deep technical capabilities and synergy with the primes’ products/technology.

With the increasing technological sophistication of military systems, it is vital to select a partner that has deep technical capabilities, specialist in-house engineering teams and a synergy with the primes’ core technology. As the move to network-centric warfare continues, it is clear that experience in IT, communications, and infrastructure technology will be increasingly important. EMS providers that offer the full gambit of services-from design through to PCA, repair and field support-have advantages over the traditional “board stuffers.”

To ensure a successful outsourcing relationship, primes should aim to select a low-risk EMS provider-a partner that has worked on similar products and programs before. Primes should strive to partner with a supplier with strong design for manufacture (DfM) expertise and can then engage in the program at an early stage, performing, for example, tasks such as engineering system architecture analysis and other activities that ensure ease of manufacture.

Customer-driven focus

Customer-driven focus and extensive, established partnerships with suppliers is also an important factor. A customer-centric EMS provider can improve operations while cutting costs-releasing time and capital that the customer can redirect to the core areas of his business. At the same time, the customer should structure the relationship to look beyond direct cost reduction, to the business and strategic impact of outsourcing, to enhance customer satisfaction. It should also ensure that the EMS provider’s network of preferred suppliers maximizes costs and efficiencies.

Customers will reap the most benefit from selecting an EMS provider that can offer multiple points of leverage, including: scale, expertise, and access to markets and lower material costs through a sophisticated, scalable, global manufacturing network.

The ideal EMS provider should provide access to localized supply chains and global cost points and should have the ability to support the customer’s response to its own customers worldwide-including helping with offset liabilities. Partners should also have AS9100 accredited facilities in all the major geographies-North America and Europe in particular. EMS companies also should provide automated real-time component traceability, obsolescence mitigation, risk-management methodology, software validation, and product reliability testing. The EMS provider should have a solid track record of execution in the aerospace and defense markets.

A strong management team, a strong balance sheet, and a healthy customer base provides comprehensive, business process outsourcing relationships typically for the long-term-spanning five, seven, even 10 years.

A strong EMS management team that can deliver a solid balance sheet and short cash cycle indicates efficiency and access to capital. This will enable the customer to leverage the EMS provider’s cutting-edge technology and information technology investments as well as the best practices developed over the years by delivering high-efficiency fulfillment solutions to a global customer base.

Customers should work with their EMS partners to define the objectives of the outsourcing relationship early on and detail how the agreement fits into the overall enterprise strategy. Primes should also encourage early, intense collaboration with the people who will be delivering the service to gain a sense of the way they think, their workplace culture, and their values “under fire.” Primes can then embed this learning into the governance framework.

Evolving relationship

Clearly, successful outsourcing relationships are not formed overnight. These partnerships typically evolve in three stages-tactical, value-add, and strategic-during which trust needs to be established and nurtured between a defense customer and its EMS partner. This trust must be developed over time to facilitate the deeper outsourcing partnerships experienced in the more strategic stages of a relationship.

Looking ahead, defense primes will need capable partners if they are to rise to the technological challenges confronting their industry. The U.S. Department of Defense-with a $404 billion budget in 2004, and projected budget of $477 billion in 2005-is focusing resources on enhancing readiness and technological sophistication by incorporating advanced electronics to improve systems performance, reduce operating costs, and extend the life expectancy of both existing and future platforms.

With resources stretched to the limit, customers will find that partnering with the right EMS provider offers significant advantages-particularly as the relationship develops beyond the tactical or task-based approach to a deeper, more strategic partnership.

Tom Lovelock is the general manager of the Celestica Inc. Aerospace and Defense group in Toronto. For more information contact Lovelock by phone at 877-257-1414, by e-mail at [email protected], or at www.celestica.com/markets/aerospace.asp.

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