Five Considerations in Selecting a Mexico EMS Provider for Tariff Mitigation

Between component availability issues and tariffs, the electronics manufacturing market has never been more challenging. Market-driven cost pressures continue to exist, while the cost of raw materials goes up. Transitioning to an Electronics Manufacturing Services (EMS) provider in Mexico represents one option for reducing costs and, in some cases, mitigating tariff impact. However, it is a step that requires careful consideration. This whitepaper looks at five areas to consider when making this choice:

•  Cost/benefit equation
•  EMS provider’s supply chain management expertise
•  Project transfer support
•  Logistics simplicity
•  Alignment with longer-term outsourcing goals.

The Cost/Benefit Equation

Tariffs are often short-term issues. Consequently, the savings on tariffs alone, particularly if they are short-term in nature may not offset the cost of project transfer. That said, a transition to Mexico from the U.S. and/or Asia can deliver labor and overall cost savings far beyond tariff abatement.

Benefits can include:

•  Labor and associated overhead cost reduction
•  Ability to supply European markets utilizing Mexico Free Trade agreement benefits
•  Ability to abate U.S. component tariffs with direct shipments from Asia to Mexico
•  Access to a broader range of engineering and manufacturing expertise, as the scale of manufacturing in Mexico is far greater than found in many regions of the U.S.

According to a Boston Consulting Group study, Mexico’s labor costs dropped below China’s labor costs in late 2012. When productivity is factored in, Mexico is even more competitive in this area.

According to a Boston Consulting Group study, Mexico’s labor costs dropped below China’s labor costs in late 2012. When productivity is factored in, Mexico is even more competitive in this area. When the logistics cost reduction of a shorter finished goods transit pipeline is considered, the savings are even greater. In short, Mexico is good choice for cost reduction with or without tariffs.

That said, the tariffs are applied to electronic components with China as the country of origin, when they are imported into the U.S. In some cases, distributors with limited ability to screen for country of origin within a single component SKU which includes parts manufactured in China, are applying the tariff to all components in that SKU regardless of where manufacturing was located for that particular component.

Components imported into Mexico from China, do not incur the tariff adding a new cost advantage to manufacturing in Mexico. Consequently, Firstronic’s Mexico facility is able to work with its component manufacturers and distributors to pull stock from their Mexican warehouses. By taking delivery of the components in Mexico for manufacturing in Mexico, the tariff no longer applies.

EMS Provider’s Supply Chain Management Expertise

Component availability issues are likely to be a far longer term problem which some industry watchers predict may last for years. Consequently, selection of a new EMS provider should look carefully at supply chain management systems, processes and expertise.

In Firstronic’s Lean supply chain model, master agreements have been set up to support a bonding strategy. Green, Yellow, Red (GYR) reports have been set up to identify issues far enough in advance to enable resolution prior to a line-down situation. Within the GYR framework, green indicates the order is on plan, yellow indicates the order is trending out of plan and needs help, and red is an out-of-control limits situation requiring immediate attention. Suppliers are expected to deliver the exact quantity, exactly when the materials organization asks for it.

A red card log tracks supplier compliance. Non-cancellable/non-returnable (NC/NR) commitments are being made to the component lead-time rather than to the full annual quantity.

To support this Lean approach, program management generates forecasts based on analysis of customer orders and annualized projections, plus historical demand, when available. In the current component market, this focus on extended forecasts (and concomitant larger bond sizes) has been set up to address lengthening lead-times.

Within this model, Firstronic uses a two-bin Kanban system. The standard process for setting bond size is to determine part type and lead time and then calculate the average usage over the current lead-time. A visual card system is utilized in Materials and Production to indicate materials availability. This Available to Promise (ATP) report is color codes (grades) parts as follows:

•  Red: If the ATP balance is equal to zero anywhere in the lead-time window
•  Yellow: if the ATP balance is less than the minimum bond within the lead-time window
•  Green: if the ATP balance is within bond within the lead-time window.

Firstronic is involved in escalation meetings with all key component manufacturers to review its pipelines in parallel to whatever they are seeing in the Company’s forecast through distribution.

Firstronic uses a Synchronous Flow Manufacturing System which changes from order based on a projection (push) to order on physical action (pull). Both raw material and finished goods are driven by demand pulls. Zones and bins are sized to support downstream material flows, while the upstream system produces and delivers replenishments. There is 100 percent visual management of real-time status.

Under this system, when a customer order is received, parts are pulled from finished goods zones in an order that maintains First In, First Out (FIFO) status. The ATP GYR color codes are used in finished goods Kanban, as well, to trigger appropriate replenishment priority. Once the shipment is completed, the card is delivered to the master rack in front of SMT to trigger replenishment.

From a raw materials standpoint, suppliers are focused on ensuring component availability to agreed upon bond size. If a demand variation begins to deplete the buffer faster than anticipated, suppliers have adequate lead-time to address the issue. In short, they are focused on managing exceptions versus constantly addressing expedites.

To further address the extreme constraints in the supply chain at this time, Firstronic is involved in escalation meetings with all key component manufacturers to review its pipelines in parallel to whatever they are seeing in the Company’s forecast through distribution. Firstronic also leverages its supply chain relationships globally to expand its options on constrained parts. As a result of this level of attention to detail, none of Firstronic’s customers have gone line down due to parts availability issues.

Firstronic is also teaming with each customer to address potential supply chain challenges from day one.

For example, Firstronic’s team works with customer engineering teams on new products to identify obsolete parts or parts that have been not recommended for use in new designs due the point they have reached in their lifecycle during product development. They also make recommendations on parts that are easy to cross reference and avoiding unique parts wherever possible.

Project Transfer Support

The largest cost associated with moving manufacturing is project transfer costs. Some of these such as Non-Recurring Engineering (NRE) and tooling are measurable. However, the cost of learning curve time, mistakes driven by miscommunication and the amount of time spent internally on managing the new EMS provider can be hard to measure.

Firstronic’s Lean manufacturing culture helps ensure a strong focus on minimizing inefficiency and waste. There is strong focus in identifying issues before and during new product introduction (NPI). Firstronic’s visual factory philosophy and real-time shop floor control systems provide both its team and customers with 24/7 visibility into project status.

In conjunction with establishing a new customer partnership/engagement, Firstronic often agrees to assume existing tooling and do what it takes to minimize or eliminate any additional investment up front to “lower the hurdle” for the customer through the transition.

For program management, Firstronic utilizes a cross functional team (CFT) approach, defining a group which includes a tactically-focused program manager, a strategically-focused account director, a buyer, a product engineer, a process engineer, a test engineer, a quality engineer, a production supervisor or leadperson and a customer service representative focused on materials and scheduling. The goal was to create a team that was broad-based enough to govern all the necessary outputs associated with each customer. Many of Firstronic’s programs involve production in multiple regions of the world so the division of labor among a program manager and an account director ensures an internal, factory-resident, tactical focus via the program manager, while the account director focuses on strategic and commercial issues and has accountability for global program performance.

Firstronic’s Plex Online ERP system enhances each CFT’s abilities to manage and mitigate risk. Plex allows searching for process and product risk. As part of every new customer transition, the team looks at the top ten product risks for that customer. Plex gives real-time visibility into all aspects of project activity to top management at all facets of the organization. Supply chain management and new product introduction (NPI) are two of the areas that have been most enhanced in terms of additional risk management tools.

Logistics Simplicity

Firstronic’s facility is located in Juarez, Mexico, which is accessible to El Paso, TX via bridges over the Rio Grande. Product shipped from Firstronic’s facility in Juarez is normally over the border and in transit to its US destination within 24 hours. Firstronic can also ship to other parts of the world from that facility, enabling use of Mexico’s Free Trade Agreements with other nations. Firstronic’s goal is to ensure the logistics strategy associated with each program is as cost effective as the manufacturing strategy. For customers with ship to locations in the U.S., Firstronic also sets up finished goods Kanbans in El Paso, TX (or other locations) to ensure rapid response and same day shipment for Kanban pull signals. When this type of system is established with the customer, Firstronic guarantees shipment within 2 days and greater than 90 percent of the time, the shipment is made on the same day as the pull signal is received.

Firstronic’s Lean manufacturing culture helps ensure a strong focus on minimizing inefficiency and waste. There is strong focus in identifying issues before and during new product introduction (NPI).

Alignment with Longer Term Outsourcing Goals

Tariff abatement should not be the only benefit or rationale for selecting a new EMS provider. The ultimate goal should be to select a partner who can support changing sourcing needs over time. Firstronic has several customers utilizing its services in multiple plants around the world and has won customer awards for its ability to support multi-facility production ramps. This capability supports companies wishing to have production in close proximity to either their end markets or design teams. It also enables companies wishing to split production based on product maturity to utilize a single supplier for both U.S. and Mexican production.

CFTs are Firstronic’s front line resource in ensuring that what is delivered to customers meets their requirements. They provide the rest of the organization clear focus on what resources are needed to support the customer. The broad-based nature of this team structure ensures that each customer has a complete set of subject matter experts focused on project execution and continuous improvement. The teams measure a number of metrics including process and specific product yield relative to key performance indicators (KPIs), customer and product line gross margin, forecast accuracy, revenue to project budget, on-time delivery performance, customer satisfaction, corrective actions and inventory turns. If issues arise in the metrics, the team analyses the root cause and recommends appropriate corrective action.

The result is a responsive, coordinated approach that mitigates risk and provides responsive solutions to any issues that develop in the project. This also ensures continuity should customer requirements change over time. The CFT assigned to the customer would be the same (including one Global Program Manager) and would support all volume production needs even when production is supplied in multiple plants globally. This ensures seamless transitions between the plants, duplicated tooling and transfer of raw materials, as needed to support the shift in demand, despite constraints in the component industry.

Selecting Firstronic, provides cost and efficiency advantages that go far beyond tariff abatement. Firstronic’s CFT model helps ensure that as requirements change there is a seamless transition utilizing the same team and systems, making Firstronic truly an extension of your manufacturing strategy.

ABOUT FIRSTRONIC

Firstronic LLC (www.firstronic.com) provides advanced electronics manufacturing services and optimized supply chain solutions for companies in a wide range of industries including automotive, industrial and medical device. Headquartered in Grand Rapids, MI, Firstronic has a 35,000 square foot facility, state-of-the-art equipment and a seasoned management team with an average tenure of 20 years and a 70,000 square foot facility in Juarez, Mexico. It also supports companies needing access to global manufacturing locations via joint venture operations in China, India, France, Germany, Poland and Tunisia. To learn more visit our website: www.firstronic.com. To set up a sales visit call (816) 316-8645 or email info@firstronic.com.

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