Tips for adjusting to changing customer forecasts.
The EMS industry is running true to a cycle no one likes: big drops in demand following a period of inventory buildup. The drivers for inventory buildup were material constraints and unpredictable spikes in demand following the Covid lockdown period. OEMs increased both raw materials and finished goods in their desire to stay ahead of parts shortages and customer spending sprees. Unfortunately, our heated economy is finally slowing. While consumer spending has remained strong, they are tightening their belts on big purchases and purchasing fewer discretionary items.
As a result, electronics manufacturing services (EMS) providers are seeing a different set of issues than they have been dealing with the past two years. Material inventories are still high and forecasts are dropping as customers slow down new orders to burn off existing finished goods inventories. How do you counter these challenging trends? There should be three areas of focus:
- Partnering with existing customers on forecasts and orders
- Internal cost control
- New account acquisition.
Partnering with existing customers. When demand drops, a customer’s first reaction is to lower excess finished goods inventory. While this improves their balance sheet, it also increases the uncaptured liability that higher-than-usual raw material inventory at an EMS provider represents. Consequently, a strategy that addresses both raw material and finished goods inventory is better than simply pushing out all orders a couple of quarters until finished goods inventory drops. From a program management perspective there are several steps to take:
- Make it easy for your customer to understand their current material liability and the impact any forecast pushout has;
- Discuss new product opportunities that could replace forecast drops and consume excess material;
- Determine options for mitigating inventory liability through liquidation;
- Review the customer contract or any excess material agreements signed during the material shortage period to see if the customer is liable for purchasing excess material or added cost if their forecast drops;
- Work with each customer to develop a plan that helps them continue to draw down excess inventory.
The goal isn’t to drop the hammer contractual agreements may represent, but to come up with a workable solution that preserves the relationships built during the worst of the material allocation period. Given the much lower margins that most EMS companies have compared to their customers, excess inventory is a much bigger drag on an EMS provider than on an OEM.
Internal cost control. Cost cutting in a slowing economy is management 101 and most companies are already doing this. That said, there may be hidden opportunities for cost control that get overlooked.
One of the first areas to review is receivables. Are all customers paying within terms? Have packing list or invoicing errors been slowing payments? Are there opportunities for negotiating more favorable terms to balance the cost of higher inventories?
Another area to consider is human behavior. We’ve just finished a period where unplanned cost increases, expedites and schedule changes were the norm. That suspended a lot of cost control checks and balances. Have team members returned to practices more aligned with current conditions or are they still in firefighting mode?
The final area to review is quality. While production quality is a given at most EMS companies, is there equal focus on transaction quality? How much time gets wasted on administrative errors, inefficient processes or customer-driven changes that create uncompensated cost? Do employees consider the cost of inefficiency in their activities? If the answer is no, that may be an area with opportunities for improvement.
New account acquisition. Material allocation issues made customers afraid to change EMS providers. Improvements in material availability are now encouraging companies dissatisfied with their current EMS providers to shop for alternatives. New product development is also coming off the back burner.
Consequently, it’s important that your company is easy to find and your sales team is tapping their relationships to identify companies that are looking. Increase educational content on blogs. Highlight innovative processes, capabilities or solutions in industry magazines. Exhibit at trade shows that have been relevant in the past and walk target industry trade shows that aren’t a great traffic fit for exhibiting. Trade shows improve when there is economic uncertainty because people see benefit in networking. If budgets allow, consider advertising. While most ads don’t generate trackable leads, they are the most efficient way to create brand awareness when the publication’s audience and target decision-making audience are aligned. Suppliers can also be a good source of information on which companies are shopping. They are likely sharing that information with every EMS company that asks, however.
This year will bring a different set of challenges, but it will also have better opportunities. Good planning will put you in the best position to mitigate challenges with new opportunities.
Susan Mucha is president of Powell-Mucha Consulting Inc. (powell-muchaconsulting.com), a consulting firm providing strategic planning, training and market positioning support to EMS companies and author of “Find It. Book It. Grow It. A Robust Process for Account Acquisition in Electronics Manufacturing Services.” She can be reached at This email address is being protected from spambots. You need JavaScript enabled to view it..
