Design globally, make locally?

Readers of EDN know that contract and outsourced manufacturing are major factors in our industry. Fewer and fewer companies operate their own production and assembly facilities; some industry analysts believe that less than half the pc boards we design and make are loaded, soldered, and put into their final enclosures at production lines owned by the design engineer's company. (Reference 1 contains an overview of today's contract-manufacturing industry and its top 100 companies.)

Such outsourced manufacturing makes a lot of business sense. Production equipment is costly, components come on 5000-piece reels, and component pricing depends greatly on lot size. You have to run an efficient line if you are going to make money on your product in today's brutally competitive retail consumer environment, in which customers may choose one seemingly similar unit over another because of a dollar's difference in their prices.

But outsourcing can present a new set of headaches for you, the product designer. If the outsourced facility is far from your location, you may be spending lots of time traveling, going over procedures, ensuring product and source-component quality, and tackling problems that you could have more easily solved with frequent but low-key physical contact and conversations. And if you want to try slight modifications to your design, to improve it or avoid unforeseen problems, proximity is critical.

So, does it make sense to outsource to a faraway facility? It does if your product has high volumes, as cell phones or DVD players do. But a surprisingly large number of the products that EDN readers design come in volumes of 100 to 1000 units per month; some specialized or customized systems run as few as 10 units per month. These offerings include process-control instrumentation, vending machines, specialized test systems, and many diverse products. In such cases, it may be smarter to design using globally sourced components, both active and passive, but build closer to home—whether that "home" is in the United States, Europe, or Asia/Pacific.

Ty Eggemeyer, president and chief executive officer of a midsized contract manufacturer, Pinnacle Electronics (www.pinnacleelectronics.com) of Pittsburgh clarifies this idea. With 2002 revenue of $34 million, the company ranked number 74 on the top-100 list, far below top-ranked Flextronics International at $13.6 billion. Eggemeyer points out that labor consumes only about 5% of the overall assembly cost and is thus a relatively small part of the cost equation. Instead, the BOM (bill of materials) is the critical factor, accounting for about 80% of the cost. Thus, "scrubbing the BOM" through careful component selection and sourcing is the most important cost-related task any design engineer working with the purchasing group, whether internal or external, can tackle.

Note that buyers everywhere have access to the same components, though not necessarily at the same price. Other ways to save cost include putting all the large ICs on only one side of the pc board, replacing through-hole components with surface-mount ones, and specifying devices from the approved vendor list. Implementing these steps, which admittedly may not always be possible, reduces purchasing costs and simplifies the pick-and-place and solder operations.

Most of today's engineering projects involve team efforts by hardware and software designers, system integrators, test engineers, and production specialists, among others. For simpler designs, one team member may assume several roles; for complex ones, each role may require many people, and they may be located around the world. But in the end, there's a small group whose job is to take the prototype to preproduction and then full production. In either case, you have to assess the tangible costs of where you manufacture as well as the intangible costs of your time and headaches, misunderstanding, and product delay. The answer may contradict conventional wisdom.

Contact me at bschweber@edn.com.