Company Says New Paradigm for OEM Outsourcing is Offsite, Not Offshore

Outsourcing

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Mark Shortt
Editorial Director
Design-2-Part Magazine

E Systems Technology has developed an OEM-level, offsite outsourcing model that integrates services into a low-cost, high quality 'Made-in-the-USA' manufacturing solution, its founder says

During the last two decades, many original equipment manufacturers (OEMs) have sought to reduce their operating costs by outsourcing production of their equipment to offshore contract manufacturers (CMs), particularly in China. But this strategy is now open to debate as labor and shipping costs rise, worsening a situation already complicated by hidden costs stemming from quality deficiencies, communications difficulties, and logistics problems. Additional factors, such as the increasing complexity of OEM products and heightened risk of intellectual property (IP) theft, are further stoking demand for an entirely new approach to outsourcing--one that rewards technical competency while protecting IP.

A Mountain View, California-based company is trying to change the current OEM outsourcing model that has in many cases led to offshoring. E Systems Technology (www.esystemstechnology.com), started by a small group of engineering and manufacturing professionals with previous experience as leaders of OEM companies, offers what many traditional contract manufacturers lack--the capability to provide OEM level services, such as new product introduction, supply chain management, lean production, and global customer support.

The company maintains high-volume manufacturing operations in Newaygo, Michigan (just outside of Muskegon), offering an "off-site outsourcing" business model designed to keep manufacturing here in the U.S., protect valuable IP, and reduce product introduction and support costs. "What's needed is a new approach to sourcing and a new type of OEM supplier; one that departs from the current model of CM-based, offshore outsourcing to a new paradigm of OEM-level, offsite outsourcing that integrates all of the above functions into a single, low-cost, high quality 'Made-in-the-USA' manufacturing solution," says E Systems Technology CEO Robert de Neve.

In order for OEMs to really succeed in today's global market, de Neve says, they need to be able to depend on new types of suppliers with turnkey capabilities supported by advanced and progressive manufacturing systems. To fulfill this need, E Systems Technology has developed a proprietary set of capabilities that it calls its "Level 5 System" for OEMs. The Level 5 System is designed to provide OEMs with a "complete package" of services, from the "hatchery," where products are born, through the complete product life cycle (PLC) process. In addition to product development and launch, the system provides what it calls "simplified sourcing" (SimSource), product build/manufacturing, system integration, and global product support services. It's designed to ship complete products to OEMs in the aerospace, analytical instrumentation, telecom, biomedical, alternative energy, and semiconductor industries.

Like de Neve, the former CEO at robot manufacturer Equipe Technologies, E Systems' principals have an extensive background in the manufacturing of mechanical and optical equipment for the semiconductor industry. Most of E Systems' current staff, in fact, have followed de Neve through "two or three companies," including Equipe, which started with $50,000 in 1991 and sold for $500 million in 2003, according to de Neve.

"That was a real fun ride, and a lot of these people remember that, so they believe in the Business Operating System and philosophy we have," de Neve told D2P in a phone interview. "As a result, we have a very deep and strong loyal team here. Most of them aren't asking for premium or even market. Most of us are below market. We're incentivized on the equity side, but we have a core group of dedicated people who want to keep the U.S. in the forefront of manufacturing and be part of another success story."

The company's eight top managers are said to have, collectively, 220 years of OEM experience in designing, building, and servicing complex optical, electro-mechanical, and automation equipment. For this reason, de Neve says, E Systems is in a unique position to understand and solve the operational problems facing OEMs today.

"Growing up in that [semiconductor equipment manufacturing] environment, we had to come up with new products, basically every year or year and a half," says de Neve. "We were driven by Moore's law, which says that every 18 months, chips will be half the price, but twice the computing power. Moore's law drove the chip makers, which in turn drove us equipment makers. And we became--those of us that survived--really, really good at designing, building, and supporting complex equipment, and doing it very quickly."

Even as Equipe thrived, de Neve saw problems developing with the company's own supply chain.

Like other OEMs in the industry, Equipe had grown to depend more and more on a supply chain that eventually couldn't keep up with them. One day, de Neve realized that the holes they saw in the supply chain couldn't be filled easily because equipment makers were basically asking their sources to be OEM-level suppliers.

"The problem that we set out to solve when we started E Systems is basically to take all the holes that we saw in the U.S. supply chain and plug them, and design what we feel is the perfect OEM supplier," says de Neve. "We said, 'Let's create an OEM capable supplier that has its services as its product. 'One of the things that's probably most unique--I'm always going to start with the major differentiator between us and other CMs--is, we were OEMs. You will not find a CM that has the OEM experience that we do."

E Systems Technology's Level 5 System derives its name from the company's stratification of the supply chain into five levels that serve the OEM (Level 6). Level 1 refers to makers of parts and components; Level 2, to sub-assembly companies that put together electro-mechanical assemblies. Level 3 includes the traditional electronics contract manufacturer--"basically board companies that are doing box builds," says de Neve. While at Equipe Techologies, de Neve found it difficult to find suppliers that could rise above their level in the supply chain to take on the responsibility of designing and building a complete product.

"We, as what I'll call a Level 6 OEM, said, 'We need Level 4 people, minimum,'" said de Neve. "We need you guys to step up and be able to assemble, test, and integrate modules and subsystems--not just subassemblies or parts or assemblies, but subsystems. But we prefer that you be Level 5 guys and build all our legacy machines, our legacy equipment, so that we can stay innovative and keep up with Moore's Law. This was a challenge for us, and we were probably the best supply chain guys in the Valley, and we still couldn't get our lower level suppliers to migrate up this chain. And one day it hit us: This barrier between level 3 and 4, and ultimately, 5, was an invisible barrier. We didn't recognize that this large gap couldn't be bridged because level 1, 2, and 3 guys are the service guys. If you're a 4 or 5 capable supplier, you're a product guy; you're good enough to design and build your own product.

"We got fed up with everyone going offshore," de Neve continues. "So we stepped down from Level 6 to Level 5, the unachievable level that our suppliers could not attain, and now we provide system integration, product development, supply chain, and global support services in this suite of solutions we ultimately made Level 5.

"So now, we go to our former OEM brothers, if you will, and we say, 'Listen, guys, we know your pain. You guys are locked up with legacy products. You used to be innovative; we were there. Now, as you're trying to execute, your innovative cycles have lengthened. We can allow you guys to innovate while we execute for you. So feel free, Mr. Established OEM, to throw your legacy products over the wall--we call it the 'dump and run.' Dump it on us and run, because we're designed to be able to handle that.

"If your outsourcing strategy is offshore, versus what we like to say is off-site (with us), you've got lower labor, and your costs may have dropped 30-40%. But to recognize those savings completely, if you're building complex products--that's the caveat; if you're building toasters or lawn furniture, this doesn't apply--but if you're building IP-sensitive equipment and instrumentation, you have to send your engineers out there for anywhere from three to 12 months to train these guys.

"So all of the savings initially realized go out the door because your budget goes through the roof; your design cycles extend out because all your engineers are over there. Once you finally get them up to speed and help them design the fixtures, write the software, and design [the product], you come back only to leave a potential competitor in your wake. Because they'll turn to their associates and their suppliers, and they'll share the IP and launch a competitive company. That's the pattern; that's what all my buddies got burned with. I've fortunately stayed away from it.

"Now, take that same phenomenon with offshore Asian suppliers, and turn it on its head. That's what you get with us; it's the complete opposite. I've got some supplier partners in China that do a good job, but I'm never going to build anything that's IP-sensitive or complex in China."

To illustrate how E Systems is able to keep costs low while maintaining high quality, de Neve gave an example of the company's work for an OEM that's a rising star in the solar power industry. The company, BrightSource Energy (Oakland, California), recently broke ground in California's Mojave Desert on what is believed will be the largest solar thermal power plant in the world. BrightSource selected E Systems as one of three suppliers to produce linear actuators for their mirror assemblies.

"BrightSource experienced this negative supply chain in its entirety, so they wanted to try a new model," says de Neve. "None of their engineers have been here. We designed all the fixtures, wrote all the software, designed the production line, and developed the supply chain. In fact, they deliberately gave us just a rough design and said, 'Look, don't ask us anything. Let's see how good your Level 5 System is'--to try to really test us. And we've done it, and that's why we got an order for 25,000 units. They haven't even set foot here. Their technical people were ready to start producing this stuff early next year with very little, with zero technical support; they've never been here to help us. We just have phone calls to talk about commercial things, like contracts. So that's the big difference.

"Now, we may be a little bit more expensive, but with the economy changing, and if you look at total cost, and you factor in risk, we're probably cheaper. So that's kind of an example that helps identify the differences."

Another reason why E Systems Technology is cost-competitive, de Neve says, is its efficiency, which means it doesn't have to pass extra cost on to customers. "When I was an OEM, I would pay machine shops and board houses and suppliers a fee," says de Neve. "And I know that fee was not just profit for them. It included paying for all the inefficiencies.

"Our model is so new, and we come from a field that demands such efficiencies, that when we do a 'cost plus' quote, our fee is profit, with some risk management there, and it's invariably lower. It surprises people, because they're used to paying the standard fee and inefficiency multiplier. It's very eye-opening; we've seen it from both sides."

Robert de Neve sees significant growth possibilities ahead for E Systems Technology. One big growth area, in terms of volume, is the solar thermal industry. As far as what he sees as the next "killer app" in technology, he points to the area of personal robotics. "Everyone's talked about getting robots in the home and the workplace, but finally, after many years, there are some very talented people out there," he says. "The founder of Anybots (see Telepresence Business Robots Are Manufactured in America, Ready for Shipment), Dr. Trevor Blackwell, for example, is one of them. They're all vying to be the Steve Jobs of robotics. So because we're industrial robotics guys, a lot of these personal robotics guys are migrating towards us, and we're marketing to them and networking. So there's a neat synergy developing, and we're telling them, 'Look, we've been building industrial robots for semi equipment for 30 years. Let us help you build this first generation of personal robotics."

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