J.Kulp. 3/06 Why Outsource? A summary discussion of why companies decide to outsource. Simply stated, the decision to outsource is made to positively effect the profitability of an OEM. Jake Kulp Vice President New Business Development MC Assembly

J.Kulp. 3/06 In-source vs. Outsource Why outsource electronic manufacturing Why outsource electronic manufacturing How to select a contract manufacturer How to select a contract manufacturer The manufacturing agreement The manufacturing agreement Obstacles to a successful outsourcing Obstacles to a successful outsourcing How to get started How to get started

J.Kulp. 3/06 Why Outsource Electronics Manufacturing? Electronic manufacturing is not one of your core competencies Electronic manufacturing is not one of your core competencies Your supply chain is not optimized for procuring and handling electronic components Your supply chain is not optimized for procuring and handling electronic components Your ROI on capital expenditures is not as high as it should be Your ROI on capital expenditures is not as high as it should be –Under-utilized assets SMT Utilization < 70% SMT Utilization < 70% –Equipment obsolescence Finer pitch components Finer pitch components Increased placement accuracy Increased placement accuracy Outdated testing capability Outdated testing capability X-Ray advances X-Ray advances

J.Kulp. 3/06 Why Outsource Electronics Manufacturing? You are carrying too much working capital / cash flow improvement: You are carrying too much working capital / cash flow improvement: –Capital Equipment Assembly Assembly Test Test Part Prep Part Prep Material Handling Material Handling –Inventory Early Early Excess Excess Obsolete Obsolete Does the OEM really understand all the costs associated with buying materials, carrying employees that are not fully utilized, upgrading capital equipment to current standards, and how fringe benefit costs and burden must be applied?

J.Kulp. 3/06 Why Outsource Electronics Manufacturing? Your labor cost is too high and unpredictable: Your labor cost is too high and unpredictable: –Outdated equipment –Wrong skill mix –High wage rates –Turn-over / re-training, re- certification –Excess support personnel (Indirect labor) Procurement Procurement Quality Quality Administrative Administrative –Cost Center /vs./ Profit Center Fixed prices Fixed prices Total acquisition costs

J.Kulp. 3/06 How To Select A Contract Manufacturer Manufacturing competencies – capital equipment Quality systems / certifications Supply-chain strength Test capabilities Scalability Size of business to EMS total business Market focus Similar customers, complexity and technology Financial stability Flexibility - Schedule Industry testimony Price competitiveness Engineering services Direct fulfillment support Warranty / repair support Executive commitment Cell team commitment FIT

J.Kulp. 3/06 The Manufacturing Agreement Clear Statement of Work Clear Statement of Work – Manufacturing Plan – Testing Plan – Acceptance criteria Mutual Responsibilities Mutual Responsibilities – Goal setting – Business reviews – Communications – Problem Resolution Shared risks / returns Shared risks / returns – Inventory excess / obsolescence / M.O.Q. / safety stocks / NCNR – Re-schedule (in or out) windows – Long lead items Payment Terms Payment Terms Product end of life Product end of life PO and forecast cancellations PO and forecast cancellations PPV PPV Legal issues Legal issues – Warranty – Indemnity – Terminations (cause or without) – Intellectual property – Confidentiality The best relationships allow contracts to remain in the OEM and EMS desk drawers.

J.Kulp. 3/06 Obstacles To A Successful Outsourcing Poor “fit” between the OEM and the EMS provider Poor “fit” between the OEM and the EMS provider Outsourcing poor designs effects yields and causes excessive de-bug / repairs / support costs; poor OTD / quality ratings. Outsourcing poor designs effects yields and causes excessive de-bug / repairs / support costs; poor OTD / quality ratings. Poor forecasting / lead-time violations Poor forecasting / lead-time violations Poor communications, poor goal setting, no business reviews Poor communications, poor goal setting, no business reviews Lack of investment of people / time to manage outsourcing Lack of investment of people / time to manage outsourcing Lack of partnering: transfer problems, won’t share risk & return Lack of partnering: transfer problems, won’t share risk & return Lack of buy-in from OEMs cross-functional organization Lack of buy-in from OEMs cross-functional organization Slow payments Slow payments Outsourcing can be a smooth and well run process but investments of time, planning and execution must be made by both the OEM and the EMS provider.

J.Kulp. 3/06 How To Get Started? Two Approaches 1.Traditional Outsource model Qualified Sources Qualified Sources Bid, audit, award process Bid, audit, award process Step and repeat by P/N Step and repeat by P/N 2.Divestiture: Dispose of Manufacturing Capability As Non- Core Sell To Qualified Source Sell To Qualified Source – Assets – Inventory – Special capital equipment – Transfer potential human capital