EMS provider OnCore CEO interview

VentureOutsource.com talks with Dan Perez, CEO of privately held EMS provider OnCore Manufacturing Services (www.oncorems.com). OnCore serves some of the fastest growing and most profitable markets in the EMS sector – outsourced defense electronics assembly being one of them.

In this exclusive interview, Perez, a former senior sales executive with tier-1 EMS provider Solectron (acquired by Flextronics), talks candidly about challenges he sees facing EMS providers already serving, or wanting to enter, the defense electronics EMS sector.

Perez shares his thoughts on OnCore’s roadmap strengths and weaknesses; managing third party suppliers trying to meet stringent defense quality control measures, managing U.S. government RFQ flow down requirements, gaining OEM trust, plus one of the most comprehensive responses regarding battling counterfeit components we’ve heard in a long time, among other topics during our open discussion.

Transcripts from that discussion follow…

VentureOutsource.com: Let’s begin by painting a picture for readers of the percentage breakdown of OnCore’s military / defense electronics business, medical electronics, and industrial electronics?

Perez: About 47 percent of OnCore’s business relates to the defense industry with the balance evenly split between industrial electronics and medical electronics.

VentureOutsource.com: High mix / low volumes typify the military defense electronics opportunity set. This runs counter to the more volumetric, steady assembly models many EMS companies employ. How does OnCore manage the variety of high-reliability work in assembly lines geared for only a few line changes?

Perez: We have been thoughtful about building our capacity and capabilities around the military / defense electronics market since OnCore’s inception employing a systematic approach using flexible equipment on our lines.

With this approach, we have designed our own applications for shop floor systems, our own materials management systems, our own quality systems — which we own the software code to — as well as the overarching discipline around how we schedule builds, which further supports this idea of rapid set-up / tear down as well as better understanding total factory capacity.

VentureOutsource.com: Most EMS companies are set up to assemble rigid printed circuit boards (PCB). Of the $1.1 billion U.S. military printed circuit board market, roughly $300 million (and growing) of this is for military rigid-flexible PCB work, the majority of which includes some assembled value, or PCBA.

Currently, what percentage of OnCore’s military defense electronics work is rigid-flexible, and how do you anticipate this percentage changing in the future?

Perez: Well, that’s a good question because we have begun seeing that type of work. It’s a very small percentage of what we do today, but we anticipate it growing.

VentureOutsource.com: Federal Acquisition Regulation (FAR) and defense FAR supplements (DFARs) flow down requirements are critical for many request-for-quotes (RFQ) when companies want to provide products or services to the US government.

How do you see FAR and DFAR flow down requirements impacting the way EMS companies go after military electronics / systems programs?

Perez: Well, it actually is quite involved. We spend quite a bit of time understanding all of the flow down requirements when we bid on projects. And where we have gaps, there are some instances we simply do not bid.

We don’t advocate or represent we do everything that would be required, but generally we have been successful in understanding the requirements and then building the right structures and documentation and support to be in compliance with those flow downs.

So it is much more rigorous than you would see in commercial environments or industrial-related type activity, but it’s something that’s necessary, and we have been successful at managing these activities over time.

VentureOutsource.com: Given the long gestation period for developing wins in military / defense electronics contracting (up to three years in some cases) how does OnCore balance that strategic business development effort in military / defense with more immediate opportunities in non-military markets you serve like medical and industrial electronics?

Perez: It’s a matter of intentions. We started the company saying we wanted to focus on military / defense and aerospace-types of projects and programs and support that industry. We’re seeing steady growth in defense.

When we talk about our medical electronics / device programs and other opportunities we support, there are differences there as well as in industrial.

Ideally, we would like our markets we service to each be 33 percent balanced as we grow the company. We want it to be symmetrical.

Right now we’re running our defense business much more rapidly, but we have initiatives and capability we’re streaming online we feel over time will bring things back into balance.

So, we’re taking opportunities where they come to us, but I think we’re growing the company in the right way.

VentureOutsource.com: AS9100 is a highly desirable (almost not optional) quality management system for working with military customers. What emerging quality management system certifications do you foresee beyond AS9100?

Perez: Other than AS9100? I’m not really aware of any other certifications or requirements that are flow down. AS9100 is stringent enough.

I think there are probably some environmental kinds of controls that are going to be included, but beyond that, I’m not aware of anything else.

AS9100 is a pretty rigorous system as it currently stands, especially to auditors that come in with years of experience auditing to the AS9100 standard.

So, there’s that, coupled with some mil spec certifications around some specialty areas defined by customers and product.

I would say these are probably the things we anticipate changing over time.

VentureOutsource.com: Developing trust with OEM customers has never been easy for EMS companies. Typically, OEMs don’t fully trust EMS providers with their complete product roadmaps for fear portions of the OEM’s roadmap or strategy might be shared with competing OEMs the EMS provider also serves.

How do you see the EMS industry trying to move past this?

Perez: Trust is a pretty big subject area. There are many levels of trust. One of the basic levels of trust is simply sharing information with a credible or capable partner.

Lets not be misunderstood, there are levels of secrecy inherent in this type of work, even within defense contractors themselves, where they don’t share certain pieces of information throughout their organizations.

It’s something we don’t take lightly.

We’re very serious about how to protect what information customers give us. We’re ITAR compliant and we have COMSEC clearance to handle communications products.

VentureOutsource.com: Counterfeit parts are a growing problem in military / defense electronics supply chains. What are some of the things OnCore is doing to help mitigate the risk of receiving or installing a counterfeit part?

Perez: First, we primarily buy from approved sources. This is number one for us. In cases where we have to go to other sources, we’ve already identified the sources we trust and know have a higher percentage of yielding us good product.

Even in instances when we’ve not received product from our standard approved vendor’s list (AVL) of suppliers, we go through a number of different tests in order to assure the parts are good all the way from de-capsulation and testing for correct markings and microscopy on parts to electrical tests we perform using outside parties, plus we x-ray all the way down to the die level.

The final thing we’ll do is functional testing, and we’ll give samples of completed assemblies to our customers so they can also do another level of functional tests [at the system level], internally, when they know we’ve had to go outside the normal supply chain in order to give them parts to sustain supply.

A combination of each of these efforts provides us with a very good solution, although it’s never, never without risk.

We’ve not had any situations where we’ve had ‘escapes’ using these procedures.

VentureOutsource.com: As mentioned earlier, OnCore also serves the industrial electronics and the medical electronics sectors. Key to serving medical OEMs is helping them with their 510K process. What are two key challenges you often see medical electronics OEMs run into when in the midst of their 510K process?

Perez: We have been developing our medical device capability. While we work with our customers, they’ve taken responsibility for adherence to the 510 process. So we’re not involved in actually providing them with a service.

I can’t say OnCore is intimately involved in moving products from start to finish in getting FDA compliance.

VentureOutsource.com: That’s a respectable response to a question where I’ve seen some companies try to skate by, while all along I’ve known them not to be capable.

Perez: I’m just being honest.

VentureOutsource.com: Can you give us an idea of some challenging situations OnCore has run into more than once when trying to qualify vendors / suppliers for some of your military, medical, or industrial electronics customer programs…where supplier just didn’t meet your expectation?

Perez: In the defense industry, what we find is there’s a higher percentage of customer directed and customer designed components. So from the traditional EMS standpoint, there could be up to 100 percent designed products by supplier.

In an ODM environment you’d find not as much flexibility around highly engineered defense kinds of products.

But where there are opportunities for us to add value with components that are built to print, or fabricated parts, we have found that there is a fair amount of supplier development required to meet quality standards and to make sure that they understand their flow down requirements.

So I think that as we define our opportunities as EMS providers to the defense industry, it really requires a lot of supplier quality engineering as well as supplier development work, and I think that’s the number one challenge we face in providing additional value to our customers that are, as the industry evolves, are allowing us to add more value in defining the supply chain.

VentureOutsource.com: Where are third-party suppliers falling short when they don’t qualify against standards?

Perez: It is primarily just building parts to print, to tell you the truth. Building parts to the level of specification and to the level of standard.

Issues can surface even looking at something as simple as product finishes.

An item’s finish may not be not appear to be that different from anything you would see with a commercial part, except many of these fabricated parts we’re dealing with have to pass through specialty ‘types’ of processes or finishes that are somewhat unique.

Just understanding the print requirements, followed by interpreting these to the suppliers, and then making sure suppliers are adhering to all of the steps required can be a challenge.

Some of these parts require up to 20 different steps before they actually get into our hands and, then, into other assemblies.

There are 20+ opportunities for these parts to get out of spec.

VentureOutsource.com: What makes OnCore different from many other EMS providers like API, WORLD, Suntron, or International Control Services… also serving some of the same, non-traditional EMS markets? (Read: ‘So you think you know defense EMS?‘)

Perez: Well, I think there are a lot of good EMS providers out there, and I simply don’t know enough about each of them to really comment, other than to say we’ve developed a whole set of systematic processes, services, and people that are engaged in one pursuit and one pursuit only, and that is satisfying our customers’ needs and be very, very flexible which is characteristic of this industry.

You have to be flexible, and in order to be flexible, you have to know where you are all of the time in order to make good commitments you can act on and actually deliver on.

We’ve built all of our processes around that aspect of the business.

So, it’s flexibility. It’s managing change. And, all of the tools we’ve built. All of the training we’ve put our people through…

We’ve been very good at that and I think we’ve been rewarded by the fact we’re continuing to see growth and we’re continuing to get very good comments from our customers about how much they appreciate what we’ve been able to deliver to them.

VentureOutsource.com: I’ve said before that over the next couple of years we will see smaller EMS players serving lucrative non-traditional EMS markets begin to face more competition from larger, better-funded EMS competitors.

This heightened competition in the non-traditional sectors will result in smaller EMS players exhibiting more flexibility with their customers as they try and hold on to healthy margins and find themselves working even harder to retain OEM programs…possibly straining just to maintain market share.

This shift will be driven partly by many tier-1 EMS providers becoming less capable of effectively squeezing more margin from highly commoditized programs like handsets and PC’s. Essentially, these larger EMS providers are becoming forced to obtain more adequate skill sets and proper certifications and move even more aggressively into non-traditional EMS markets.

As this happens, overall margins across non-traditional EMS sectors will surely take a hit. What are your thoughts on this? How will things change regarding the way OnCore competes?

Perez: Well, that’s a fact of life in this business. It’s a very competitive environment. I think everything you stated in this question is very, very true.

Our challenge is to continually serve the customer. We anticipate that as we grow with our customers…forget the fact there is tier-1 competition or tier-2 competition…our customers expect more value for the increased level of business they give us.

What we’ve become more efficient in everything we do. So, we’re always looking for opportunities to take cost out of our own operations.

We also feel there is plenty of room to become more efficient over time, and I think as we continue to scale, we will see benefit in that additional leverage internally.

We’re also developing a quite capable supply chain management organization that will continue to provide our customers with additional leverage by developing our own supply chain partners that will, in turn, benefit from our growth.

We will make sure that these supply chain partners grow with us, and we will be rewarding these [supply chain] partners by providing them with additional business.

In return, we expect to see lower prices from these partners.

So in many ways we’re symmetrically running this business, but anticipating that there will definitely be marginalization as we grow with each of our customers.

We’re prepared to handle this.

VentureOutsource.com: What are some of OnCore’s plans for growth?

Perez: Our plans for growth revolve around what our customers have told us they need from us. So, we’re not building capabilities that have no market need that might be nice to have but aren’t really important to customers.

We’re looking at geographic expansion.

Many of our industrial and medical customers have told us they would like us to be in Asia. So, this is in our geographic roadmap. We will also be in lower cost regions of Europe later on

Beyond geographic expansion, another thing we’re considering is making additional investments or acquisitions around design — especially at the system level. Customers are telling us they want additional technology capabilities related specifically to the defense industry as well as the medical industry.

VentureOutsource.com: Are there any other comments you’d like to share with our readers?

Perez: This is a great industry. I know it’s very challenging but, for the right EMS companies working on projects for the defense sector, the medical electronics industry, and industrial infrastructure, we’re doing important work for the country and the world.

We can’t lose sight of that.

We play an important part in the development of new products that keep people more secure. We work on products that keep people more healthy and also make their lives easier.

I’m very proud to be in this industry and I hope everyone else serving OEM customers feels the same way.