Feature Article

Eastern Europe: a Mosaic of Outsourcing Opportunities

Posted in Supply Chain by Camilla Andersson on February 8, 2013

EU member states that were formerly part of the Eastern Bloc are all over the map in terms of global competitiveness. An EMS supplier to medtech manufacturers explains why it chose to locate its facility in Poland, rather than in one of the EMS giants in the region, and how that benefits its customers.

Unlike many consumer products, medical contract manufacturing typically requires a skilled labour force, strong quality management disciplines, excellent systems for traceability and device history recordkeeping and the ability to support high-mix and/or low-volume production. In selecting the right electronics manufacturing services (EMS) provider, criteria beyond contractor capabilities should be evaluated. Factors to consider include economic trends in the region, workforce availability, education, turnover and logistics.

Regional economic trends

Employees at the Kimball Electronics facility in Poznan, Poland, manually inspect and assemble PCBA components.

In terms of manufacturing outlays and hidden costs, labour markets can be loosely grouped into three categories: emerging, established and mature. A given country can have multiple labour markets. As an example, overall the United States constitutes a mature labour market. However, variations in levels of employment, state regulatory policies, age of the available workforce, level of unionisation, cost of living and dominant employers in the region can change the cost structure. Each type of market category has tradeoffs.

Emerging markets are characterised by:

  • low labour costs;
  • an inexperienced workforce;
  • inefficient labour utilisation because of overspecialisation or lack of automation;
  • focus on consumer goods with lower quality expectations;
  • minimal infrastructure;
  • gaps in supply base;
  • difficulty in communications;
  • high potential for cost surprises.

Established markets are characterised by:

  • better labour utilisation and existing skills mix;
  • higher turnover in popular regions;
  • increasing use of automation, but equipment may be old or region-specific;
    preference for high-volume business models;
  • fairly comprehensive supply base (but service issues may be present);
  • possible communications issues;
  • market popularity may drive cost increases.

Mature markets are characterised by:

  • best skills mix and labour utilisation;
  • higher technology automation;
  • strong focus on high-level quality systems and continuous improvement initiatives;
  • specialised supply chain;
  • strong communications and programme management focus;
  • business-friendly environment;
  • good technical and educational infrastructure;
  • predictable costs;

Evolutionary stages
Eastern Europe’s manufacturing centres represent the full spectrum of these evolutionary stages. Countries such as Hungary and the Czech Republic have the largest EMS infrastructure, but they also have the higher costs and turnover issues that come with the evolution from an established to a maturing market. Turkey has relatively low labour costs, but harbours many of the tradeoffs associated with an emerging market.

The overall economic climate in a given country can impact a contractor’s ability to grow, hire qualified workers, meet production and delivery schedules and operate in a predictable cost structure.

 Table I: Overall rankings for former Eastern Bloc EU Members1

As shown in the World Economic Forum’s Global Competitiveness Index1 in the Global Competitiveness report, the former Eastern Bloc EU member states vary widely in global competitiveness rankings. (See Table I.)

Understanding the economic trends in a particular country can help predict the probability of cost increases or labour shortages driven by economic policies.

As an example, Kimball Electronics chose Poland and established its initial operation in Poznan in 2000. Although both Hungary and the Czech Republic were the more popular choices for EMS providers at that time, Poland has turned out to be a better long-term choice. The region has seen positive economic growth over the last decade. From an economic and business perspective, there are no barriers: there is still substantial growth potential without significant inflationary pressures. Comparatively, the EMS clusters in Hungary and the Czech Republic have focused on high-volume production, which has in turn driven inflationary pressures. Economies and cost structures in these more mature countries have grown and outpaced the cost structures the company has seen in Poland. Turnover is also higher in these more mature markets.

Workforce factors
Workforce availability, education and turnover are other factors to evaluate. Access to higher education and training can be critical in ensuring availability of workers with the higher level of skills needed in a high-mix, variable-demand production environment focused on mission-critical products. Table II shows a sampling of country rankings for higher education and training in the World Economic Forum’s Global Competitiveness report. According to the report, this set of rankings measured secondary and tertiary enrollment rates and the quality of education as evaluated by the business community. The extent of vocational and continuous on-the-job training was also taken into account.

 Table II: Higher education and training rankings for former Eastern Bloc EU Members2

Other factors to consider include:

  • language skills of engineering and programme management;
  • labour market dynamics such as turnover and availability of employees with required skills;
  • number of projects of similar size and scope in the facility;
  • quality of data collection systems.

An EMS company’s existing experience with high-mix and variable-demand programmes is particularly critical. Switching from a high-volume to a high-mix, variable-demand environment not only represents process change, it may also represent a fundamental cultural shift.

For example, Kimball acquired its initial facility in Poland from an OEM. Converting the workforce from a group focused on meeting the needs of a single company in a single industry to running a mix of projects for multiple companies over multiple industries was a training challenge.

Originally, employees were focused fairly narrowly in terms of job skills. As the company’s customer base grew in size and diversity, so did the need for greater flexibility in production activities on the floor. The requirement to maintain headcount meant that operators needed to be trained for several job stations. Initially, employees were uncomfortable with multitasking. They were accustomed to doing the same job repetitively. The company created an incentive programme that rewarded employees willing to expand their skills and knowledge through training. The rewards included promotion opportunities and pay increases. Some employees embraced this; others did not.

The new programme created a core group of employees called multi-operators. When demand varies, employees can be shifted between production lines. To qualify as a multi-operator, the person must be trained and certified for 60% of the job stations within the production area.

A strong management development programme was also launched. Polish managers were accustomed to a hierarchical structure where focus was placed on pure efficiency. Softer management skills weren’t part of the culture of the acquired facility. Kimball began including the facility in its Vision and Guiding Principles Surveys in 2004. In 2007, the Polish group included an additional step in the survey process to provide group leaders and production unit leaders with 360 degree feedback on soft management skills. Employee comments on areas needing improvement in previous guiding principle surveys were used as criteria in the feedback process.2

Turnover is one of the key measures used to track the success of employee development programmes. From a voluntary turnover perspective, Kimball’s Poland facility has averaged less than 1% turnover per month during the past year, in spite of the fact that the company relocated operations to a new facility, thereby lengthening commute times. Management tenure in the facility averages 10 years.

This example illustrates the level of cultural change required to refocus a facility on high-mix, variable-demand production. In this case, the results of a multiyear programme included turnover that is below labour market averages. Workforce stability has a direct impact on quality in complex projects. Consequently, supplier audits should look closely at:

  • factory turnover compared with averages in the region;
  • alignment of operator training and certification programmes and workforce utilisation strategies with high-mix, variable-demand production;
  • widespread use of tools such as lean manufacturing or Lean Sigma to drive a strong focus on efficiency and continuous improvement.

Another factor to consider is where products are likely to be shipped. Aspects to take into account include:

  • whether or not the country belongs to the European Union;
  • transport options and likely costs;
    quality of the logistics-support infrastructure;
  • geographic proximity to predominant end markets or distribution centres.

Kimball’s choice of Poznan, Poland, offered significant advantages from a logistics standpoint. Poland is part of the European Union, so there is no barrier to market entry. From a logistics perspective, the facility is located 130 km from Gdansk, which is Poland’s largest port. Export to Hamburg is also easy. Munich and Frankfurt have direct links. Many customers have distribution centres in Germany and transport time to these centres is less than 24 hours.

Putting it all together
Eastern Europe offers a variety of EMS options. Selecting the right one requires careful evaluation of contractor capabilities as well as the alignment of a country and labour market with a project’s long-term needs. Key factors to evaluate carefully include:

  • experience of a particular facility with high-mix, variable-demand production;
  • inflationary pressures in the country and labour market;
  • overall economic stability of a particular region;
  • availability of skilled labour and average turnover in the region;
  • how systems and processes in the facility align with programme requirements;
    language skills of the programme team;
  • quality of logistics support and predictability of logistics costs;
  • proximity to preferred distribution centres and end markets.

1. World Economic Forum, 2010, The Global Competitiveness Report
2. S. Mucha, “Investing in Employees Is Still in Vogue,” Printed Circuit Design & Fab, 27, 4, (2010).


Tom Ferris is
Director of Business Development at
Kimball Electronics Group’s Medical Solutions, 6 Derra West, Listowel, Co. Kerry, Ireland
tel. +353 68 577 96
email: tom.ferris@kimball.com

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