In the last few years, Original Equipment Manufacturers (OEMs), especially in the communication, computing and networking sectors, have attempted to refocus their efforts on product design and marketing. This resulted in an unprecedented divesture of their manufacturing assets to "Tier One" Electronic Contract Manufacturers (ECMs). For ECMs, achieving economies of scale through acquisitions was the "flavor of the day", gaining them multi-billion dollar contracts and transforming them into global manufacturers practically overnight. Revenue growth exploded and Wall Street cheerfully supported the transformation of an industry.

Economies of scale do offer opportunities for higher efficiency, provided that manufacturing capacity utilization is optimized and supply-chain costs are reduced. However, the worldwide economic slump of 2000-2001 came fast and without warning challenging the notion that technology is immune to normal business cycle. Capacity utilization declined dramatically, approximately 50% in some industry sectors, with plant closings, layoffs and profit warnings featured daily in the press.

• ECMs' acquisition-driven growth delayed the capturing of efficiencies.
• "Unconditional outsourcing" put logistical pressures on an industry relying on quality, flexibility and speed.
• The supply-chain proved inadequate in forecasting lagging demand.
• The equity markets became less enthusiastic about the industry's growth prospects.

The recent economic downturn has had a profound effect on the industry's vision for the future. Growth strategies and business models are being reexamined and questions are raised on whether economies of scale by themselves, can serve innovation and higher efficiency.

• Does "unconditional outsourcing" serve OEMs' drive for innovation and efficiency?
• Does reliance on the large "Tier One" ECMs, advance OEMs' interests?
• What is the optimal OEM-ECM partnership that serves innovation and cost efficiency?

Manufacturing outsourcing is expected to remain strong in the next 5 years, topping $140 billion worldwide, with the ECM industry growing by double digits. Undoubtedly, "outsourcing" is generating productivity and efficiencies. However, it was the drive for innovation in the first place that fueled manufacturing outsourcing. Advancing innovation should remain the corner stone and single most important objective of the OEM-ECM partnership, to be achieved by the sharing of a common vision and by introducing flexibility and creativity in their relationship.

Our company was recently invited by one of our Fortune 100 medical equipment customers to participate in a "web based" auction for the manufacturing and assembly of one of their products. This particular product required plastic molded and sheet metal components and a printed circuit board assembly, to be manufactured in our own integrated facilities. We were competing with companies in Mexico, India, China and the United States. The preeminent question in our mind was how could a small Massachusetts based company compete against firms with global presence and with low cost manufacturing sites. By the end of the day we had the answer and it was an emphatic: "Yes, we can compete!" We won the bid. We were price competitve but it was ultimately the "valued relationship" that we had developed and the additional support that we were prepared to offer to this customer that won the day.

The supply-value chain support that ECMs can provide will ultimately advance OEMs' mission for better products reaching the market cost effectively and on time. Such OEM-ECM partnerships will include early supplier involvement, vertically integrated manufacturing and engineering, flexibility, communication and specialized skills. To the extent that small and mid size companies can position themselves as true partners to OEMs, supporting them in their drive for innovations in design and engineering and manufacturing efficiencies, the future of US manufacturing is assured.