Any significant impact on a manufacturer’s profitability can result in many outcomes, including missing quarterly forecasts, declining stock price, layoffs, and closure.
The manufacturing request-for-quote (RFQ) phase, sometimes called request-for-proposal (RFP), is important to any manufacturer. Managing RFQ expectations early with the right tools, processes and procedures helps lay the groundwork for how your company is positioned, and perceived by electronics solutions providers, when negotiating pricing (your cost).
The ever-changing contract electronics services landscape
The hyper-competitive contract electronics manufacturing services (EMS) industry is always facing new challenges. Whether the electronics solutions provider is EMS, CM, CEM, ODM or JDM, technology understanding by contract electronics industry is typically 18 to 24 months behind understanding by their OEM prospects and customers.
And while sourcing contract electronics services saves OEMs costly investment in manufacturing plants, property and equipment (P,P&E) and can drive faster ROI, vertically integrated solutions providers have higher fixed costs than providers not vertically integrated, and both are constantly facing rising costs for obtaining capital amid challenges servicing revolving lines of credit common in industry. And, as providers take on more leverage, higher costs are passed on to customers.
But no two contract solutions providers are the same. Each factory has its own cost basis (staffing, overhead…), its own circuit board assembly line and work cell or workstation distinctions. You may have heard the term digital twin, whereas solutions providers state that any two locations/factories for the solutions provider have exactly the same assembly processes and lines in place. But this is deceiving. Every workstation, which is a stage for the entire production process, contains its own labor costs. Costing of workstations is directly related to outsourcing program (accurate) pricing and services fees.
This includes costing for both supplier direct labor, and costly indirect labor. So is F,G&A, S,G&A, and, even sales commissions are often included, in some cases, into a workstation costs – all tied to your supplier quoted pricing.
To further complicate pricing, each supplier workstation also has a set of further defined variables; like depreciation equipment value and a lot of other cost centers important to manufacturing finance and functional support teams (indirect labor) in office of program management. How EMS suppliers determine their internal costs will influence your quote pricing for your programs.
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Every labor type is important to understand for a particular location and geography and, labor application, such as how (and where) labor is added to the EMS manufacturing quotation process. And more importantly, where it should not be added.
From our experience assessing 1000s of outsourcing program price quotes issued by EMS providers, this is where lines become skewed: how is real value-add labor identified vs non-value-add labor? Knowing the latter is often rolled into quoted pricing for EMS program.
Contract electronics production locations also have currency exposure and related finance issues based on geography and local currency. You’ll often see bill-of-materials (eBOMs and mBOMs) quoted across different currencies; from euros to dollars to pesos to đồng…for example. So, normalizing Forex variables within your program quote is also extremely important, not only for budget forecasting and comparing your program total landed cost against other supplier quote pricing (apples-to-apples) but also EMS provider cost of capital and operating input costs for that geography.
And based on our experience, it’s more common than not to find gaps between service capabilities claimed by solutions providers, and reality. We find even wider gaps between internal costs solutions providers claim are needed to service customer programs (quoted pricing) vs actual cost and we regularly find annual spend savings of 5% to 15%+ run through both our cost modelers. Read more about our costing modelers, here.
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