Materials cost of goods sold (MCOGs) is the EMS PCB assembly manufacturer’s largest cost, second only to indirect labor, which is typically hidden among the EMS provider’s S,G&A.

EMS providers want to use the inventory turns metric to show their materials management prowess in managing MCOGs. But inventory turns are easily, and often, manipulated and do little to convey how EMS providers are at managing raw materials once inside, across operations.

Depending on the quarter, if you look at Jabil’s or Flex’s inventory, analysts must be scratching their heads asking themselves why is inventory so poorly managed in an industry that says MCOGs is so important? (SEE: How to drive cost out of your manufacturing product portfolio)

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I believe EMS CEOs have been managing EMS business wrong all of these years because industry did not know any better and didn’t have the right tools. EMS industry is not known for innovative, outside-the-box thinking.

USD WIP (% raw materials)

Foxconn, Flex, Jabil, Celestica and others talk inventory turns all day. But it would be more insightful for prospective customers, current customers, and investors if EMS firms breakout the dollar value for materials work-in-process, or work in progress (WIP) across corporate, or the operation, as: USD WIP (% raw materials).

Savvy EMS providers with deeper understanding of operations, and more technically savvy, could go further and include: 1) WIP value + contributed value added at each segment of operation as % raw materials, and 2) break this information out per customer, and per customer program, even at board level. But, no EMS provider can do this today at the time of publishing this article, despite claims otherwise. Image below shows, as an example, some of the global supply chain sourcing complexity for a washing machine.

Public contract electronics PCB assembly EMS manufacturers could do this in 10K filings. Non-public solutions providers could make this information available on request.

Having this information available would be beneficial for prospective customers and existing customers to learn more about how effective the EMS provider is at managing their finances, and managing OEM customer spend. EMS providers could also be ranked by operational excellence based on weighted ratios.

The USD WIP (% raw materials) metric focuses EMS provider attention on materials purchasing and PPV, direct labor costs, and costly indirect labor. OEM customers are already paying for these directly, and indirectly with inefficient EMS provider workflows.

Its in both the EMs provider’s best interest and the OEM customer’s best interest that EMS providers have a better understanding of their operations in terms of workflow accuracy, timeliness, and productivity/execution so EMS providers can free up working capital and pass on savings to OEM customers, while mitigating risk and reducing lost opportunity costs.

Venture Outsource has several white papers to help electronics OEM professionals sourcing EMS manufacturing services, to improve supplier focus and performance in the above areas here.

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