Manufacturers want lower total landed cost and margin expansion. In his book, Nuclear Weapons and Foreign Policy, Henry A. Kissinger writes, “Because we have won two world wars by outproducing our opponent, we have tended to equate military superiority with superiority in resources and technology.”
Kissinger continues, “Superior mobility and superior use of artillery, a better relationship between fire and movement, provided the basis of Napoleon’s victories. Similar examples were the victories of the Roman legions over the Macedonian phalanx, of the English archers against the medieval knights”.
Readers of history may recall the Battle of Agincourt, October 25, 1415. English archers faced superior numbered and battle-armored French knights.
In 1940 superior doctrine enabled the Germans to defeat an allied army superior in numbers, at least equal in equipment, but wedded to an outmoded concept of warfare. “All of these were victories not of resources but of strategic doctrine”, writes Kissinger.
When sourcing contract electronic manufacturing (EMS) services, understanding manufacturing cost engineering is helpful when dissecting EMS quote pricing for your programs, but this only goes so far when wanting to uncover each of the many internal EMS cost buckets where EMS providers pad profit and claim to make only 5% to 8% profit on your program.
This is one reason why its important electronics original equipment manufacturers (OEM) see the total EMS program and generate a real EMS program strategy.
Cause-and-effect analysis for EMS program quote pricing review in the request-for-quote (RFQ) phase, without knowing where to look and, how to determine actual internal EMS factory and organizational costs to then request reductions in EMS program fees and pricing with clear and irrefutable justification paints only a partial picture of the EMS business model – and leaves most OEMs fenced in when it comes to EMS contract agreement negotiations.
So, the majority of OEM decision makers tend to focus on the large dollar materials during pricing talks resulting in leaving considerable money on the table.
Establish equal footing at first engagement, before contract negotiations
One way how OEMs can manage the EMS manufacturer’s perception of the OEM’s understanding of EMS industry is by establishing equal footing at first engagement – during the first discussion with the EMS provider ‘after’ the EMS provider responds to the OEM’s quote request during the RFQ phase.
For example, in most instances, below are quote details your EMS manufacturer might reveal in your quote pricing:
• Material cost
• Material inventory reserve, adjustments, scrap
• Material freight-in cost
• Material duty cost
• Product warranty reserve
• Capital and finance charges
• Material overhead
• Direct labor overhead
EMS manufacturers may even extend their effort and determine, what they believe, will be your total manufacturing cost of goods sold (MCOGs) and, SG&A plus, their total operating costs so they can claim to reveal the typical 5% to 8% they will make from your OEM program. Venture Outsource (VO) risks few OEM readers by mentioning we commonly find obfuscation in EMS figures presented to OEMs.
Intentional, or not, nearly every EMS quote we’ve seen contains some degree of inaccuracy. EMS providers do not accurately assess all RFQ inputs and cost buckets – especially for high cost EMS indirect labor.
The vast majority of the thousands of EMS manufacturing quotes VO has helped process have not been too particular about getting the details right and, the majority of these quotes tend to make generalizations, lumping completely different activities into a catch-all cost bucket or category. Doing things this way helps insure the EMS provider will recover their cost, because a vast majority of EMS providers are unable to accurately track their actual internal costs.
Comparing quote pricing from different EMS manufacturers
One approach for OEM professionals when vetting contract electronics providers and comparing quote pricing, where, more often than not, inaccurate and incomplete solutions sets are input into the EMS manufacturer’s quoting platform, is for OEMs to focus on the following at the beginning of your RFQ phase, asking the EMS provider specific details about scope and objectives for your program to be quoted.
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