Tools for EMS manufacturing quote pricing analysis - Optimize total landed cost savings for your contract electronics outsourcing programs

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Tools for EMS manufacturing quote pricing analysis - Optimize total landed cost savings for your contract electronics outsourcing programs

Details here
 
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Effective request-for-quote (RFQ) process for contract electronics manufacturing

Vetting, selecting, contracting with EMS manufacturers

 

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.

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.

Historically, long-standing enterprise RFQ procedures and practices were never a huge success. This is based on industry analysis of 5,000+ different outsourcing programs and contract electronics provider-prepared pricing quotes.

OEM company procedures, systems, and tactics previously utilized in the RFQ cycle management process are, today, archaic because internal costs inside contract electronics solutions providers is becoming more obfuscated.

In nearly every OEM company RFQ engagement project we conduct where the buyer already signed the contract supplier’s service level agreement, the OEM customer ended up paying considerably more for total landed costs than they should have. The takeaway is electronics OEM decision makers can no longer approach their contract manufacturing proposals and quote requests and run their RFQ cycle ‘as usual’.

Contract electronics RFQ best practices vs common industry practices

So, what do best practices  for the contract electronics RFQ phase look like?

We must discuss new procedures, new thinking, and new strategies in your RFQ cycle. Additionally, discuss common-sense ideas specific to your current RFQ practices that will assist you creating a more sound foundation in keeping contract electronics solutions providers on their heels, ensuring fees paid for contract electronics services are reasonable and your total landed cost for your program are what they should be.

Although it is impossible to review every important point of the RFQ cycle process in this article, we will touch on several. We offer this consulting service based on our experience and proprietary framework evaluating solutions providers and improving manufacturing RFQ processes. This is where Venture Outsource begins its RFQ cycle and process analysis; we conduct a complete manufacturing RFQ system assessment.

It is crucial that all of this information is accurate from the start. Knowing where holes are in the RFQ processes, errors are made, and how to root-cause and resolve these issues is a top priority. As a result, Venture Outsource offers a more thorough and beneficial assessment result than our competitors.

We begin with talking with you and learning more about your manufacturing program specs and sourcing and business objectives. We then evaluate your current functional group staffing and experience supporting your contract electronics programs, processes and flowcharts, forms and procedures.

Many OEMs typically decide which solutions providers to contact based on colleague recommendations or in-house research. The purpose of our service is to remove subjective influences. Whereas, our assessment results in a list of potentially suitable electronics solutions providers matching your program and business requirements using our proprietary framework.

We then advise how best to prepare your company for provider engagement, and we convey effective knowledge to you about suggested internal functional group staffing (and roles and responsibilities), and training to ensure OEM manufacturers absorb the information needed for smooth processes among functional groups (e.g., finance, purchasing, planning and scheduling, program management…) supporting your EMS manufacturing programs. Doing this effectively lays the groundwork for expectations about provider obligations.

If there are ineffective RFQ procedures and actions in the future, there should also be systems to flag these along with a protocol in place, enabling functional groups to work together and communicating more effectively to ensure gaps are closed.

 

SEE ALSO
How to get lowest component pricing for your bill-of-materials

 

A little time and effort spent upfront will produce greater efficiency and better outcomes down the road. At Venture Outsource, we also provide certified education and documentation services that further upgrades your contract electronics services RFQ system.

Creating a list of potential contract electronics providers

Venture Outsource has knowledge and experience from 1000s of detailed discussions with OEM decision makers working in various industries and product markets. In most instances, we fount RFQ systems management was not aligned with OEM manufacturer finance and business analyst targets and desired outcomes.

RFQ cycle practices and administration are outdated. Yet, RFQ practices are still implemented without knowing how they will affect the OEM’s budget, planning and forecast, and program total landed cost. As Venture Outsource founder and lead consultant, Mark Zetter, has always said, “We help clients see the broader outcome – connecting the dots between their decisions and their consequences.”

Because of the revolving door nature of employment and hiring among solutions providers in industry, we found common supplier and vendor tactics and behaviors among sales, business development and marketing functions. Additionally, supplier quote pricing response to OEM RFQs is also comprised of inaccurate calculations supported by outdated systems and methodologies. As you read this article, many OEMs continue to share complaints and their experiences with Venture Outsource.

Let’s discuss what RFQ practices should look like. But before we do this, none of this matters if you are considering solutions providers not aligned with your business and program requirements.

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