Understanding manufacturing manpower and labor costs is a learned skill which requires education over preparing and evaluating ‘n’ number of quotes plus, having an intrinsic understanding of the entire contract manufacturing business model.
For example, it takes a high caliber, manufacturing executive to be able to cost out, and create an accurate quote for any OEM, even a startup.
The biggest challenges for OEM professionals regarding RFQ phases and quoting for EMS manufacturing services are processes and labor.
The majority of persons on either side of the manufacturing quote (OEM and EMS) focus on raw materials because materials is proportionally a larger amount (always estimated at 65% to 85%) of MCOGs, while labor cost falls to a second priority.
Many will say its materials, but costing and PPV for materials is the easy part if you have a thorough understanding of VMI, distributor model markups and how sourcing availability and demand impact unit pricing.
Manufacturing labor costing is difficult because the truth about how a process or methodology is trained in university, or throughout the millennia, lets say, is not tied directly to how labor is actually utilized and how/why the manufacturing business model exists.
The disconnect between the EMS manufacturing business model and how the manufacturing labor cost is calculated (estimated) is because the laborer is somebody who is considered indirect labor (IDL), or direct labor (DL). But direct labor, by methodology, in its truest form, is somebody who contributes to the ‘actual production’ of that item during that time or, that unit of measure.
So, somebody walking between two work stations carrying a tray or pushing a cart, is not considered direct labor, yet EMS manufacturers count them as direct labor, such as material handling.
So the skewing between who is ‘labor’, combined with the production process people (process engineers), who are not generally super creative and they don’t really stay up to date on new production processes or seek out continuing education credits and certifications, etc…
Instead, most process folks tasked with determining manufacturing labor costs tend to use software presented to them, or templates that are inadequate, and that’s how they price.
SEE ALSO
EMS manufacturing RFQ best practices
EMS Manufacturer internal cost vs OEM quoted fees vs OEM target price
If you gather many process engineers in a room you will find the manner in which they measure and determine manufacturing labor costs will vary widely and be very different.
Some process engineers who have been around a while will apply a ‘golf course’ approach – pull some grass, toss it in the air to see which way the wind is blowing and then eyeball it. And others will simply walk the line, or set up fake work stations, while others will build a 1/32 scale solution then play out scenarios in their mind but there will never be a merge between all of the disciplines.
Arrive at a more accurate total landed cost,
while helping you save between 5% and 15%
of your program costs for new programs,
and your existing programs.
Then, someone at the end of quotation process phase just cuts the labor segment cost in half so they can close the deal. This results in all of the previous efforts to arrive at the finite, scientific (I use this term casually) cost is thrown out the window by the EMS manufacturing sales person.
EMS factories do this because they know the OEM will always leave money on the table because few OEMs understand internal EMS factory costs.
Labor process costing and labor quotations are extremely difficult.
The takeaway here for OEM evaluating quotes from their EMS manufacturers is: excessive fees are hidden in EMS labor (DL and IDL) and EMS processes.
OEMs should ask themselves, “why don’t EMS manufacturers tie activity-based costing into labor quotations? EMS solutions providers don’t do this because there are too many unforeseen issues.
In your search results, you can further target other provider End Markets and Services plus, you can add more Geographies.
While this is the case, it can also be said OEMs should always prepare a more in depth DFM or manufacturing process that their vendor(s) could adopt as the baseline. When this is the case, the OEM would then start off with a better starting point — allowing the EMS to truly focus on materials spend (or savings) and, therefore, not creating and presenting to OEMs a labor quote that includes roles not considered value added.
To better understand the EMS mindset, OEMs should also ask themselves, “when do EMS managers sit down and design thee SMT/PCB assembly lines and work cells around a specific OEM program?”
They don’t.
EMS factories determine this ‘design’ after the OEM accepts the quote price and signs the EMS contract service agreement.
But the EMS quote is often built around NPI, and the OEM customer program is not necessarily adjusted for a later phase (e.g., ramping, full-scale production).
To put this into perspective: ask yourself, is it true your life needs the same things when you’re young vs. when you’re middle-aged vs., when you’re old?
No. You need more health care.
So if you’re quoting the life of a person’s costs, you have to accommodate that the costs do change.
This is the same for OEM program product lifecycle changes, and related costs. And what EMS manufacturers should do, but they do not, is re-quote OEM program pricing at the end of every program phase. But they don’t know how and OEMs are will to pay too much – right from the start – at contract signing because they don’t any better.
This is also why many EMS providers who enter the NPI space (attracted to higher margins) also tend to fail at NPI costing because its so granular and difficult to capture properly vs quoting large OEM programs, where EMS providers can also more easily hide excessive fees.
We have EMS factory and labor costs across the globe. OEMs reading this article should carefully evaluate how, and why, EMS manufacturers identify internal EMS costs of factory processes and labor tied to your program quote.
Having this information will enable you to arrive at a more accurate total landed cost while helping you save between 5% and 15% of your program costs for new outsourcing programs, and your existing programs.
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