EMS manufacturers make healthy profit by warehousing raw materials and finished goods inventory (FGI) for OEM customers. Most OEM equipment companies don’t know how to identify these hidden, internal EMS costs (OEM fees) and, EMS providers do not accurately break out these costs in quote pricing presented to OEMs during RFQ and contract negotiations phases.
Integrating separate eBOMs (program engineering perspective) and mBOMs (manufacturing process perspective) with product lifecycle management (PLM) software helps tie BOM costs to EMS pricing and P&L, but if EMS providers are unable to track your customer inventory of parts per customer program how do OEMs know what is reasonable EMS internal costing (OEM price) for managing your outsourcing program?
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The truth is, most EMS manufacturers don’t know this cost either. So they simply pad OEM customer pricing to make sure they make a profit. The problem is most OEMs simply pay the EMS invoice with question and, without making EMS providers accountable for their pricing.
One end result from OEMs performing adequate contract negotiation leaving out important clauses in their EMS manufacturing agreements? EMS manufacturers hide profits in quoted pricing, and OEMs are unable to accurately track innovations/engineering part IDs while paying more than you should.
To add insult to injury, the EMS manufacturer profit center extends beyond FGI warehousing and logistics associated with your program and taps into extracting financial gain (for EMS providers) from OEM customer fluctuations in forecast demand and production scheduling.
EMS firms handsomely profit from changes to your program forecast by acting as a passive storage company.
OEMs give away money simply because EMS providers are not held responsible to tie your customer program yield per product per lot per month to fluctuations in your production schedule. You have little control over your end market demand yet you burden all of the risk – and you pay for it.
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Ask your EMS manufacturers, how is pricing for our production yield vs lots determined? How are lots vs costs of storage for FGI measured? How are production costs tied to shipping fees?
Ask your EMS provider for a workflow for your EMS program, detailing process steps.
Can you help me understand why changes to inbound receiving inspection, production schedules, manufacturing throughputs, and varying FGI carry fees that are constant?
Also, ask your EMS provider about a flowchart, or workflow, for your EMS program. There are many good reasons to ask this. Equally important is what their response is, especially if they are unable, or refuse, to do so. (Read more about material flow work-in-progress WIP here and here for some additional insight)
Venture Outsource creates effective EMS manufacturing ‘should cost’ models and templates to help OEMs make more informed decisions in their EMS and ODM supplier relationships by helping OEMs uncover hidden fees and profits so you gain more insights and control over your outsourcing program costs.
OEM readers can read several articles about costs and pricing tied to EMS and ODM supplier services on this page. (scroll down)
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