OEM execs often face resistance when asking EMS providers to breakout internal costs in quotes for pricing contract electronic solutions. Few EMS providers reveal open-book costing in the RFP/RFQ process and I feel this s to their detriment because providers that open-book costing often speak of deeper, more fulfilling relationships with customers.
One reason EMS providers don’t offer open-book costing unsolicited is it takes more time to prepare quotes and EMS providers have a low sales-to-close ratio of new business ‘wins’ compared to the number of inbound sales leads they feel are pre-qualified.
From our experience open-book costing appears more common among European EMS providers than providers in the US and less so among EMS providers in Asia.
One European EMS provider with factories and customers in the US, Europe and Asia revealed to us they have only four customers they do open-book costing for. All four customers are located in Europe.
Maybe the European trend is influenced by the economic challenges countries in Europe, and the EU, have been dealing with as capital flows seek more stable investment beyond Europe’s financial uncertainty. We believe open-book costing helps [European] EMS providers attract prospects easier and close deals faster. [European EMS providers] need revenue in their trying business environment and their European prospects and customers need solutions to offset the soft European business climate.
Is EMS open-book pricing typically offered without OEMs having to ask? Or do OEMs have to ask for it? Do most EMS providers sit at the table with prospects with an us v. them mentality? These are all good questions.
Asked one Fortune 50 OEM below about EMS pricing:
“Is it true that one big reason you use an EMS provider is to be able to utilize and flex their workforce since they have many customers and OEMs shouldn’t be charged for the workers not used…Is that correct? In other words, there wouldn’t be any dedicated folks per se to each OEM since cost could go up or down depending upon volumes that can change.”
EMS labor cost management is an integral part of open-book costing. EMS providers allocate both direct and indirect labor to OEM customer programs but involvement (hours of dedication) for an SMT machine operator or program manager can vary as program forecasts and schedules are dynamic. Technology for managing this is available but no EMS provider today can yet claim they have this technology stack. Some EMS providers are currently attempting to internally build this capability (with high costs) but yielding little tangible results.
Another reason EMS providers don’t mention open-book costing unless prospects request it is the majority of EMS providers (tier-1s included) do not know baselines for internal EMS cost buckets determined against optimal performance.
Not one EMS provider today can claim they have accurately mapped out their processes and procedures across all functional groups on a per person per function basis for determining optimal performance standards. Doing this and implementing real management tools requires artificial intelligence. But AI is scary because most in the EMS industry do not understand it and nobody wants to face the music if AI reveals just how poorly they’ve been managing their resources. So why change unless they’re pushed to do so.
EMS industry is slow to acknowledge, adapt and embrace change and is ripe for disruption.
Years ago I worked at Flex where the corporate culture was one of continual improvement. One executive often said, “Being fat, dumb and happy is comfortable but not sustainable.”
[Most] EMS providers today don’t want to know how inefficient and ineffective they are at managing operations and employee actual performance. Open-book costing nudges EMS providers in this direction and I believe can make any EMS provider improve their organization and help them to create better customer relationships.
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