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.

Additionally, items for your quote package should include the following:
1. Annual quantities (list multiple volumes)
2. Production start date (include commits for alpha/beta boards, prototypes)
3. Important schedules, deadlines (e.g., first delivery date)
4. Quality and technical requirements and specs
5. Warehousing, storage, shipping (FGI) requirements
6. Bill-of-materials (BOM) for your program
7. Approved vendor list (AVL) – where applicable
8. Assembly drawings
9. Printed circuit board samples, fab drawings – where applicable
10. Gerber data
11. Testing requirements (e.g., ICT, functional, environmental)
12. Labor requirements: includes production process broken down by steps, per suggested factory. This is typically in checklist format presented by OEMs then filled in by EMS providers.
13. Packaging requirements
14. Quote due date

Once you receive your quotes from EMS providers you are considering and, before your first discussion to negotiate contract clauses, fees, and pricing, its important you confirm with the EMS manufacturer whether (or not) all items from your quote package have been submitted.

Getting EMS confirmation on this aids you by preventing your EMS sales contact from later claiming something was inadvertently left out of the quote – thus possibly allowing the provider to walk back their quoted pricing.

A detailed EMS program workflow or checklist is also valuable for OEMs to obtain from their EMS providers. For without seeing the EMS manufacturing business model for what it is, a true profit center, EMS sales people continue to perpetuate the myth of thin EMS margins.

SEE ALSO
OEM RFQ best practices sourcing EMS manufacturing services

Keeping up to date on the various EMS business models and how EMS providers operate their finances is essential. For OEMs committed to formulating a real EMS manufacturing strategy, obtaining access to pertinent information begins with EMS industry experience and proper tools for analysis.

Aligning internal OEM functional groups for EMS program strategy

One way electronics OEMs could achieve this is by dedicating a dozen or so employees (each with previous internal EMS provider work experience) across internal OEM functional disciplines in manufacturing; test and process engineering, sourcing and procurement, program management, supply chain management, vendor and supplier management, quality assurance, finance and logistics – for a period of eight to twelve weeks, depending on current EMS business model understanding – and focused on creating comprehensive EMS program cost modeling tools supporting a strategic EMS sourcing program. Read: Comparing standalone vs systems integrated cost modelers)

A cost-effective alternative to this is attending VO proprietary EMS industry education-based training sessions combined with our proprietary EMS program should-cost value engineering modeling and data-driven instruction, all born from within EMS industry from direct experience managing and setting up EMS provider divisions for profit, and assessing EMS value in EMS company mergers and acquisitions.

We further leverage this EMS industry experience, including, but not limited to, having processed thousands of OEM-EMS program quotes, and brokering and negotiating OEM-EMS sourcing deals worth billions of dollars, to carefully guide attendees of our EMS costing seminars and labs with private, individual company lab instruction tailored to your EMS program and using your EMS program inputs and then showing you where, and how, on average, you can save 5% to 15%+ on your annual EMS program spend.

For absence of doubt, an electronics OEM customer paying its EMS manufacturing partner $45 million for one year of services can save a minimum of $2.5 million with just a 5% reduction in payments to your EMS manufacturer, where:

OEM-EMS Program Spend $45,0000,000 x .05 = $2,500,000 OEM Savings

Identifying results equaling a minimum 5% reduction in total EMS annual spend is guaranteed.

These instructor-led lab sessions customized to your EMS program inputs and EMS manufacturing cost modeler outputs convey value further by identifying areas in your EMS program where OEMs are paying to much, and how, OEMs can use VO EMS cost modeler outputs to identify excessive costs, drive savings and control EMS pricing discussions

Today, even electronic OEMs without internal EMS industry bench strength or, even with fewer internal resources, can apply strategic doctrine by attending a VO seminar to achieve more aggressive EMS program cost target setting with their EMS providers. This is true even when comparing smaller OEM organizations to larger OEM companies employing more resources for managing their EMS programs and running higher EMS program volumes.

Once optimal EMS program total landed cost is determined with fact-based reasoning, OEMs can then begin their EMS journey on sound and equal footing and can further establish and maintain EMS partner performance deploying suitable KPIs that hold EMS partners accountable and drive overall EMS program performance to round out an even more comprehensive EMS program strategy.

Informed decision-making is better decision-making

Effective employee career development and learning management for OEM cross-functional teams supporting your firm’s sourcing of EMS manufacturing services is best founded on suitable training needs analysis specific to EMS industry and specific to your EMS programs.

VO EMS manufacturing lessons and private labs are similar to the Matrix movies. When Neo wants to learn Kung Fu or, Trinity wants to learn how to fly a helicopter, they plug into a specific resource, consume information, then they execute.

VO lessons are focused on sourcing EMS services. The VO e-learning courses are each instructor-led, embedding years of EMS business knowledge into the attendee. Providing exactly what is needed as part of the seminar and lab to achieve, at least, a 5% savings.

Knowing what’s important, and what’s not, when pricing services for extended EMS manufacturing supply chains cannot be achieved simply by hiring more employees to cost-out company EMS manufacturing initiatives.

Strategic human resources planning and hiring the right people across OEM company functional teams, with the right EMS industry background and experience in sourcing and managing EMS manufacturing services takes time and money to put in place.

For OEMs wanting to achieve cost transparency with your EMS program that enables you to expand margins and achieves lower total landed, OEM corporate trainers can engage third-party consultants and continuing education courses offered by manufacturing industry groups such as APICS, IPC and ISM to aid in curriculum development employee learning in these disciplines.

But even then the information and instruction provided is only as good as the source.

VO is an external partner for electronics OEM equipment manufacturers and corporate training officers seeking best-in-class EMS management training programs and creating learning strategies, with interactive live lab sessions focused on effective EMS pricing and management when sourcing EMS manufacturing services and managing contract EMS manufacturer supplier relationships.

And while supply chain learning management systems must be agile, the importance of also being appropriate cannot be overemphasized. Attendees completing VO EMS manufacturing costing seminars and labs each receive a ‘EMS Manufacturing Programs Cost Auditor’ certificate of completion and, a proprietary EMS manufacturing cost modeler. Obtaining this certificate guarantees certificate holders understand and can manipulate even the subtle nuances of EMS sourcing management.

Instructor-led learning delivered through our interactive lab sessions shows participants, step-by-step, how to use our EMS manufacturing modelers, with data input from actual participant EMS sourcing programs, to drive savings, on average, between 5% and 15%+ of your annual EMS manufacturing program spend.

VO seminars enable OEMs to engage in EMS manufacturer discussions armed with proper tools and facts – whether your company is in the planning stage building product prototypes, launching NPI programs or, you are currently managing large and complex, high-mix, low-volume EMS programs – regardless of which electronics market or industry your company serves, a VO EMS manufacturing cost modeler seminar more than pays for itself with your first EMS program engagement and sets the standard for cost savings for your EMS program management.

Seminar fees are more than covered with savings and ROI realized by inputting and processing just one of your EMS programs through our EMS manufacturing cost modelers. Meanwhile, you can use the cost modeler again, and again, with future EMS programs.

EMS manufacturing supply chain education

As more employees train with the EMS manufacturing cost modeler, your organization builds deeper bench strength capabilities for focusing on EMS spend management and ensures a high degree of execution consistency across OEM functional teams tasked with EMS program product launches and even wen onboarding new hires tasked with responsibility for EMS sourcing and managing EMS provider suppliers.

Learning objectives for any OEM organization coursework and training modules focused on EMS manufacturing supply chain management should thoroughly discuss the internal drivers of EMS manufacturing costs and identify key cost elements that drive EMS provider quote pricing and, objectives should extend into understanding EMS organizational functional groups and costly EMS indirect labor all supporting the EMS providers manufacturing production department for what it is – a profit center.

 

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Manufacturer corporate trainers and educators inside electronics OEM manufacturing firms that are responsible for OEM employee and functional team member career development when it comes to how EMS providers price components and calculate costs for their EMS services, and how EMS providers rollup these costs into OEM quote pricing, is helpful.

But knowing what EMS providers pay for raw materials for your EMS program and how much it costs the EMS providers who build your product and where these costs come from is key to OEMs being able to drive lower total landed cost and expand margins for your OEM products.

Add to this, knowing how to leverage this knowledge to identify initial cost reductions and ongoing cost reduction improvement opportunities and, increase your OEM product profitability through negotiating more favorable EMS manufacturing contract service agreement terms and clauses for reduced EMS pricing makes you absolutely deadly when formulating a more competitive manufacturing supply chain against your competitors.

Why seek the Venture Outsource ‘EMS Manufacturing Programs Cost Auditor’ certificate?

Most electronics OEM manufacturers create some sort of EMS supply chain strategy. How this strategy is formulated might be dependent on the project management office (PMO) or some central planning depending on internal OEM employees with actual EMS industry experience who know what they’re doing.

Electronics manufacturing supply chain professionals participating in training focused on EMS sourcing programs want learning continuums that leverage contract EMS industry best practices based on a wide variety exposure to different EMS programs and different EMS business models, all tied to fact-based decision making using real-time data analytics.

Manufacturers attending VO seminars and labs achieve lower EMS sourcing costs and are able to measure training effectiveness and progress with mathematics that tell the truth. The cost of a VO EMS cost modeler seminar and lab is easily justified in the return on invested capital (ROIC) and amount of savings tied to your company’s annual EMS spend.

Doctrine, by definition, is a rule or principle of law, especially, when established by precedent. Obtaining your ‘EMS Manufacturing Programs Cost Auditor ’ certificate by completing a VO working lab as part of a VO EMS costing seminar bridges distance e-learning to bring about real OEM change management and leadership development for you and your career, within your organization and, external when it comes to managing EMS suppliers.

Manufacturers formulate and deploy their supply chains to compete against each other. Marketplace product price discovery is a balance determined by costs manufacturers can afford to spend to bring their finished goods inventory to market against the price buyers are willing to pay.

Depending on your P&L, your manufacturing MCOGs can make or break your quarter numbers. You want to spend as little as possible to bring your product to your customers (buyers) in a timely manner with the right quality, at the right total landed cost.

These capabilities are cornerstone to your company’s survival.

Electronics OEM manufacturing firms with extended supply chains managed by contract electronics manufacturing services (EMS) providers have the added benefit of lowering OEM costs for manufacturing plants and factories and property overhead, and costs for capital equipment, to drive greater OEM EMS program ROIC.

In one aspect of communicating the advantage doctrine plays for OEMs formulating a comprehensive EMS sourcing strategy, look no further than Kissinger where he writes the key to a proper doctrine is the ability for one side to apply its superiority “the key to a proper doctrine is the correct understanding of the elements of one’s superiority and the ability to apply them more rapidly than the opponent, whether through the choice of an advantageous battlefield or through the superior utilization of available weapons systems.”

Armed with a Venture Outsource ‘EMS Manufacturing Programs Cost Auditor’ certificate, you will help run ‘what-if’ scenarios on the fly and during EMS pricing discussions and drive product cost-out execution across your organization’s product design-to-value optimization and should-cost modeling business objectives. This include achieving more favorable EMS supplier contract negotiations and supplier support and manufacturing optimization for your EMS sourcing needs while driving better EMS partner performance.

Increase your EMS sourcing knowledge and become more active in development of EMS manufacturing execution strategies and interfacing with all other project and functional teams supporting your company EMS initiatives and related cost and value engineering (CVE) objectives with the right tools, methods and processes that work. Learn more.

 

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“Was able to very quickly find details on the important elements of setting up EMS and ODM partnerships, talked with an advisor for personalized info on quality providers matching our requirements while getting up to speed quickly about the industry and connect with key staff from like-minded companies and potential partners. Great resource.”

— Jeff Treuhaft, Sr. Vice President, Fusion-IO

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