A CFO in an electronics OEM recently commented about the range in pricing they received for quotes from sending one identical RFP to four CEMs to contract both electronics services design and manufacturing for the OEM program. He wanted my opinion on should cost pricing for EMS.
As expected pricing varied from provider to provider. But one thing the OEM took issue with and was not prepared for was the prices submitted by providers was spread so wide.
I’ll note here that all providers had similar technical services capabilities, manufacturing footprints, years of market expertise…
Provider due diligence shed some light on how each provider was leveraged. One provider had just completed a large acquisition financed by a lot of debt. The OEM discovered part of the acquisition carries certain investor financial convenants for provider management specific to balance sheet items and debt:equity ratios.
What’s interesting is this provider also quoted the lowest pricing in the RFP process by a considerable margin. The provider could be under pressure to meet his financials and is willing to bring in business at or below cost with hopes to drive program efficiencies that lower internal costs, meanwhile he brings in revenue to reduce risk of defaulting.
This OEM’s program roadmap also has a huge upside plus, the OEM plans to front-load POs on a quarterly basis against a non-cyclical industry forecast.
Maybe the other providers are unwilling to take on risk or, management in each doesn’t have confidence they can turn a profit.
SEE ALSO
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Providers have different ways they add up internal costs when deciding to take on a new program. Many of these ways are similar when structuring OEM-CEM deals but there’s no industry standard when it comes to determining provider pricing. In many instances providers want to charge as much as they can without the OEM walking away.
In your search results, you can further target providers by choosing End Markets and/or Services.
One thing for sure, OEMs should not make their decision to partner with a provider based solely on price.
To emphasize this point, many readers can recall the heroics of US Airlines Captain Chesley “Sully” Sullenberger and the “Miracle on the Hudson”. He landed his Airbus on the Hudson River January 15, 2009. Everyone lived!
To reference a guest post written by an airline pilot shortly after that event, and published on the blog Freakonomics.com, ‘Captain Steve’ speaks to the accomplishment that day by Captain Sullenberger, and expertly ties the topic of airline pilot salaries with the public’s misperception of pilots being overpaid.
SEE ALSO
OEM decision-making outline for EMS provider selection
How to free up working capital in manufacturing supply chains
Captain Steve references less expensive airlines in his post while also noting certain disasters associated with cheaper airlines. In his writing at the time he states: “domestic flying is being shifted to the regional carriers, like the American Eagles, Comairs, Mesas, and Colgan Airs, to name a few. These consist of the lowest bidders and the newest pilots flying into the harshest of environments. The airline management teams would respond that it works and that this is routine flying.”
Captain Steve begged to differ and drives his point home writing: “The public thinks it is entitled to fly anywhere in the country for $99. Get Real. You get what you pay for. Less airfare means less pay, less maintenance, and less customer service.”
Coming back to the topic of contract electronics, regardless of a provider’s financials and, ignoring how long he’s been operating in certain markets and offering specific services, none of these can be a single indicator on whether or not a provider is good at what he does. After all, he could be in business for twenty years – and doing mediocre work for each one of those years.
On the other hand, just because a provider’s response to your RFP comes in too expensive compared to other quotes you have does not mean that provider offers exceptional work.
Just as a provider’s reputation in industry can help him land on your ‘short list’, so can it remove that same provider from the list of providers you were planning to visit next month.
Is choosing the least expensive quote really saving you money?
Sometimes. But, not always.
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