Contract pricing, profits, and OEM direct costs

Contract pricing and profits are topics on the minds of both the OEM executive as well as his counterpart, the electronics contract manufacturing executive. When it comes to OEM direct costs, these obviously weigh more heavily on the mind of the OEM.

Contract pricing and profits can determine which contract manufacturing companies (and their OEM customers) continue to gain market share and stay in business and which companies do not.

Meanwhile, what determines contract pricing and profits for both parties derived from the outsourcing OEM’s direct costs of doing business with his outsourcing contract manufacturing partner.

While there are some common outsourcing manufacturing contract formats, no two contracts are identical and, there is no viable, common platform that can be applied to every outsourcing contract pricing model with regards to either party’s profits or, cost reductions.

Meanwhile, the diagram below communicates how a high number of contract manufacturing executives run their businesses in hopes of being profitable.

The above is based primarily on the fact every request for quote (RFQ) process and contract negotiation process varies as does the list of dynamic objectives for management on both sides.

Contract pricing, profits and negotiations

During contract manufacturing negotiations, it’s in the contract manufacturer’s best interest to try and drive (i.e., negotiate) contract pricing and profits with his OEM customer while focusing on the green-shaded area in the diagram (more on this in a moment)

Meanwhile, within the area of the diagram with the numerical value of 1, on the upward slope, is where the contract manufacturer is ramping the OEM’s outsourcing product program in production.

In this phase of the relationship, the contract manufacturer’s initial outsourcing contract profit per unit is low because of high fixed costs (i.e., non-recurring engineering (NRE) and extended non-recurring engineering (ENRE) costs), where:

NRE can include, but is not limited to:

• tooling, or
• special work stations
• conveyors, and other items

ENRE can include, but is not limited to:

• cost of starting a program
• pipelining materials
• seeding inventory and distribution channels, and
• managing component liability

    

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