How to select an EMS provider - Part 2

Price and supply chain management

By Ron Keith

Other Side of the Table

Part 1 of How to select an EMS Provider discussed the importance of evaluating the financial strength of an electronics contract manufacturer, or EMS provider. Once a potential supplier has been qualified from a financial standpoint, the process of evaluating capabilities and fit can begin in earnest. The first step is for the OEM to evaluate the competitive factors in their product market and prioritize the issues of price; delivery, schedule flexibility, quality, reliability, intellectual property (IP) protection and other issues so as to understand the relative importance of each factor in the selection process.

The peril of a great price

Many OEMs have a difficult time prioritizing the competitive factors in their given product markets and thus attempt to weight everything equally - save for price which is almost always given the greatest weight regardless of the actual importance of price in the end product market.

Price is believed to be the ultimate quantifiable variable and one that can seemingly be compared most easily on an ‘apples-to-apples' basis. But every EMS provider is different, with different operating procedures; systems, policies, talent, locations and experiences and, therefore, it can be very difficult to compare electronics contract manufacturing companies on anything other than an apples-to-oranges basis.

Comparing quoted unit price is not the same as comparing total cost. "Every OEM can compare two quotes and see which one has the lower unit price, but it takes a much deeper understanding of product requirements; logistics cost, contract terms, quality and EMS' performance to be able to derive a total cost picture" says Matt Ryan, executive vice president of global operations with Flextronics, a leader in global electronics contract manufacturing and services. "Accurately measuring all of the costs of outsourcing and appropriately allocating each to individual products to derive an accurate total cost picture requires significant accounting rigor and sophistication", adds Ryan.

Not all OEMs possess this level of accounting sophistication and thus often select an EMS provider on the basis of a miniscule unit price difference evaluating suppliers on an apples-to-oranges basis. "What OEMs miss" says Arthur Tan, president and CEO with Integrated Microelectronics (IMI), a Philippines-based EMS provider that relies heavily on intellectual property to service its customers, "is the quality system itself generating the overall quality level of the products and other variables such as material management; technical resources, language barriers. These variables add up and, more often than not, can contribute a significant cost of doing business that outweighs the unit price decision."

OEMs often realize too late that getting the lowest price requires specific operational inflexibility around build location; supply chain management, reliability testing or some other unforeseen and under-negotiated factors that can cost the OEM time; money, material liability, non-recurring engineering (NRE) charges, or possibly market share. Whereas, a thorough understanding by the OEM of their product markets usually reveals varying levels of both elasticity of demand and market acceptance around key competitive factors, thus indicating varying levels of importance around key supplier selection criteria such as price; lead time, demand flexibility, and even quality.

Understanding the relative importance of each factor is vital to both selecting the right supplier and negotiating the right contract. OEM's that ‘expect it all' at the ‘lowest price' without understanding the policies; procedures, and management practices of EMS providers, in effect, allow EMS providers to make operational trades-offs that may not be in the best interest of the OEM. "Opportunities we have come across where the main driver has been unit price, almost always end up to be a disappointment for both parties", adds IMI's Tan.

Price is a critical factor for most OEMs when choosing an electronics contract manufacturing or, EMS provider; however unit price is far from a comprehensive measure of total cost.