Very often it appears EMS sourcing decisions are almost exclusively made on unit pricing in complete ignorance of other factors.
A lot of time is spent with OEMs hammering on EMS unit price and its supporting cast (material, labor, overheads and margins).
EMS sourcing decisions are largely economic, but the largest cost differential between suppliers can be unrelated to unit price and any of the components above.
Smarter OEM customers look deeper to see how sourcing decision will impact their internal costs, downstream of the EMS provider’s operation.
Basing a sourcing decision too heavily on unit price can be hazardous to your career. I can’t say for sure, but if we knew the truth about most famous product failures (and I know the truth about some), the failures came down to bad decisions when constructing the value chain. (Read: Lean manufacturing outsourcing and value stream mapping)
It’s not the way you want to be famous. Most savvy buyers already know this.
Figure A shows the breakdown of unit price into the main components of material, labor, (plant) overhead, SG&A and profit. The column at left is a ‘high mix / low volume’ product and the one on the right ‘low mix / high volume’. (Read: Chasing EMS value with low-volume / high-mix)
Price component breakdown for electronics manufacturing of high mix / low volume vs. low mix / high volume product
Material cost is the single largest cost component so we naturally spend a lot of time on it because of this.
Differences in material costs can eliminate many EMS candidates when evaluating and selecting EMS provider partners. But, in most cases when handled correctly, material cost shouldn’t be the deciding factor.
MCOGs not most important
To be successful in offering EMS, a provider must be very effective in assembly, but also in managing the materials going into the assembly process.
If you have good control of your material costs (at least the major ‘A’ items) and you have pre-qualified your EMS provider candidates as having adequate procurement personnel, then the only way there will be a difference is if there is a disconnect in the process because someone didn’t get the latest information (e.g., ECO, bad part numbers…). (Read: 80 metrics to focus EMS provider materials management and increase profits)
If you know what the prices are, the sourcing shouldn’t be decided based on a guessing game or one EMS provider having inside knowledge.
Many small- to medium-sized OEM companies typically under invest in materials and procurement because they don’t see doing so as strategic and therefore do not have a good handle on the component suppliers, so EMS companies can differentiate themselves by doing a better job at this.
The correct way to manage costs is for the entity with the most impact to take lead responsibility.
Impact can be through design control or leverage.
If the OEM customer retains design control and approval on key parts, should these parts be in the annual cost reduction target?
In a many cases, EMS providers have better leverage than OEMs do on a large number of component categories.
Most of these are ‘B’ and ‘C’ parts, but the savings can be significant.
Raw printed circuit boards are often the highest cost part where a good EMS provider can help OEMs improve on when it comes to cost. Freight can be another category where turning over control to your supplier can be an advantage. (Click for breakdown / savings detail when OEMs outsource greater portions of their supply chains)
Once the product process has been designed, the amount of labor in a product shouldn’t vary much from one supplier to another. The only difference between EMS providers should be the cost of labor between countries and you really don’t need suppliers to tell you this. (See: Outsourcing Calculator for OEMs targeting low-cost regions)
Beyond material and labor, the remaining categories will vary widely based on the type of business (volume, mix, how EMS providers account for cost, regional cost variances…) and will be very hard to reconcile.
If the analysis is being done on outsourcing an internal operation then you’ll have a good baseline to use. (See also: How to decide whether or not to outsource)
If you’ve never produced something like this and it accounts for a small fraction of the capacity of the facility, do you really care? If you care, do you really understand how to analyze this?
It’s hard on OEM-EMS negotiations when you’re not just explaining costs, but giving refresher courses in cost allocation.
If you keep material costs from being a differentiator, and you know the labor content and use benchmarks to develop targets for the other costs, then you really don’t need the suppliers to tell you what this should cost. So how do you make an economic sourcing decision when deciding between different EMS providers?
Should you even quote suppliers, or just give them a target to meet? In my next article, I’ll answer these questions and provide some examples when unit price is subordinated to other costs in the value chain.