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What you should know about quote pricing, purchase orders, and ERP systems

By Mark Zetter

Below is a summary of how purchasing, materials, and program management departments within many contract manufacturers manage quote pricing and purchase orders as these relate to the contract manufacturer’s enterprise resource planning (ERP) system.

Price

Pricing can be broken-down into four categories.

Contract manufacturer quote price
The quote price is the price which the contract manufacturer has negotiated with their suppliers

OEM customer quote price
The customer quote price is the price which the contract manufacturer charges the customer for the component. This price is the landed cost price for the contract manufacturer. The customer quote price includes duty and component packaging but it usually does not include freight or contract manufacturing overhead for handling the component.

Purchase order price
The purchase order price is the price (or cost) the contract manufacturer pays to the supplier. This price typically must include duty and component packaging and this price could also include freight.

OEM customer contract price
The customer contract price is the component price negotiated by the customer with the supplier(s) and given to the contract manufacturer to use as the purchase order price. The OEM customer contract price could be based on cost reductions or shared profit savings and is based on using direct channels unless stated differently by the manufacturer. This price usually must include duty and component packaging and could also include freight. The OEM customer contract price does not include overhead for handling the component.

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OEM customer quote price

Program management and materials management will usually have the responsibility of determining the customer product or services quote price. The basis for this type of decision-making is usually distilled from customer contract pricing and pricing negotiated by the contract manufacturer. Meanwhile, the customer quote price is then communicated to the OEM customer and other relevant organizations. It’s important this is determined three, maybe four, weeks before the quarter begins.

OEM customer contract pricing is provided to the contract manufacturer at least four weeks before the quarter begins. The customer contract pricing will / should be exactly similar to the customer quote price for the same quarter.

The contract manufacturer’s negotiated pricing is determined between program management and materials management. When doing so, many contract manufacturers follow a general framework whereby the current quarter’s pricing is added to the subsequent quarter’s pricing and the total is divided by two. Additionally, any price breaks are usually based on volume related to forecast numbers. (See: Various articles on EMS cost reductions for OEMs)

Enterprise resource planning (ERP)

OEM customer quote pricing should usually updated at least once each quarter. This is typically performed by the contract manufacturer’s purchasing department. (See: Top ERP Challenges for EMS/ODM Firms)

Meanwhile, buyers for the contract manufacturer should always check this pricing before placing any purchase order through the system. In instances where the price is higher in the purchase order than price in the ERP system, the buyer usually fills out a cost variance authorization form. The purchase order is then placed only once the buyer and program management both sign-off on the cost variance authorization form.

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