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Contract manufacturer (internal) cost vs OEM quoted price vs OEM target cost

By Mark Zetter

Savvy electronic OEM equipment manufacturers never give contract manufacturers a costed bill-of-materials (BOM). How you determine your lowest product landed cost (target price) is determined by obtaining accurate information about your contract manufacturing solutions provider.

This article covers achieving timely new product development (NPD) and product launch pricing (cost) with new and existing EMS and ODM partners and, includes best practices for renegotiating contractual pricing terms for your existing products already being built by your EMS and ODM partners.

Every contract manufacturing program is comprised of three primary components in terms of cost vs price:

  • EMS/ODM (actual) cost to service OEM program
  • EMS/ODM internal cost (with markups)
  • Cost quoted to OEM

But how much higher? And, how can you find out? When contract manufacturers respond to your RFQ with a quote (the price the hope you pay) they break out their costs to justify (they want you to believe) what is fair pricing for your program into a few, basic categories: materials, labor, S,G&A, finance, freight, and overhead.

But this is misleading.

Our manufacturing cost models tell you why, and help position you in a manner so you are more informed about EMS/ODM actual costs when you negotiate EMS and ODM pricing and terms in your contract agreements.

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(Actual) Cost to EMS provider vs. OEM pricing discovery

EMS and ODM suppliers want as much money from you in fees, as possible. You want to reduce your annual spend. Somewhere between these two opposing business objectives you sign on the dotted line. You can tip the scale in your favor and we show you where and how.

There are hundreds of individual internal EMS/ODM pricing drivers that influence OEM price quote. (Readers can get a general list of EMS/ODM pricing drivers here). Contract manufacturers pad in their profits in nearly all of these, frequently double-dipping and triple-dipping.

Warehousing raw materials and FGI inventory fees are two of the largest money makers for EMS and ODM suppliers, after MCOGs, followed by indirect labor costs.

We have developed a contract manufacturing cost model second to none, enabling OEM decision makers to identify and uncover hidden cost when sourcing EMS and ODM services.

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OEMs using our cost models input your costed engineering BOM (eBOM), obtained from your solutions provider, and output reveals (in extreme detail) internal EMS/ODM costs for your program, the minimum EMS/ODM break-even (walk away) program costs, and OEM program price quoted. The latter fulfills you the model works, while also revealing you paid too much. (You want to get as close to the EMS/ODM break-even (walk away) point as possible.

All cost models can expand to scale, including locations for EMS/ODM factories, globally.

Below are just some aspects of our comprehensive manufacturing cost models:

Local costs for each factory and every assembly line and work cell or workstation are included in the models, with accompanying direct labor (including loaded local benefits) for the location, and definable variables to tune the model specific to precise program requirements and accurate (desired) outcome.

We include local currency with ForEx variables which can be adjusted and add to this materials for your program which include no less than raw materials and components, contractors fees, consumables per program, freight in, and so on.

READ
Top 10 impacts to EMS pricing OEM quotes

Beyond details for direct labor, costly indirect labor (IDL) is broken out into dozens of EMS/ODM functional departments, all supporting your production program, such as engineering, logistics, production, program management, quality, facility, R&D, TQM, (reverse accruals for G&A), and more.

F(Factory)G&A, which covers freight out, supplies, utilities, energy, equipment, insurance costs… and SG&A which includes costs for EMS/ODM sales and business development, account execs, and much more.

Users of our manufacturing cost models know more about EMS and ODM factory cost of revenue, materials, direct and indirect labor, depreciation, FG&A, cost of goods sold, EMS/ODM gross margins, S,G&A, EBIT and EBITDA than the vast majority of EMS and ODM executives in industry.

Using the costed BOM from your EMS or ODM supplier, you also plug in your program details into your cost model we provide you. The model will also inform you what to expect to pay suppliers as you hit manufacturing volume, specific to geography and factory. You immediately know how much room you have so you can further negotiate downward. You can also run what if scenarios and determine pricing before EMS and ODM supplier can re-quote your program. We arm OEMs with the tools to make more informed decisions. More details here.




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OEM Checklist for EMS Manufacturing Quotes

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