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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.

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You might also like:

OEM Checklist for EMS Manufacturing Quotes

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