EMS activity-based quote model for electronic systems integration manufacturing

By Mark Zetter

Your contract electronics solutions partner needs to be able to make a profit to survive. Otherwise, they can’t continue to serve you. Meanwhile, EMS providers are responding to OEM RFQs with activity-based quotations (activity-based costing; ABC) as more OEMs seek open-book EMS costing for program quote pricing from their electronics outsourcing partner.

Ideally, below are RFQ inputs your EMS provider might reveal:

  • Material Cost
  • Material Inventory Reserve / Adjustments / Scrap
  • Material Freight-in Costs
  • Material Duty Costs
  • Product Warranty Reserve
  • Capital / Finance Charges
  • Material Overhead
  • Direct Labor Overhead
  • Direct Labor

Your EMS provider then determine the following: Total cost of goods (COGS) plus, SG&A and, their total operating costs so your EMS provider can then determine the amount of profit they will make from your OEM customer program. (Related: Top 10 impacts to EMS/ODM quote pricing OEM programs)

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But nothing happen unless people get involved so we then look at direct and indirect labor, knowing number of people and hour required will vary based on customer program volumes.

Direct labor

Direct labor is sometimes broken down into standard hours required for a given period and volume of production, overtime hours anticipated (and actual) for same period and efficiency (utilization hours loss of actual v ideal throughputs).

From here your EMS provider then determines their total direct labor costs, which includes direct labor benefits. This allows your EMS provider to determine total direct labor headcount and the amount of cost for direct labor that goes into each unit (of your product) produced.

Indirect labor

Managing people is an art form and managing EMS indirect labor is filled with uncertainty.

Indirect labor costs associated with your program will vary based on your program EMS functional support requirements, program volume and amount of time required per indirect plus, that indirect’s annual salary on percent salary-contributed basis: the more hours an EMS indirect spends on your program, the greater percent of that indirect’s annual salary (EMS cost) needs to be captured by EMS finance.

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In your search results, you will be able to further target provider options by choosing End Markets and/or other Services.

Below are relative EMS indirects that will likely be assigned for supporting your electronics systems manufacturing integration program:

  • EMS General Manager
  • Director of Operations / Manufacturing
  • Administrative Assistant
  • Manager of Program Management
  • Program Manager
  • Program Manager Associate / Administration
  • Manufacturing Manager
  • Manufacturing Supervisor
  • Manufacturing Clerk
  • Manufacturing Material Handler
  • Supplier Quality Engineer
  • Receiving Inspection Inspector
  • Test Engineering Technician
  • Process Engineering Manager
  • Process Engineer
  • Quality Engineer
  • Quality Inspector / Auditor

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  • Test Engineer
  • Process Engineering Technician
  • Documentation Specialist
  • Documentation Clerk
  • Materials Manager
  • Production Control Manager
  • Master Scheduler
  • Production Control Planner
  • Warehouse Distribution Manager
  • Material Receiving Clerk
  • Warehouse Staff
  • Shipping / Distribution
  • Supplier Quality Manager
  • Purchasing Manager
  • Purchasing Buyer
  • Purchasing Administration Clerk

The final quote presented will also likely include total number of indirect hours required on a per month basis, along with indirect headcount, indirect labor costs (again, this will vary based on percent indirect labor contribution and production volumes), indirect costs for indirect labor benefits and total indirect labor costs.

Get help finding EMS providers

Keep in mind its difficult for EMS providers to properly capture indirect effectiveness and drive efficiencies making it easy for EMS providers to overestimate indirect labor costs in your quote. EMS indirects who are slow to act, use poor judgement and/or fail to execute among IR EMS functional teams tie up billions of dollars in EMS working capital each year resulting in higher OEM customer costs.

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