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EMS manufacturers incorrectly calculate manufacturing labor and process fees for quotes that unfairly raise OEM pricing in RFQ phase

Estimating manufacturing labor costing is not tied directly to how labor is actually utilized.

By Mark Zetter

Understanding manufacturing manpower and labor costs is a learned skill which requires education over preparing and evaluating ‘n’ number of quotes plus, having an intrinsic understanding of the entire contract manufacturing business model.

For example, it takes a high caliber, manufacturing executive to be able to cost out, and create an accurate quote for any OEM, even a startup.

The biggest challenges for OEM professionals regarding RFQ phases and quoting for EMS manufacturing services are processes and labor.

The majority of persons on either side of the manufacturing quote (OEM and EMS) focus on raw materials because materials is proportionally a larger amount (always estimated at 65% to 85%) of MCOGs, while labor cost falls to a second priority.

Many will say its materials, but costing and PPV for materials is the easy part if you have a thorough understanding of VMI, distributor model markups and how sourcing availability and demand impact unit pricing.

Manufacturing labor costing is difficult because the truth about how a process or methodology is trained in university, or throughout the millennia, lets say, is not tied directly to how labor is actually utilized and how/why the manufacturing business model exists.

The disconnect between the EMS manufacturing business model and how the manufacturing labor cost is calculated (estimated) is because the laborer is somebody who is considered indirect labor (IDL), or direct labor (DL). But direct labor, by methodology, in its truest form, is somebody who contributes to the ‘actual production’ of that item during that time or, that unit of measure.

So, somebody walking between two work stations carrying a tray or pushing a cart, is not considered direct labor, yet EMS manufacturers count them as direct labor, such as material handling.

So the skewing between who is ‘labor’, combined with the production process people (process engineers), who are not generally super creative and they don’t really stay up to date on new production processes or seek out continuing education credits and certifications, etc…

Instead, most process folks tasked with determining manufacturing labor costs tend to use software presented to them, or templates that are inadequate, and that’s how they price.

SEE ALSO
How to reduce costs from your manufacturing portfolio
Best practices for EMS manufacturing RFQ quotes
EMS Manufacturer internal cost vs OEM quoted fees vs OEM target price

If you gather many process engineers in a room you will find the manner in which they measure and determine manufacturing labor costs will vary widely and be very different.

Some process engineers who have been around a while will apply a ‘golf course’ approach – pull some grass, toss it in the air to see which way the wind is blowing and then eyeball it. And others will simply walk the line, or set up fake work stations, while others will build a 1/32 scale solution then play out scenarios in their mind but there will never be a merge between all of the disciplines.

Arrive at a more accurate total landed cost,
while helping you save between 5% and 15%
of your program costs for new programs,
and your existing programs.

 

Then, someone at the end of quotation process phase just cuts the labor segment cost in half so they can close the deal. This results in all of the previous efforts to arrive at the finite, scientific (I use this term casually) cost is thrown out the window by the EMS manufacturing sales person.

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