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EMS manufacturing profit center: Production vs inventory costs

By Mark Zetter

EMS manufacturers make healthy profit by warehousing raw materials and finished goods inventory (FGI) for OEM customers. Most OEM equipment companies don’t know how to identify these hidden, internal EMS costs (OEM fees) and, EMS providers do not accurately break out these costs in quote pricing presented to OEMs during RFQ and contract negotiations phases.

Integrating separate eBOMs (program engineering perspective) and mBOMs (manufacturing process perspective) with product lifecycle management (PLM) software helps tie BOM costs to EMS pricing and P&L, but if EMS providers are unable to track your customer inventory of parts per customer program how do OEMs know what is reasonable EMS internal costing (OEM price) for managing your outsourcing program?

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The truth is, most EMS manufacturers don’t know this cost either. So they simply pad OEM customer pricing to make sure they make a profit. The problem is most OEMs simply pay the EMS invoice with question and, without making EMS providers accountable for their pricing.

One end result from OEMs performing adequate contract negotiation leaving out important clauses in their EMS manufacturing agreements? EMS manufacturers hide profits in quoted pricing, and OEMs are unable to accurately track innovations/engineering part IDs while paying more than you should.

To add insult to injury, the EMS manufacturer profit center extends beyond FGI warehousing and logistics associated with your program and taps into extracting financial gain (for EMS providers) from OEM customer fluctuations in forecast demand and production scheduling.

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