Estimating true manufacturing cost of goods sold

By Staff

In an ideal world, raw material inventory is pipelined, scheduled for production and manufacturing functional support staffing, shipping and commit schedules. Its a FIFO system (first in, first out).

But the reality is workflow is not constant. Engineering change orders and weekly OEM-EMS customer meetings shift priorities and unplanned material variances surface. Manufacturing demand changes can occur any time of day and at any point in your supply chain. It becomes increasingly difficult to drive cost out of your manufacturing product portfolio if you do not begin on proper footing.

Manufacturing work orders

These changes keep EMS providers, and OEM customers, in a constant stat of reaction and add strain on the OEM-EMS relationship.

This is also good reason why customer stickiness in EMS industry is a moving target. EMS providers know, that, at any time, OEMs can pull out run to a competing EMS provider.

EMS/ODM Contract Agreements Development & Negotiations [PDF]

One defense EMS providers commonly deploy against this ongoing risk is to get as much money from OEM customers, in fees and charges, as frequently as possible. EMS providers pad their quotes and charges for two reasons:

1) EMS providers do not fully understand their true, internal costs to support an OEM customer program

2) EMS providers can double-dip and triple-dip in excess fees charged to customers because most OEMs don’t understand how to deconstruct EMS/ODM quote pricing in the RFQ phase and the general complexities tied to EMS and ODM industry.

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OEM customer costs (fees)

It should come at no surprise to OEMs that sudden changes to circumstances with OEM customer materials impact the EMS and ODM supplier’s working capital. EMS and ODM providers are notoriously inefficient. Every contract manufacturing program is comprised of three primary components in terms of EMS supplier cost vs OEM price:

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

Read more here about EMS internal costs vs OEM customer charges vs total landed costs. OEM decision makers wanting to better understand how EMS and ODM providers handsomely profit from changes to your program forecast by acting as a passive storage company, racking up additional revenue from your production WIP and finished goods inventory charges can read more here.

Having greater insight into EMS and ODM manufacturing cost models helps OEM companies identify areas EMS/ODM companies pad their pricing and charge more than they should. (Related: Top 10 impacts to EMS/ODM quote pricing OEM programs)

This knowledge also helps OEM during pricing negotiations and program cost reductions.

Learn more about outsource EMS/ODM manufacturing cost models here. To gain more understanding about EMS/ODM pricing drivers we offer this handbook available here.

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How to Cut Costs 5% to 15% for EMS Manufacturing Services

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