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EMS fallacy of optimizing materials cost of goods sold (MCOGs)

By Mark Zetter

Contrary to popular EMS industry belief, nearly every EMS provider today does not purchase components and materials using procurement economies of scale (volume), across multiple customer programs, in an effort to achieve lower MCOGs for your OEM customer program.

The deeper you go into the inner, business workings of even the largest EMS providers, and understand how customer quotes convert to drive procurement and generate OEM program work orders, it becomes apparent EMS providers have less control than customers would believe over processes and activity surrounding EMS materials procurement and customer inventory management. And even less control over the EMS industry’s second greatest cost: EMS provider S,G&A.

 

Even large EMS providers like Foxconn, Flex,
Jabil, Celestica, and Sanmina do not have the
technical capabilities to optimize MCOGs.

 

Where vertical integration might offer some real competitive advantage for EMS provider, capability for an EMS provider to increase material spend v EMS competitors with less spend capability does not transfer to lower MCOGs for the OEM customer.

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Here’s why. EMS providers routinely insulate the business risk with double-ordering/making risk buys and keeping every OEM’s program and related materials neatly packed in a shoebox.

EMS providers just aren’t equipped to delve into the entire, global materials marketplace; locate ‘real’ best pricing among the billions of parts in the components and materials universe, identify and purchase the desired or alternative (similar spec) OEM program materials needed using purchasing economies of scale (volume) for lower (optimal) per unit cost reductions, pipeline inventory delivery based on availability, and then keep track of which components belong to which OEM customer program(s).

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Measuring EMS WIP (% raw materials)

Even big EMS providers like Foxconn, Flex, Jabil, Celestica and Sanmina, to name a few, do not have the sophisticated, technical expertise or technology stacks inhouse to do this, nor are the tech stacks cobbled into frankenware by third party vendors like IBM Watson, Oracle and SAP. You would think the large technology consulting firms would have this figured out by now, but they don’t.

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EMS executives in industry know EMS providers have little differentiation separating their business from competitors, and each day live in fear of losing your business, so they invest time building a friendship with you, while always being ready at a moment’s notice to pack up your shoebox should the day come you decide to take your business elsewhere.

EMS provider supply chain systems are not setup for managing vast amounts of materials, for tens of thousands of BOMs, and millions of components, and establishing and accurately managing source and assignment data.

Yet technology exists today for manufactureres to do this. So why don’t they?

Next steps for OEMs

If your EMS provider claims they have access to best pricing, and they purchase components in bulk to drive lower component costs for you — ask them to show you.

Chances are, the EMS provider will show you a dashboard of material buy v build signals tied to your work orders for your program on the production floor and generated from an insufficient third party materials demand SaaS vendor.

But don’t get distracted. Ask the EMS provider to further clarify, and expand and visualize their materials management expertise.

Tell them they can obfuscate any data for privacy, and ask them to show you a map of a series of bulk materials purchased (with obfuscated part numbers), assinged to obfuscated customers, and broken down by obfuscated programs within an obfuscated customer’s family of products.

Whether you are on a call or in the room with EMS providers when you ask them for this information, be mindful to listen for the pin to drop.




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