How OEM manufacturers use EMS sourcing models as step toward Industry 4.0

By Staff

Technology used by EMS manufacturers trails OEM technology by 18 to 24 months. One reason for this is risk averse, habitual thinking in EMS industry further weakened EMS manufacturers have small budgets when it comes to technology spend.

And whenever EMS providers do innovate its because an OEM customer is dragging the EMS partner out of the dark ages, forcing the EMS to invest (after the OEM satisfies the EMS provider’s request for a PO to hedge EMS tech spend liability).

EMS manufacturers are uncomfortable with anything they cannot immediately understand and, prefer doing things the way they’ve always been done instead of investigating and learning something new.

Billionaire Chamath Palihapitiya, founder/CEO at SocialCapital and frequently interviewed on CNBC and other televised and online channels, uses venture capital as a force to create value and change on a global scale. He’s a smart guy with no fear of saying what he thinks. Regarding some large organizations he’s noted for saying, “Incumbency’s biggest drawbacks are lack of creativity, sloth, internecine politics and waste.”

EMS manufacturers large and small are notorious for having unoriginal, stale thinking and, while ERP and materials management should be a cornerstone of EMS customer operations, EMS providers across industry – even the top EMS manufacturing provider – deploy faulty ERP zombie systems, incapable of optimizing supply chain planning and real-time monitoring encompassing their entire manufacturing vendor supply chain. (Read: Corona virus reveals ERP planning insufficiency in manufacturing supply chains)

This glib thinking among EMS manufacturers, coupled with a risk averse corporate culture, causes EMS manufacturers to heavily pad quote pricing in RFQ proposals presented to OEMs. EMS firms are afraid of losing money on a deal because EMS firms don’t know how to properly track their internal costs accurately – and they want to be 100% certain to eliminate any doubt they’ll be profitable with your program.

Understanding the complexity needed to adequately, and accurately, determine and calculate accurate quote pricing of OEM programs, is beyond the capabilities of the vast majority of EMS manufacturing sales and EMS quote teams today.

So, contract EMS providers stack onto programs enough fees and excessive profit to a point where they’re comfortable plus, other fee layers (read: storage) are added to give them wiggle room to lower total program cost slightly so OEMs can feel they’ve accomplished some form of negotiation vs the EMS providers quoted price.

But trends we’re seeing in EMS industry say this is changing — for electronics OEM manufacturers — buyers of EMS services.

One growing trend is that OEMs are demanding lifting the hood on the EMS RFQ quoting process. Doing so is satisfying the need for better understanding and greater transparency of EMS internal costs as OEMs keep their eye on Industry 4.0 and saving cash and putting pressure on EMS industry program fees.

Trend details

We published a three-page white paper that goes into this EMS fees trend in more detail, titled: “How RFQ Proposals & Quote Complexity in EMS Services Changes Demand for Industry 4.0“.

A case in point is a commodity manager who overseas electronics. They often have 10 to 30 (and more) programs operational plus millions, even billions, of dollars of raw materials (direct, indirect and, MRO) to prioritize. However, the time and acumen necessary to maintain competitive pricing are not possible without adequate tools to support.

In this white paper, read how OEM manufacturers with Industry 4.0 mandates are using manual cost models as a logical first step to help manufacturers have less costly EMS manufacturing engagements and, achieve better positioning for transition to an automated and intelligent manufacturing costing and quote system.

It’s a must-read for any electronics OEM manufacturing decision maker tasked with conserving cash, determining your lowest product landed cost (target price) and reduce EMS program spend while creating more transparency in service engagements with EMS manufacturing partners as you move toward Industry 4.0 and real, just-in-time (JIT) inventory management.

Request this white paper here.

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