Contract manufacturing NRE strategy for electronic OEMs

By Staff

How do NRE (non-recurring engineering) charges imposed by EMS manufacturers play into the quote and production phases of your OEM program with your contract electronics solutions provider? This is important, especially for the mindful OEM manager wanting to cut EMS program costs and reduce EMS spend.

The cost of the expense is for tools, molds, software…specific to your program the EMS or ODM cannot share with other OEM customer programs.

Typically, NRE items need to be addressed before a program begins. One way OEMs can view NREs is each is a one-time cost for something that gets consumed over time, yet it has potential to not be directly or 100% correlated with every unit in the OEM’s program that gets built.

NRE often also gets amortized based on OEM program quantities built. When EMS providers amortize NRE for an OEM program one of the downsides is if, for example, the program has $100,000 NRE over a period of time and if the amortization is completed after, say, the first 10,000 units, how are OEM programs costs impacted after the first 10,000 units are built? This can become an administrative nightmare and if there are a lot of NRE in a program it becomes more difficult for the EMS/ODM firm to manage.

Simultaneously, from an internal viewpoint, you need to look at your own company. Each company has a different financial structure and you need to understand (most likely from your CFO) what’s important. Is cash important? Is OpEx important? Is CapEx important? NRE decisions are usually determined based on a company’s financial structure. Know what’s important at that time.

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For example, if you’re part of a public company and Wall Street/your market has focused on OpEx the last five years these external influences cannot be ignored. Influence can also be based on what industry you’re in. Ultimately, you need to make the best deal for your company and look at your total cost of ownership.

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To emphasize, take the $100,000 NRE example above: if you decide to address the NRE upfront and you pay for it upfront against the first 10,000 units built and shipped then your NRE cost is reflected in the higher cost for each of the 10,000 units. As the OEM you’re going to pay for it and doing so could be related to your cost of capital. What if your EMS partner can raise capital cheaper than you? These are just some considerations.

Another consideration with NRE is who owns the tooling or molds? If tooling is 100% owned by the EMS provider, and then he also uses it for other customers, it should never be an NRE. Review all of the variables and plan ahead how you’re going to deal with each of them.

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Whatever you decide be consistent across all programs so it becomes easy to interpret should questions on ownership or liability surface. For custom injection molds and other things of this nature its sometimes best to own the mold IP, drawings and actual molds so should you need to transfer your program to another electronics solutions provider later your current EMS provider can’t hold onto the molds and therefore hold your program hostage should the relationship turn.

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