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Ways OEMs can use RFQs to manage EMS providers and material costs
The author shares insight into creating an adequate quote package to compare EMS provider quotes as apples-to-apples plus, how OEMs can migrate electronics product programs from one EMS provider to another.
SOME OF THE MOST EFFECTIVE request for quotes (RFQ) I have seen and / or participated in from an OEM perspective had many similarities. These shared a common theme as an RFQ package that bridged the search for an EMS provider with establishing the principle tenants of the supply agreement.
At provider selection, which is the exit point of a typical RFQ process, some of the better RFQ packages also emerge with most of the business terms of a supply agreement already in place.
Addressing both in the RFQ clarifies that the pricing you establish is what you wanted, is clearly understood and contains the math to how it was calculated visible as well as removing the emotion of unresolved terms out of the ensuing negotiation of the contract supply agreement. (See, also: Outsourcing Calculator for OEMs)
Standard quote package
In a standard EMS quote package, the following items are desired assuming this is not a stealth or confidential OEM program transitional search:
- Mutual NDA agreement
- Introduction letter that introduces you, your product or product line and a brief company bio
- Product sample
- Drawings of final unit and printed circuit board assembly (PCBA)
- Drawing of silkscreen layers with part placement reference designators
- Pictures of product and sub assemblies
- Bill of materials (BOM)
- Approved vendor list (AVL) / approved supplier list (ASL)
- Engineering change notice (ECN) and deviation package if different than BOM and drawings
- Annotate program parts and base raw parts and if purchased, or programmed at ICT not the actual JEDEC files
- Custom part and controlled part authorizations to quote, or at least budgetary prices
- Test process with test times and yield rates (actual, or assumptions)
- Tooling that is to be transferred or, you are requesting to be made
- Special considerations or requirements
- Forecast by product going out 12 months with estimate for a total of three years
- Supply agreement terms and conditions sheet (See my article: ‘9 key points help OEMs negotiate better contract service agreements with EMS providers’)
- Time line and standardized response template that details exactly how you want the quotes formatted
- Electronic copies with CAD files
- Professionally packaged not a bunch of emails or separate files
Find electronic design services
In your search results, you will be able to further target provider options by choosing End Market, then selecting Go.
Most of the above are self explanatory except maybe the response format as pricing varies and is not uniform unless you force the formats.
Your goal is to get a uniform apples-to-apples comparison of pricing for all services you are requesting and to be able to establish a forward looking template for all of your business. Meanwhile, the EMS provider is attempting to create flexibility and to win your business; more detail for them isn’t the goal.
Examples of these formats follow below.
Typical material and labor
Bill of materials (BOM) plus
The above charts are a suggestion related more to PCBAs (printed circuit board assemblies), but if you are looking for complete turn-key product, which many OEM customers prefer, simply add a line for top level assembly (TLA) that rolls up all of the PCBA’s plus the top level assembly components.
Simple is better – if it is supported by enough detail to uncloud the cost drivers as well as clarify the cost structure.
Find product development services
In your search results, you will be able to further target provider options by choosing services, then selecting Go.
Other points to consider:
Prototype pricing
- This is usually: a hourly rate
- A flat charge
- A piece rate that amortizes the capital cost in the unit price, plus test time
- Top- and bottom-side silk screen
- Flying probe hourly rate
- Plus, NRE set up time
Service and repair rates for out of warranty
- Service is usually stated as material plus labor, (hourly rates need to be disclosed for labor and debug), or
- Above can also be stated as a flat rate charge, which is preferred for some people. Flat rates can also be broken down into easy, medium, expensive, and NTF (no trouble found)
- Material mark-ups should be disclosed and established as cost plus whatever mark-up as I have seen rates used that mirror production pricing to 50% margin as a FRU (field replaceable unit) rate (50% margin = 2x of material cost).
Stealth EMS provider search mode
If you are conducting a stealth EMS provider search in attempt to transition from EMS provdier to another, bear in mind that once the BOM goes out for quote the ‘cat is out of the bag’. (See also: EMS Resources Directory)
Custom parts, registered parts and unique parts are most likely to draw attention. Providers provide OEM customer names on quotes unless told not too to insure they get any customer preferred and registered pricing ‘treatment’ so be aware of this dynamic.
In most instances, it is better to use a budgetary material number that is directionally correct initially, but not to provide the AVL / ASL for providers under consideration to quote against even though they may be adamant they need this.
Migrating from your current EMS provider
Use these ‘budgetary numbers’ instead of a total BOM quote of the BOM when establishing your preferred EMS provider list top three. Get all terms and everything else agreed to and be sure you have your near-term supply covered through this pending transition period before you let the BOM be quoted (because this can take roughly 10 days and news to your current EMS provider will usually take three or four days for the initial news followed by confirmation to your current EMS provider quickly after that.
Always deal professionally with your current EMS provider but only openly disclose your outward migration intentions to them once you are comfortable with the situation – keeping in mind EMS providers transition OEM business in and out regularly and realize doing so is just business as usual unless someone makes it personal, which you should always try and avoid. But if the latter does occur, always take the ‘high road’.
Do your due diligence and visit the EMS site that will be building your product and not just their corporate offices. Create a scorecard to try and quantify your results and preference and then sort the top three EMS contenders.
Talk to other customers the EMS provider currently serves. Search Linkedin to locate others who have done business with them. A good way to do this is to ‘link’ with EMS site business leaders you meet during your visits. Their Linkedin contacts will usually have customers linked to them.
You then can call or email these customers and get their thoughts.
You should target more than one OEM customer per potential EMS partner and you should also ask the EMS provider for OEM customer references (doing business at the same EMS site) that are also similar to your type of business / end market.
Mitigate risk and stress
It pays to be organized. You should have a full RFQ package, along with the terms and conditions that EMS providers will need to support the level of OEM business being quoted and to better understand your OEM product and, to a large part, the terms of the engagement. Doing so speeds up your time to transition immensely and takes most of the stress out of the negotiations.
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Wilson
Posted at 7:53 am on July 23, 2012
Somewhere EMS providers are sweating. Good article but I would like to see more detail on strategy to negotiate supply agreement for complex build product.
You can also openly reveal to all contract manufacturers quoting the program who their competitors are and what they’re willing to take in the project. You’re not looking for the lowest bid but you’ll find providers willing to openly bid will begin throwing in a lot of extras like some NRE they would otherwise want to collect on.
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Senior Consultant at Providence Partners
Posted at 10:13 am on July 25, 2012
Great question Wilson, in most of my outsourcing I have top level assembly or box builds as well. However, there isn’t a standard convention used and surprisingly not a universal formula for the actual performance of the work. Thus a single template isn’t likely but it would contain the following elements if that helps. Assuming this is electronics, it contains: Labor rates for assembly, time per operation, yield assumptions, test time/amortized by multiple tests by operator if 1 operator can run 2 tests sets, etc…final QA, pack out, and of course all materials consumed. The point is require sufficient detail so that when you change a cost driver such as improve yield rates or reduce test times you can calculate the cost reduction through the mark up model to the new price. same for materials.
I usually do not tell the bidders who they are bidding against and try to keep it 1:1 they pretty much know anyway who is bidding as it is a very small world. That said the real objective is to establish that you get the best price from each provider upfront as you won’t go back and ask a 3rd place bidder to resubmit or to rework their quote only the best value bid will be worked to contract. That should be a fair warning to keep extra PPV and mark ups out of the initial deal. The formulas established in the RFQ and contract help keep price creep out as it eliminates the unknown variables that providers want to remain unknown through new “quotes”.
I hope I addressed your questions.