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Why quote pricing for contract electronics services isn’t standardized

Does the cheapest EMS provider really cost you more in the end?

By Mark Zetter

pricing_electronics_servicesA CFO in an electronics OEM recently commented about the range in pricing they received for quotes from sending one identical RFP to four CEMs to contract both electronics services design and manufacturing for the OEM program. He wanted my opinion on should cost pricing for EMS.

As expected pricing varied from provider to provider. But one thing the OEM took issue with and was not prepared for was the prices submitted by providers was spread so wide.

I’ll note here that all providers had similar technical services capabilities, manufacturing footprints, years of market expertise…

Provider due diligence shed some light on how each provider was leveraged. One provider had just completed a large acquisition financed by a lot of debt. The OEM discovered part of the acquisition carries certain investor financial convenants for provider management specific to balance sheet items and debt:equity ratios.

What’s interesting is this provider also quoted the lowest pricing in the RFP process by a considerable margin. The provider could be under pressure to meet his financials and is willing to bring in business at or below cost with hopes to drive program efficiencies that lower internal costs, meanwhile he brings in revenue to reduce risk of defaulting.

This OEM’s program roadmap also has a huge upside plus, the OEM plans to front-load POs on a quarterly basis against a non-cyclical industry forecast.

Maybe the other providers are unwilling to take on risk or, management in each doesn’t have confidence they can turn a profit.

SEE ALSO
OEM Best practices managing RFQ/RFP phase in EMS manufacturing
Four types of contract electronics agreements

Providers have different ways they add up internal costs when deciding to take on a new program. Many of these ways are similar when structuring OEM-CEM deals but there’s no industry standard when it comes to determining provider pricing. In many instances providers want to charge as much as they can without the OEM walking away.

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In your search results, you can further target providers by choosing End Markets and/or Services.

One thing for sure, OEMs should not make their decision to partner with a provider based solely on price.

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

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