Posted on 08 May, 2014 by Chris Ames
Are you looking into alternative suppliers to manage your manufacturing? Can you see yourself outgrowing your existing supplier’s facility over the next couple of years and want to plan now to secure the future growth of your business? Maybe quality or delivery levels have started to slip which is now putting a strain on your relationship?
If any of this sounds familiar then maybe now is the time to explore your options. But before you commit to any change in Electronic Manufacturing Services (EMS) company, take time out to understand the costs in doing so.
On the face of it, working out a cost comparison between two suppliers should be a straight forward exercise but seldom is the case. There are a number of factors that impact costs and each assembly partner will account for these differently. So, the purpose of this post is to highlight some of the areas that need further consideration, enabling you to make the right decision for your business.
Pricing is typically split out by EMS providers into two main elements – material cost and labour cost. If you have a good idea of how much the material costs within your product then you are going to be comparing the contribution factored in from admin, purchasing and programme management costs and, of course, profit by each of the suppliers. If you feel that you have lost touch on how much your material costs, you may want to get some pricing on the key cost drivers so you have a better view.
The actual time it takes to build your product shouldn’t vary much between Contract Electronic Manufacturers (CEMs), providing of course they are working to the same requirement. In this instance you will want to compare labour rates i.e. the amount charged per hour for assembly/test etc. Assembly houses will have a variety of labour rates as they will typically charge out a person doing manual work at a lower rate to that of an expensive piece of automated machinery. Make sure you are clear with how long each process takes and what rate is being applied.
It’s vital you consider the ‘cut in’ lead time for any new supplier as this will have an immediate impact on your stock liability. To minimise risk, you’ll probably want to keep your existing contractor and stock pipeline in place until your new partner is fully up and running. This makes perfect sense but could take between 3-6 months. During this time you could find yourself having to commit to additional stock with the new supplier whilst the transition takes place. And on that point do you know what stock you are currently liable for with your incumbent? It’s worth establishing this from the outset as this could dictate financially when the best time to change is going to be.
If you intend to outsource the purchasing of the materials - instead of free-issuing them - check that the unit pricing quoted by the CEM is ‘fully inclusive’ and/or details any Minimum Order Quantities (MOQ) or Minimum Pack Quantities (MPQ). Your unit price could soon become much more expensive if there are unforeseen MOQ/MPQ’s which later need to be underwritten by you. A key question to put to your potential EMS partners is how they would propose to handle all of this and what support they could provide to you during the transition.
Supply and Demand
If you or your assembly partner have buffer stock arrangements in place with component suppliers, there may not be enough stock in the pipeline to satisfy the needs of additional builds. Stocking agreements are typically based on estimated annual or monthly build quantities. During any transition, an artificial short term demand for material could be created which, depending on your current agreements, could outstrip the supply chain. As a result you or your EMS partner may have to source additional product through catalogue grey market sources in the short term which is likely to come at an additional cost.
A change in CEM could incur additional tooling or non-recurring engineering (NRE) costs. These will be managed differently by each assembly partner, however they are very much a real cost that you need to understand. Some EMS companies will tell you these costs are absorbed or amortised into the pricing. This may be acceptable to you but remember these are typically ‘one off’ costs so you shouldn’t really need to pay for these against each batch. Some suppliers may even suggest these costs are ‘free’ in which case you should challenge this statement as it’s likely that you will be charged somewhere else.
The key therefore is transparency. There are a number of ways you may want to manage the costs so by understanding what these are, you and your preferred EMS partner can work out a solution that is acceptable to you both.
The time needed from you, or someone else within your organisation responsible for supplier selection, should not be underestimated. In fact it’s probably going to be the biggest cost associated with making any change. Once a decision has been made, you are likely to need input from a range of other departments (engineering, R&D, purchasing, sales etc) to help the transition process run smoothly. It’s worth creating a detailed plan of what resources you will need and from where. Each department will have costs attached to them somehow and even though it’s difficult to predict what you will need in the future, having an understanding of some of the basic needs from the outset will prove beneficial to you.
Changing your EMS company is certainly not a quick fix and can be a complex and demanding process. Trying to juggle your existing supply chain whilst trying to establish a new one, will challenge you and your internal departments. Commitment to the change is going to be needed throughout your organisation, with a close eye needed at all times on the associated costs.
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