Posted on 11 Sep, 2014 by Neil Sharp
How did that happen? You sent exactly the same Request for Quotation (RFQ) out to two Electronic Manufacturing Service (EMS) providers yet you’ve received very different pricing back. And why is one of them so much more tempting than the other?
Getting a price for your assembled product should be a straight forward. Particularly when there are really only two key elements providers need to focus on – the materials within your product and the time it takes to put everything together. To some extent this is true. However each EMS company will approach the RFQ in a different way and in turn make a series of decisions before submitting their final quote.
This blog post explores where some of the variations in companies’ pricing proposals originate from. This will help you to challenge your suppliers on pricing that seems too good to be true, so you can make sure you are really comparing apples with apples.
- Supported pricing - If your organisation has already negotiated supported pricing on price sensitive items then it makes sense for the assembly partners to use these costs. However, EMS providers may not be aware of your source of supply and even if they are, are unlikely to be able to access this pricing without your approval. It’s worthwhile providing these cost and supplier details within your RFQ data pack, so you can guarantee the very best pricing is being used.
- Economies of scale - Companies will need to determine how much commitment they can give to their supporting supply chain if they are to win your business. If they can commit to annual volumes then they should be able to access competitive material pricing for you. If however they have not been given these details, or don’t feel that the annual figures are realistic, they may be forced to use reduced quantities - which will lead to potentially higher material prices. Be realistic with your quote-request quantities. And if you have forecasted to sell 2000 units over the year, there’s little benefit in asking the EMS companies to quote for double this figure.
- Machine Set Up - If your product contains surface mount technology (SMT) devices then the EMS provider will use automated pick and place machines to manufacturer the printed circuit board assembly (PCBA). Before production begins, an element of manual ‘set up’ is required - which usually gets accounted for within the EMS provider’s labour quote. Typically this cost is amortised over the batch size of PCBAs being produced. Put simply, the fewer times the machines have to be manually set up, the more efficient the manufacturing becomes which reduces the set up costs requiring amortisation. The EMS providers will however need to balance their efficiency levels with the amount of finished goods stock they hold. They may not be keen to build the annual volume of your product in one go and then ship it to you over a 12 month period. A decision must be made on the batch size that is most economical for them, yet still competitive to you.
- Alternative devices - If your Bill of Materials (BOM) calls up a range of approved alternatives against each item the EMS provider will have to decide which component manufacturer to select when costing the material. There could be cost differences between the manufacturers, although typically this is marginal. Any deviations from your BOM or Approved Vendors List (AVL) should be highlighted to you. Whilst there could be further cost benefits in substituting parts for others not listed on your AVL, you need to ensure that these meet the requirements of your design team and end customer.
- Non-Recurring Engineering (NRE) charges - Examples of NRE can include the time taken to create detailed build packs through to the programming of specialist assembly and test equipment. Be wary of EMS companies telling you this is something they offer free of charge. It’s a real cost and therefore one that they need to recoup, so if they are saying that it its free of charge the question should be asked regarding how and where has it been included?
- Carriage - Similar to the above, unless you have agreed to collect the product yourselves from the EMS company, they will need to arrange (and pay for) a delivery service to get the products to you. The frequency of shipments, final destination, weight, size, special conditions etc are all factors the EMS Company will have to consider.
- Minimum Order Quantities (MOQs) - Some of the material called up on your BOM could be subject to an MOQ. The Contract Electronics Manufacturer (CEM) could be securing this material specifically for your design/contract, and will be limited in their ability to sell any excess to other customers. Depending on the likely frequency of the build, the CEM will have to decide whether to amortise the value of this excess material into your overall unit pricing or highlight it separately to you as an additional charge.
- Tooling - Drawn items such as bare pcb’s, front panels and enclosures will be subject to additional tooling charges if the CEM establishes new sources of supply. As with MOQs, the EMS providers will need to decide if they are going to amortise these costs into the overall unit price, quote separately for these, or waive them altogether.
In addition to the above, each EMS Company is likely to be offering different margin models and labour rates. So if there are significant differences in the pricing you receive back you may want to ask your EMS providers to split out the key elements i.e. material pricing, margin, labour rates and any additional costs. By breaking these out, you will quickly see where the differences are and can address these with the EMS companies further.
To save yourself further time, you may consider providing ‘ball park’ cost figures to the EMS companies as part of your RFQ pack. Details of the key cost drivers and time scales for assembly etc are probably enough to start with but by having these as a reference, the EMS companies will be able to see themselves during the RFQ process if they have an immediate area to address.
Hopefully this blog post has highlighted some of the key areas to focus on the next time you receive competitive bids back from more than one EMS Company. Now all there is to do is pick the right apple – make sure it’s a good one!
Image by Billy Wilson