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Best-Practices for Managing Material Costs, Part 2

Many OEMs use the same EMS provider for the same assembly for years. The startup costs in tooling, non-recurring engineering charges, and the actual manufacturing learning curve make for a substantial investment. It also takes time to build cohesive communications between the two organizations. Therefore building a long-term relationship with a provider is essential. It's well recognized that there is a significant amount of time and cost associated with changing EMS providers.

However, staying with the same EMS provider makes it necessary to measure the success of targeted cost reduction goals and verify pricing each quarter. With the frequent price fluctuations in the electronics industry, OEMs can erode their profit margins if they don't continually check the market themselves and actively manage their existing EMS providers.

An open system management (OSM) solution can expedite quarterly cycles to ensure that OEMs capture cost reductions as early as possible on components whose prices are trending downward. To begin the quarterly costing cycle, the OEM and EMS provider need to update and validate the details related to the bill of materials (BOM) structure. The OSM should facilitate the sharing of current BOM structures to make sure both parties have the same component revisions and AML data. Sharing and standardizing the assembly data in a collaborative online workspace makes it easy for both teams to edit, comment, and ultimately agree upon the current structure.

There are several other challenges associated with managing these quarterly cycles. For example, there may be multiple prices for a single component. This can occur because OEMs and EMS providers “split” purchases between two or more suppliers and/or “split” overall demand across two or more approved suppliers for the same component.

Once the BOM structure is locked in, the OEM and EMS provider can begin sharing pricing data. In the electronics supply chain, there are multiple sources of pricing data, which makes it hard to know which source data is the best and most accurate. The OEM and EMS provider have contract pricing, past purchase order (PO) pricing, request for quotes (RFQ) pricing, and more to sift through. EMS providers often buy off of the OEM's supplier contracts, adding another layer of communication and validation.

Sometimes the EMS provider may request the OEM contract pricing, but the supplier doesn't honor the price. So these pricing discrepancies need to be highlighted and resolved. OEMs and EMS providers usually try to share pricing data using spreadsheets. This is extremely challenging when managing multiple BOMs with hundreds of parts in them. Spreadsheets can contain thousands of line items. Using pivot tables, vertical lookups, filters, formulas, sorting, and other spreadsheet features can produce inaccurate results, damage data, and consume valuable time. Using an OSM system, the OEM and EMS provider can upload their pricing data and let the system filter through it to zero-in on best pricing. The system can also facilitate an online negotiation process to drive toward the best price.

After the component pricing has been locked in, the other pricing factors can be validated and renegotiated. Capturing current labor rates is usually the first step. Then the EMS provider may enter actual labor process times from the last quarter's production cycle and make adjustments if significant discrepancies between estimated and actual process times influence pricing.

After the labor cost is derived, other markups such as overhead and profit margin may be layered on the cost model. This can be very complicated, because these factors can change for each assembly, manufacturing facility, and forecasted quantity. An OSM system can help by allowing the OEM to create “templates” that standardize the way bids are submitted, at the level of detail the OEM desires. The result is an easier, faster, and more consistent way of evaluating the competitiveness of the bids and their progress toward the targeted goals.

Another variable affecting total cost is splitting the manufacturing of an assembly across multiple regions or sites. OEMs select multiple facilities to reduce logistics charges, speed time to market, and take advantage of tax incentives in certain countries, among other reasons.

The enterprise OSM system must be able to manage and normalize multiple currencies across multiple worldwide regions. Currency fluctuations need to be considered when determining the manufacturing facility. Currency adjustments need to be made to keep the product pricing accurate and to adjust margins if necessary.

Upon completion of the quarterly costing cycle, the final price for each component and assembly must be “pushed” into the ERP systems of both the OEM and the EMS provider. This ensures that purchases made throughout the coming quarter are executed according to the newly agreed-upon pricing and that any purchase price variance for that period is minimized. Pushing this data can be done through manual exports as well as automated application integration.

2 comments on “Best-Practices for Managing Material Costs, Part 2

  1. Daniel
    July 6, 2011

    Linda, in a competitive and business oriented world, sticking to a particular vendor or EMS is not at all advisable. Diversification is a better way, which opens different doors to different vendors and EMS. Hence you can a better purchasing power too. Trading currency also matters much because we know the economic situations are changing. Before the introduction of Euros, all trades are happened on unified transactions of Dollars. Now the scenario has changed, many are trading with Dollars, EU with Euros, China with their own currency etc. Since trading is happening across countries or continental, one should have a reserve for all types of such currencies. The best part is they can have a better control over different currencies and have a inflation free trade.

  2. Linda Elkins
    July 6, 2011

    “…sticking to a particular vendor or EMS is not at all advisable.”   Generally speaking, I agree.  However, in cases where this is a high switching cost due to a large investment in equipment and tooling, low volume high mix models, or stringent   regulatory certification requirements, multiple EMS sourcing may not provide a worthwhile ROI.  Thus, this article addresses what an OEM in that situation can do to assure they are achieving competitive costing.    

    Part 1 of the article, published in EBN on 6/28/11, addresses the scenario of multiple EMS providers bidding on an OEM’s business and how the OEM can simplify the daunting analysis of the sourcing alternatives.

    You are right on the money; regarding the need for a sophisticated approach managing the various currencies associated with suppliers bids.  It’s critical that an OSM system easily handle bids that are submitted by the supply base in a variety of currencies and store the historical quotes in the native currency.  Furthermore, the OSM system must easily normalize the multiple currencies for the final product costing roll up.  The added cost of doing business with less favorable currency conditions should be accounted for through total cost of ownership (TCO) factors attributed to the financial burden inherent with that source.

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