When breaking down the unit cost of any product, in many cases the 80/20 pareto principle applies. Up to 80% of the cost is made up from the materials and the rest comes from the labour needed to assemble it. If you are an Original Equipment Manufacturer (OEM) looking to outsource to an Electronics Manufacturing Services (EMS) partner, you have some decisions to make.
Most Contract Electronics Manufacturing (CEMs) partners will offer you two solutions. You can either continue to buy the materials and then ‘free issue’ these to your supplier or let the contractor procure the items on your behalf. There are pros, cons and costs associated with each route. To help during your decision-making process, here’s a simple to follow list you can work through in order to determine which direction is best for your business:
Pros of free issuing material to an EMS company
You don’t pay the assembly house a mark-up or margin on the material.
You, therefore, only pay the CEM for the labour needed to build your products.
You retain the buying power you have built up within the market place.
You have control of where the materials are sourced from.
You keep up-to-date with the latest market pricing, availability and legislation.
You maintain existing relationships with your suppliers.
Cons of free issuing material to an EMS company
You need to manage, train and potentially invest in additional procurement staff.
You are responsible for setting up new supplier accounts and negotiating payment terms with them.
You need to manage and report on existing supplier performance.
You will continue to raise, approve, send and expedite purchase orders.
You have to manage, train and potentially invest in additional logistics/warehouse staff.
You remain responsible for the integrity of incoming material.
You will need processes in place to resolve material queries.
You need to account (both financially and in terms of space) for excess stock i.e. MOQ issues.
You have to recycle waste packaging.
You need to store, protect and insure the material.
You are accountable for the cost of any material damage.
You will need to arrange outbound couriers to deliver materials to your assembly house.
You could get charged by the EMS company for any issues impacting production times.
You are exposed to currency fluctuations.
You will pay the assembly house a handling charge (margin) on the material.
You are unlikely to realise all of the benefits associated with outsourcing.
So there you have it, in a nutshell, the pros, cons and costs associated with free issuing stock to an EMS provider.
When you start looking in more detail, you may find there are a number of other hidden material costs which also need accounting for. Whether you are considering outsourcing for the very first time or looking to change suppliers, it’s important to be clear from the outset how you plan to manage such costs.