Cost estimation is one of the important tasks in electronics manufacturing. In a competitive market, profits and losses are often determined by the ability to estimate costs early in new product development or for sourcing a better cost alternative from its existing suppliers.
Faced with pricing pressure and shorter delivery demands from its customers, OEMs turn to its trusted allies, the contract manufacturers (CMs), with a request-for-quotation (RFQ).
This short article looks at three factors that can affect the outcome of a RFQ.
1. Non-Recurring Expenses (NRE) including engineering service, tooling expense and production fixtures fees.
These are one-time charges that incur at the outset of a new project. Tooling and fixtures facilitate efficient production and, besides the benefit of achieving more consistent quality, tooling and associated can drastically reduce the unit cost of a certain component/product at volume production. OEMs usually pay for the entire NREs. Some CMs may agree to amortize the NREs into the unit cost of the component/product to help OEMs kick start the project.
2. Annual/Long-Term Commitment
Price is affected by quantity. Bigger quantity drives the cost lower, and vice versa. To take advantage of lower unit cost, OEMs sometimes release a long term commitment with a bigger quantity, in the form of a “blanket purchase order”, and negotiate multiple shipments in smaller quantity across a longer period. In return, CM’s agree to charge a lower unit price.
Compared to regular purchase orders which normally take care of 1 to 3 months of demands, a typical “blanket purchase order” covers a demand with shipments that may take place in 6 to 12 months, or longer.
The faster delivery the CMs can commit, the faster the OEMs can deliver its products to its customers, and make the end customers happier. However, faster delivery often comes with a cost.
Suppliers usually provide “standard lead-time” for its components/products. When the “standard lead-time” is deemed to be too long to accept, OEMs often request CMs to expedite delivery and agree to pay an “expediting premium”.
Still, even with OEMs agreeing to the premium charge, not all expediting requests can be fulfilled. To better serve its OEM customers, one way CMs respond to this delivery uncertainty is to bring such component into its factory inventory (and call it “safety stock”,) as an “insurance” against unplanned demands coming from the OEMs. As such safety stock inevitably involves some extra cost (e.g., inventory holding cost) an agreement of cost-sharing is normally agreed upon between the CMs and the OEMs before safety stock is arranged.
In conclusion, it is always best to build a relationship with your CM in order to obtain flexibility within your demands. Allowing both of you to establish mutual agreements that are financially beneficial to both when needed.