4 Questions OEMs Typically Ask When Outsourcing

Neil Sharp, JJS Manufacturing | 11-08-2018

The decision to transfer your electronics manufacturing to an EMS company is a complex process, with the potential to impact your business, your staff, your customers and your suppliers in a multitude of ways.

In this article, we highlight four questions original equipment manufacturers (OEMs) typically ask prospective contract manufacturing partners when they first start engaging with them—and we offer our take on the answers.

Will Outsourcing Reduce the Unit Cost of My Product?

Unit pricing is always a hot topic, and especially in the early stages of negotiation between an OEM and a prospective manufacturing partner.

Sure, your EMS company could well be in a position to negotiate better deals on common components shared across multiple customers. But, for bespoke or low volume items, they're likely to be paying a similar price to you.

Although it's tempting to focus on unit pricing, it's often the deeper layers of cost reduction (such as reductions in capital expenditure on equipment and facilities) that can offer more benefits in the long-term.

Much depends, too, on the volumes and life-cycle stage of your product. A highly bespoke, "mature" product may offer less opportunities for cost-savings, whereas a newer product that consists of a high number of components and that is produced in low volumes could provide your contract manufacturer with greater cost-saving potential.

Will I Save Money by Using an Offshore Facility?

The answer to this question could well be "Yes," with offshoring offering the potential for reduced assembly rates and centralized sourcing of materials.

But it's highly unlikely that a prospective EMS partner will be able to provide a definitive figure until they’ve established a clear understanding of the nature of your design and of the complexity and stability of your product.

Other key considerations in choosing to take your manufacturing offshore will be the manual hours required to build the product and your estimated monthly build volumes. The location of the end user and how frequent the EMS company is expected to ship will also play a part in determining how much value an offshore facility will really add.

Should I "Free Issue" Material?

On the face of it, free issuing material to your EMS company may appear to offer some advantages. You're not paying a margin on the material, or a mark-up to an assembly house. You retain your buying power and keep up-to-date with market pricing and legislation. You control where your materials come from. And you maintain relationships with existing suppliers.

But it's also worth bearing in mind the potential downsides to free-issuing and the reality that there may well be hidden material costs that you'll have to account for.

OEMs who choose to free issue will need to manage, train, and invest in procurement staff. You’ll be responsible for monitoring and reporting on supplier performance. You’ll need processes in place to resolve any material queries. You'll be vulnerable to currency fluctuations. And you could well be financially liable for any problems that impact on your EMS partner’s production times.

Would You Recommend I Dual Source to Spread My Risk?

The decision to dual source has both pros and cons. And much comes down to how much confidence an OEM has in their EMS partner.

Many buyers feel instinctively more comfortable with the concept of spreading their risk. But it's also important to consider the issue of scalability (i.e. how quickly the supplier can ramp up production when you need it); the supplier’s competencies (do they excel in everything or do they have a sweet spot?); and how proficiently they can handle unexpected challenges to their supply chain.

There are many reasons why an OEM might choose to outsource its electronics manufacture—whether to reduce operational costs, to take advantage of closer collaboration or to allow more time to focus on what they do best.

Knowing which questions to ask, and how to prioritize the answers, can make the difference between a successful, long-term partnership with your assembly provider and one that fails to deliver any tangible benefits.