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The Hidden Costs when Outsourcing your Electronics Manufacturing
November 25, 2016 | Neil Sharp, JJS ManufacturingEstimated reading time: 3 minutes
When you outsource your manufacturing operation to an electronics manufacturing services (EMS) provider, you expect to reap the benefits of your decision. Ultimately, you gain back more time to focus on designing, marketing and selling your products – and you also enjoy access to your partner's contacts and expertise. But, of course, you also expect the financial side of your partnership to be rosy too.
There's a lot of truth in the saying, "you get what you pay for" – so it's important not to skimp on price when selecting a partner. Equally, you need to remain competitive. So, when you're comparing quotes from EMS suppliers, how do you find the right fit for you?
In fact, the most attractive quote may not be all that it seems because there are a number of "hidden" costs that are often overlooked. So how can you make the best choice when outsourcing?
Unit Cost Versus Total Cost
When you work out the price of an outsourcing project based on the unit cost, the picture can prove particularly favorable. Unit cost is calculated by working out both variable and fixed production costs and then dividing the total by the number of units produced. This figure encompasses tangible costs such as material, labor fees and margins, making it easy for you to identify your break-even point.
However, this method does not accurately reflect the total cost of the project, which could be far higher.
According to The UK EMS Industry Report 2013 - 2018, carried out by Reed Electronics Research: "The issue of price reduction has moved to the very forefront of OEM's requirements from their EMS supplier. The total cost of a project is important and in the past there have been many instances whereby an OEM has negotiated a low unit price for a particular electronic assembly, only to see significant costs build up, and be argued over, as problems in the low cost location have developed.
"[…] Rationally, the OEM would be considering the full cost over the lifetime of the product and that would include some measure of budgeting for things that go wrong, and the amount of supervisory time that they have to allow on the project. In reality, the unit price becomes the focus because it is visible."
Giving yourself a buffer zone, so-to-speak, allows you to calculate the cost of your initiative far more accurately. And then you're not thrown when hidden costs rear their head.
Furthermore, the best EMS suppliers will be able to offer you a range of value-added services that mean you recoup costs elsewhere. For instance, they may offer advice on how to make a certain process more cost-effective; or they may offer "through-life" or "end-of-life" services, which involve them taking ownership of product repairs or refurbishments and servicing a product as it moves through its lifecycle.
Having taken all these factors into consideration, you will be able to paint a far more realistic portrait of the financial implications of your outsourcing project.
Comparing Apples with Apples
When choosing between EMS providers, it's crucial to ensure that you are comparing like with like. For example, if one supplier offers you a lower price, but only has the capacity to manufacture X amount of products, it's not realistic to compare them with a supplier who offers you a higher price but has the capacity to grow with you as and when demand increases.
Finding out further down the line that your chosen partner is not a good fit after all is a situation you really want to avoid – and one that sees additional costs accrue.
As with any business endeavor, outsourcing your electronics manufacturing to an EMS supplier means weighing up the costs involved. However, it's not simply a case of finding the partner who offers the lowest unit cost. It's essential to take into account the bigger picture; to keep an eye out for hidden costs and value-added services; and to assess each potential partner on a level playing field.
This article originally appeared on the JJS Manufacturing blog which can be found here.
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