Which Matters Most: Unit Cost or Total Cost of Supply?

Estimated reading time: 3 minutes

The primary objective for any original equipment manufacturer (OEM) is to design, manufacture, and deliver high-quality products in the most cost-effective way possible. When demand patterns change, or there is an increase in competition, it can be easy to rely on the calculation of unit cost to relieve the price pressure.

Achieving the lowest possible price is an important element of the negotiation process. But there is also the challenge of ensuring that any potential saving is going to be sustainable over the long-term—and that it doesn't come at the expense of the quality, service, or delivery of the end product.

The Over-reliance on Unit Cost

Calculating unit cost has long been the dominant price model when it comes to working out the cost of an electronics manufacturing project. Unit cost takes into account all of the “tangibles”—the fixed and variable costs, such as materials, labor, overheads, margins, etc.—and then divides this total by the number of units being produced. On the face of it, it’s a straightforward enough way for an OEM to identify their break-even point. But, as many manufacturers are discovering, choosing to base their outsourcing decisions purely on unit cost may not always reap the expected benefits in the long term.

Calculating the Total Cost of Supply

Considering the total cost of supply means taking into account all of the associated expenses that contribute to the creation of that item—from the ordering of raw materials through to the delivery to the end user. Establishing an accurate assessment of cost can often require looking beyond what’s immediately visible, and on being able to identify the indirect or less visible factors that can all contribute to the overall cost of the project. Calculating the total cost of supply is also about budgeting for the unknowns—being prepared for the fact that things don’t always go to plan, and that there may be additional inter-departmental expenses, such as travel, administration, extra supervisory time, etc.—that may not be directly visible, or accounted for, in the P&L.

The Maturing OEM/EMS Relationship

In more recent years, there has been a greater realization among U.K. electronics manufacturers of the relevance of total cost of supply rather than purely the calculation of unit cost. And according to the findings of the latest U.K. EMS Industry Report 2016–2022, published by Reed Electronics Research, many EMS providers are seeing that their own customers are becoming more receptive to the concept. A contributing factor in this shift of focus is believed to be down to the deepening relationship between OEMs and their EMS partners—and particularly as the role of EMS provider moves from one of purely sub-contract manufacturer to that of design and manufacturing expert.

Reaping the Benefits of Value-added Services

An experienced EMS partner is often best placed to offer an OEM a range of value-added services, such as problem-solving, assembly, packaging, kitting, warehousing, etc., that can all help reduce the time to market, improve productivity, and save the manufacturer money over the product’s lifetime. By choosing to involve their EMS provider much earlier on in the project, OEMs can also draw on their manufacturing partner’s extensive knowledge and experience when it comes to areas, such as board design, product functionality, testing efficiencies, or through-life product services.

As the U.K. EMS Industry report highlights, EMS are designing and manufacturing a diverse range of products and their level of expertise is constantly evolving and growing. By harnessing their EMS provider’s knowledge of new design protocols and manufacturing techniques and processes, OEMs can ensure they stay at the forefront of efficiencies in electronics assembly.

Neil Sharp is the director of marketing for JJS Manufacturing.