Unit Price vs. Total-Cost Benchmarking
With persistent industry emphasis on dual-continent, low-cost region manufacturing; constant price pressure/margin erosion; environmental initiatives such as RoHS, REACH, and Conflict Minerals; duty/taxes/brokerage fees; post-9/11 security-related transit fees; fluctuating fuel costs; and an uncertain political environment with respect to global manufacturing, electronic manufacturing services (EMS) providers continue to be confronted by an abundance of difficult challenges.
Despite these numerous complex global manufacturing and sourcing challenges—and the many potential pitfalls they can lead to if not closely and effectively managed—OEM supply chain managers and purchasing agents often use unit price instead of total cost to drive sourcing decisions for cable assemblies, wire harnesses, and box builds.
In such a complex and challenge-rich global environment, an approach that is focused solely on unit pricing does not tell the whole story and opens the door to missed goals and other unintended tangible and intangible consequences (especially in the technology value-add sector).
Cost-Contributors that Impact Your Bottom Line
Other cost-contributors blur the lines and can be difficult to quantify, but you can be sure of one thing—they negatively impact your bottom line. These cost-contributors include:
- Remediation of long lead-times
- Rising freight costs
- Missed commitments/poor quality and recovery
- Possible resulting negative impact to company/brand reputation
- Increased demand on internal resources
Unit Pricing Oversights
Increased lead-time, cost of freight, and volume inflexibility are a few common oversights when using a global benchmarking model based solely on unit pricing.
The lack of focus on present and future strategic supplier alignment specific to technology; capabilities; solutions; new product introduction (NPI) and design/engineering support; design-for-manufacturability (DFM); comprehensive design-driven, total-cost optimization; quality; and sustainability are also common oversights when using unit pricing to drive global sourcing decisions, which can prove particularly problematic and limiting over time on several levels.
Negotiated yearly cost incentives can prove ineffective, divisive, and ultimately unsustainable. The supplier may have simply front-loaded the GPM to compensate for the negotiated yearly cost reductions to avoid margin erosion, which can actually result in inflated cost to the OEM rather than a cost reduction.
A given product manufactured in Asia may appear, at first glance, to be significantly more competitive than North America manufacture (U.S. or Mexico) when solely comparing unit pricing, but depending on how the following variables and associated costs are controlled and captured, and how transparent the supplier is with you regarding these variables, it may be a much closer total-cost comparison than you first thought. In fact, if these variables are not being closely controlled, reported and analyzed, you may actually be adding to your total cost instead of reducing it, while causing a lot of pain and noise to your organization. Depending on volume and other considerations, any one of these variables or any combination thereof has the potential to wipe out a whole year’s worth of anticipated low-cost region savings.
13 Variables to Consider When Making Sourcing Decisions
- Your pipeline and customer tolerance to the longer sea freight lead time and the unexpected cost of occasional or frequent air freight to compensate for the lead-time gap
- Point-of-entry vs. point-of-consumption (cost of local freight and impact to lead-time)
- Fees: entry, duty, tax, brokerage, post-9-11 security, etc.
- Cost of insurance on goods shipped
- Shipping terms: landed freight vs. FOB point vs. ExWorks point, etc.
- Increased packaging costs
- Costs and risk associated with identifying, qualifying, and maintaining a direct off-shore supply partner vs. working with a highly capable local supplier with extensive off-shore capabilities and support model
- Volume inflexibility/cost of excess goods
- Cost of direct labor to break down palletized sea freight shipments
- Cost of increased internal resources to manage logistics
- Complications and associated shipping costs resulting from customer furnished materials and tooling
- Fluctuation of currency exchange rates
- Cost of missed commitments and poor quality and recovery (monetary and reputation)
Bridging These Gaps
To bridge these gaps, you need an electronic manufacturing services provider that can assess your needs and objectives and recommend the most effective manufacturing solution with emphasis on optimizing your total cost, quality, and lead time—which is the true validation of your sourcing strategy.
Fourstar is a premier ISO 9001 certified, ITAR registered “solutions-focused” EMS partner celebrating our 30 year anniversary in 2017. Our core competencies include turnkey box build, electro-mechanical assembly, custom IPC-620 Class 2 and Class 3 cable assemblies and complex wire harnesses.
We offer highly capable local (Hudson, MA) and dual-continent (Mexico and China) lean, low-cost, fully scalable manufacturing capabilities. We have a deep understanding of global manufacturing and can help you achieve your cost reduction initiatives through intelligent automation-focused design, optimized sub-assembly structure, improved efficiency, and effective management of inventory, supply chain, logistics, and variables.
Fourstar specializes in new product introduction, design-for-manufacturability, engineering services (CAD, Solidworks), total-cost optimization, and time-to-market proficiency. We help you navigate DFM and manufacturing challenges with innovative solutions, reducing labor and cost while increasing quality, reliability, and product performance.
If you are thinking of reshoring, you might be interested in our informative eBook, “Reshoring Manufacturing for Custom Cable Assemblies and Box Builds” that walks you through all the variables you need to evaluate when considering reshoring manufacturing. Download the eBook now.