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Cost Reduction Benefits of Electronic Manufacturing Service (EMS) Providers

ems OEM companies can achieve cost reductions by outsourcing manufacturing to contract manufacturers, EMS providers, or original design manufacturers (ODM) who offer a wider array, or more specialized supply chain services than the OEM themselves. While there are many criteria to consider when making outsourcing decisions and selection of manufacturing partners, cost reductions/savings is often near the top of the list. Some of the other key factors are:

Capabilities and Volume - Contract Manufacturer’s can pass through cost reductions to the OEM by virtue of serving multiple OEM customers simultaneously. By servicing multiple OEM customers and programs, the CM can lower their cost of doing business by increasing capacity utilization and material cost reduction through supply chain efficiencies.

Geography – the Contract Manufacturer can pass along additional outsourcing reductions by operating in less expensive geographies. While labor and overhead drop in lower cost regions (as compared to North American and Europe), one must also be aware of any increased freight for movement of completed product to final end-market destinations.

Design for Manufacturability Services – Other commonly overlooked benefits of EMS providers is their value-add specialization for electronic assembly, such as

  • Assembly efficiency (component location to improve solder reflow or other processing such as cleaning or test)
  • Utilization of lower-cost, equivalent, components.

Supply Chain Logistic Efficiency – Contract manufacturers with mature relationships with vendors who provide quality materials, shorter lead time and reduced costs for inbound materials.

A simplified example of the cost of doing business for OEM manufacturing is:

OEM Internal % Estimated CM,
Materials 76 68 11%
Labor 4 1 75%
SG&A 6 2 67%
Finance 2 1 50%
Freight 4 4 0%
Overhead 48 4 50%
EM Profit 0 4 50%
OEM Cost 100 84 16%