Your Guide to Total Cost of Ownership in the Electronics Manufacturing Service (EMS) World
The total cost of ownership (TCO) is a financial estimate intended to help buyers and owners determine a product or service’s direct and indirect costs. In the EMS industry, TCO refers to the overall costs factors associated with developing the product/project from the design stage to the product launch stage.
While manufacturing is one of the critical stages of the overall product lifecycle, one should decide manufacturing it in-house vis-a vis outsourcing after critically evaluating overall costs and factors. Decisions based solely on the price factor often lead to an understatement of about 20-30% of the overall costs.
Various parameters associated with EMS/PCB manufacturing which should be analyzed are:
- Capital (Machines/ Space/ Technology)
- HR (Hiring/ Sourcing/ Training/ Retaining)
- Time
- Warehousing and Logistics
- Fuel/ Freight/ Duties
- IP
- Flexibility/ Understandability
- Uncertainties (Pandemic/ Natural disaster/ Stockouts/ Political risks/ Currency fluctuations)
- Environmental factors (Sustainability/ Carbon footprints)
One should factor in all cost elements before finalizing a decision. If the in-house production cost is 5-10% more than the cost of outsourcing, one should go ahead with in-house production. Whereas, if the costs are 30% or more, one should consider outsourcing the jobs to the EMS experts.
Many companies do a fair job of understanding the six fundamental cost factors when reviewing quote options with prospective suppliers. These reviews typically include the following as noted in the below table.
| Total Cost of Ownership – Six Fundamental Cost Factors | |
|---|---|
| 1 | Cost of Goods Sold (COGS) Typically reviewed |
| 2 | Ex-works Factory Unit Cost |
| 3 | Freight and Logistics Cost to Ship to Location Air Freight versus Ocean Freight |
| 4 | Applicable Duty % |
| 5 | Initial Tooling and or Capital Equipment Costs |
| 6 | Payment Terms |
What is typically not considered are all the other factors that are equally important, but far more difficult to quantitatively analyze during a source selection process.
Every company has its own unique set of contributing factors that their will vary from organization to organization. It would not be appropriate to assume that the one size fits all approach to find TCO cost drivers should be considered before making a sourcing decision.
Each of these with the EMS partner under consideration could be viewed as either beneficial or negative depending on the situation. The intent is to denote these variables for your decision review, prior to selecting a new supplier of choice.
| ELEMENTS | ELEMENTS ASSOCIATED VARIABLES | ||||||
|---|---|---|---|---|---|---|---|
| Operation Cost | Labor Saving | Assembly Cost | Capacity | ||||
| Quality | Cost of Quality | Scrap | Customer Returns | Unplanned Downtime | Rework | ||
| Logistics | Lead Time | Supplier Managed Inventory | Warehousing | ||||
| Technological Advantage | Flexibility for New Use Technology | Long-Term Advantage | Supplier Ability to Change Technology | ||||
| Supplier Reliability and Capability | Partnering Cost | Trust | Supplier Capabilities | Suppliers R&D Capability | Supplier Ability to Grow | Supplier Support | |
| Inventory Cost | Safety Stock | Storage | |||||
| Life Cycle | Project Life Cycle | Life of Product | Cost Saving Over Life of Product | Redesign Cost | |||
| Transaction Cost | Supplier Conversion Cost | ||||||
| Initial Price | Long-Term Price Stability | Initial Capital Expenditure | |||||
| Opportunity Cost | Cost of Money | Overhead | |||||
As a suggestion, it may be appropriate to pick the elements applicable to your organization and then develop a simple quantitative grading scale from 1-5 for each element. This could provide a summary of each supplier under consideration. The higher the individual value, the better positioned the supplier is on the given element. Once done, you could sum the total value of all the elements to see which supplier is best aligned with your important supplier requirements and expectations.
However, if one considers outsourcing the jobs offshore, say to a different continent, they should also consider additional variables such as transit time, lead time, order management and fulfillment flexibility, fuel cost, freight duties, shipping costs and impact on the environment leading to increased carbon footprint.
The EMS partner under consideration should allow the customer to focus on building and managing the design of the product and help the organization to deliver the same in the market. Ultimately, these factors combine to give you full control over TCO improvement year after year.
For more information on Total Cost of Ownership, Contact VEXOS today!
About VEXOS
Operating in several locations across North America and Asia, VEXOS is a high-mix, high complexity, mid to low volume electronics manufacturing and custom material solutions provider with a proven track record of delivering high quality, custom-designed electronics manufacturing services and supply chain solutions to a diverse group of OEMs. Vexos’ early involvement in the design cycle can provide customers with a product that is more cost-effective and has increased manufacturability, quality, and reliability through its entire lifecycle. Contact Vexos: Info@vexos.com