How to reduce manufacturing costs - with the help of your outsourcing partner

When you first partnered with your Electronics Manufacturing Service (EMS) provider I’m guessing that unit pricing was an important issue to you?

Whilst cost is only one of several factors you should consider when selecting an EMS company, it remains an area that is closely scrutinised in any outsourcing decision. And once you have selected a partner that you trust, and agreed the service level parameters you need from them, cost - and specifically cost reduction - is likely to remain an on-going agenda item during your discussions.

But if your product has been manufactured using the same materials and process since inception, how and where do you squeeze out additional savings without compromising quality? 

Lessons from the past

The world of outsourcing manufacturing has changed in the last 40 years. In the 70s and 80s electronics contract manufacturing became a byword for cost-cutting. ‘Made in Taiwan’ and ‘Made in China’ were labels that heralded low prices but often flimsy and short-lived products. Many OEMs chased ever-lower unit costs from these producers to increase their sales and margins, while fuelling a consumer frenzy for ever-cheaper goods. They needed to lower their cost per unit, and often didn’t care how their suppliers’ did it. But times have changed.

Why Modern OEMs and EMS providers must take a different approach

Pushing EMS providers for ever greater savings can end up being counterproductive, particularly in markets driven more and more by a desire for performance and durability. Short-term cost-cutting on quality rarely adds up to long term, strategic savings when customers can easily share poor product experiences on social media and there is new sensitivity around sustainability and good ESG practice.

Value Analysis and Value Engineering (VA/VE) explained for OEMs

How to achieve lower unit costs - sustainably

If you want to achieve lower unit costs in a sustainable way, you need to have a strategic and open collaboration with your manufacturing partner. Only when everyone involved in the design and manufacture of the product takes a holistic and ‘value engineering’ approach to per-unit cost production - will you begin to see long-term cost reduction benefits emerge that won’t threaten 

6 tips for working with your supplier to reduce per unit costs

1. Assemble a dedicated team

For the best results your CEM partner should create a cross-functional team, so that a variety of ideas and experience can freely exchange during the brainstorming stage of the exercise. Typically, this team would include production operatives, engineers and purchasing staff. It’s likely that your own internal contact will also become the project ‘sponsor’, so they can discuss the progress and initial findings with you. If you originally nominated suppliers on the key cost drivers that make up a significant proportion of the overall cost, then your CEM provider is likely to want them to join the project team also.

2. Agree the baseline cost

In order to really focus the team in the right areas, your CEM provider will need to establish the current raw cost figures. Over time, it’s likely that costs have fluctuated both ways, so before any cost reduction exercise begins it’s important to break out the current material costs, labour content and any handling margin or charges applied to each of your products. Experience suggests that 80% of the overall cost for any electronic or electro-mechanical product resides in the materials so it makes sense for this to be the first area your CEM provider pursues.

3. Analyse the material costs

The next step is for your CEM partner to break out these material costs further. It is recommended that the materials are grouped together, for example, machined parts, sheet metal, bearings, cables, electro-mechanical parts and electronic components, etc. Once separated out, a value and percentage of the overall material cost can be allocated to each subset; this enables the team to focus on the right areas. There’s clearly little benefit in looking at, for instance, cables if these make up less than 1% of the overall cost, when there are bespoke machined parts that make up 30%.

4. Use a fresh pair of eyes

Your CEM provider should physically lay out all of the constituent parts that make up your product. Each of these should be clearly labelled and then grouped together in material sets. This simple exercise can immediately start to produce powerful results. For some members of the project team this could be the first time they have physically seen all of the materials used in your product. As an example, it may become obvious to the purchasing members that there are very similar parts within the product that are currently sourced from multiple vendors. Or else, it may be clear there are subtle differences in material specifications which, if standardised, could realise potential cost savings.

The team should be encouraged to review the parts in front of them and make suggestions (no matter how bizarre they may sound) as to ways the cost of the bought in parts might be reduced. All thoughts and suggestions should be written down - flip charts and post-it notes work well here. The point of the exercise is to simply capture all of the thoughts of the team, not to debate or dismiss them at this stage.

A similar exercise should then be carried out for the labour content of the product; this time, the team should examine the production process, and talk to the operators about their views on achieving process efficiencies. This should also extend to functions outside of the actual build, such as test and logistics, where there are often opportunities for ‘time stealing’ activities to accumulate over time.

5. Take time out to reflect

Once both the material and labour exercises have been completed, the notes compiled by the project team can be worked on. A number of trends are likely to start to emerge so your CEM partner should look to group these into categories. Example categories may include:

• Materials - are there any potential savings associated with how and where the materials used within your products are sourced?
• Design - are there any potential savings relating to product design or material specification? Make sure you have a partner who thinks about DfX (design for excellence) in everything they do.
• Process - are there any potential labour efficiencies to be gained through changes to the manufacturing process?

Looking at each category in turn, the team can then decide if the ideas have merit and can be taken forward. Any suggestions that the team feel should not be taken forward, for example a request to change material specification which has previously been rejected, should be discarded so that those remaining can form the beginnings of a SMART action plan.

6. Turn notes into SMART actions

One of the most important stages of any cost down initiative is to turn the ideas and suggestions into actions. Your EMS provider may find that they are able to make some changes immediately, such as those relating to their internal production line process. Others however, like design changes, will of course need your input and approval first. It would be the role of the team sponsor to assign specific actions to the relevant team member, progress them internally, and then keep you, the customer, abreast of the outputs along the way.

So, there you have it, six steps that your CEM provider should take when approaching cost down exercises on your behalf. Whilst some Original Equipment Manufacturers (OEMs) feel it necessary to set year-on-year cost reduction targets for their EMS providers, it’s important to make sure that this doesn’t drive the wrong type of behaviour and start to impact on the integrity of your product. 

But there will always be another company that say they can manufacture your product cheaper. But that’s not always a good thing. John Glenn, the first American to orbit the Earth, wasn’t convinced about the wisdom of chasing savings when it came to space travel: 

‘As I hurtled through space, one thought kept crossing my mind - every part of this rocket was supplied by the lowest bidder’.

Be strategic and not knee jerk

Any cost-cutting exercises you undertake need to be strategic and not knee-jerk.  The right EMS partner will use formal value engineering and other tools to ensure that you are spending your money wisely and finding new efficiencies and savings wherever possible.

But in our opinion, it’s vital that product quality and service delivery remain just as high up on the agenda when conducting your regular business review meetings with your EMS partner.

For more information on How to reduce manufacturing costs - with the help of your outsourcing partner talk to ESCATEC Mechatronics Ltd