14 Apr, 2022 / BY Neil Sharp

Five reasons why free issue materials could prove more costly than you think

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Mine or yours? One prominent question always raised at the beginning of an EMS-OEM relationship is who will provide the materials. There are two possibilities: Free-issued materials are supplied and delivered by the OEM (Original Equipment Manufacturer). On the other hand, fully procured materials are sourced using the EMS provider’s supply chain, and the EMS has complete responsibility for their purchase and delivery. 

There are, of course, pros and cons of both these methods. At first glance, free issuing materials seems to save the OEM money; however, this could be a false economy on closer inspection. While it is possible to save money, any logistical issues are the OEM’s responsibility, leading to lost time and money in the long run.

Here are five questions to consider when deciding whether to free issue materials or get them fully procured. 

1. How important is maintaining control over the process?

Free issuing allows OEMs to maintain control over part or all of the component procurement process. Some organisations may perceive this as necessary, especially if it is their first time outsourcing manufacturing.

However, being responsible for materials complicates the process precisely when the objective is to simplify it by outsourcing. When you free issue material, you’re accountable for making sure all parts are genuine and available in sufficient quantities at the right time. Incorrect, damaged, or missing components cause significant delays and impact delivery times. This becomes the OEM’s responsibility, and the EMS provider will continue to invoice.  

An outsourcing partner will have perfected end-to-end processes that seamlessly merge supply chain management with the requirements of the assembly line—this is their core business. So while an OEM may not have much involvement, fully procuring materials means they have more control.

2. What are the hidden costs?

Costs are a defining factor in any business relationship, but they can sometimes prove difficult to calculate. 

There are several reasons why free issuing materials can save OEMs money. For example, buying directly from the supplier implies they won’t have to pay a mark-up on the material, meaning they only have to pay the manufacturer to build their product. They will also be able to keep abreast of the latest market pricing and control where the materials are sourced from—which could both represent economic savings. OEMs that free issue their materials may also benefit from maintaining existing relationships with their suppliers and then leveraging this buying power they have built up within the marketplace.

Yet the extra logistical burden of free issuing presents a number of challenges that can outweigh any potential savings. For instance, OEMs will need a warehouse to house their stock, which they will then be responsible for delivering to their EMS partner. With a fully procured model, the EMS takes care of the whole process. And, it is likely that the EMS also has better buying power than the OEM due to the volumes they purchase. This is particularly true for well-established EMS providers that have operated for decades.

3. How to get materials delivered on time?

For a swift time-to-market, materials scheduling needs to be impeccable. EMS providers have a better handle on this and may even have the material in the warehouse. They also have a better understanding of the daily schedule for each project and will have an established relationship with material suppliers, meaning that materials are more likely to be where they need to be when they need to be.

Material positioning is crucial for products to get to market on time. Delays in material delivery, other than being expensive for OEMs, complicate shipping dates and can affect the product’s delivery to market.

4. How to ensure the best quality products?

Experienced OEMs with longstanding supplier relationships are likely to have a great deal of knowledge about the materials they buy and be confident about their quality. Therefore, they may prefer free issuing their products to keep these same high-quality materials as part of their product. 

On the other hand, OEMs that do not have this level of familiarity with materials are not likely to want the responsibility of making quality checks. In contrast, EMS providers have many years of experience ensuring that they get the best materials, and fully procuring materials means that all the checks are made without any additional worry for the OEM.  

5. How about operating in a globalised world?

As the product and all the materials used to manufacture it are unlikely to all come from the same country, OEMs must consider the complexities of globalisation, including issues like currency fluctuations. There are, however, lesser-known problems to consider, such as importation costs. For example, OEMs trying to import materials into Malaysia must have a legal representative in the country. If they don’t, they are liable for import duty and import tax, hidden costs that will affect their profit margin.

Conclusion

Free issuing materials does offer several advantages for experienced OEMs with longstanding supplier relationships and a complete understanding of their materials. However, there are more disadvantages and potential pitfalls for most OEMs if they choose free issue over having their materials fully procured.  

Having chosen to outsource manufacturing, it makes sense to outsource as much as possible to benefit from all the associated savings, efficiencies, and benefits. EMS providers are in the business of obtaining the best prices, assuring material quality, and ensuring smooth supply chains. Allowing them to take care of everything means OEMs will waste fewer resources and achieve a faster market time. 

Outsourcing electronics manufacturing

 

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