How much stock to underwrite with a Contract Electronics Manufacturer?

If, as an Original Equipment Manufacturer (OEM), you’ve been researching the various benefits that can be gained when outsourcing to a Contract Electronics Manufacturer (CEM) you’ve probably read that one of the savings is associated with stock reduction.

When a CEM takes over responsibility for your supply chain, they take on all of the costs associated with supplier management, procurement, order processing and kitting and storage of the raw materials required to produce your products.

However, you could still find yourself liable for some stock – particularly if you require finished product to be delivered to you sooner than the total time consumed by buying the materials, the longest lead-time components and assembling the product.

The purpose of this blog post is to look at four scenarios you may be presented with and the options available to you.

Your customers are happy to wait the full manufacturing lead-time

In this scenario your stock liability should be minimal and, apart from a small number of minimum order quantities (MOQs), there shouldn’t be anything else that you need to cover in terms of underwritten material with your CEM partner.  

Your customers expect product within a reduced lead-time

It’s often the case that the majority of material lead-time resides in just a handful of component parts. Where this is the case, it’s possible to significantly reduce the overall product lead-time simply by securing sufficient buffer stocks of these parts in advance to meet the forecasted demand. Clearly each product will be different - however, from a stock liability perspective this enables a ‘liability-effective’ solution.

CEM providers with robust supply chain management will be able to talk through the options available to you, such as physically holding ‘buffer stocks’ on their shelf or drawing up supplier contracts with component manufacturers and/or franchised distribution which can be drawn upon as required.

Your customers order highly configured-to-order product which they expect within a very short lead-time 

Clearly lead-time expectations vary from market to market. Often ‘very short’ can mean around a week and this is where your stock liability could start to increase. OEMs with highly configurable products are often unsure exactly which variant they will sell until the last minute. As a result, in order to meet demand, they must be in a position to supply all of the options.

Unless all of the material is available through the supply chain within a day or so, and the assembly times are equally as short, your CEM provider will need to buy in materials and build up sub-assemblies in advance of receiving any firm orders from you.

It’s common in these instances for bespoke service level agreements to be drawn up to cover the quantities of sub levels of pre-assembled product needed to support this level of agility, the delivery parameters expected for the top level product and the value of raw materials and sub-assemblies to be held in your CEM partner’s stock or committed to in their supply chain.

Your customers expect product to be with them the next day

Clearly at this stage either you, or your CEM provider will need to hold finished product on the shelves ready to ship. Once again, bespoke agreements are typically used to manage this process and ongoing dialogue and regular business meetings between the OEM and CEM must take place to ensure that forecasted demand and stock levels remain aligned and service expectations are being met.

While a formal agreement would need to be in place in support of this model, it’s important to remember that any stock underwrite liability you have to sign up to would typically only ever need to be covered in full should the contract be terminated, an agreement lapses or your product design totally changes. In these circumstances a good CEM provider will work alongside you to mitigate the impact of any stock liabilities held on your behalf.

Sophisticated supply models are becoming increasingly popular as OEMs rely on the supply chain management capabilities and manufacturing agility of their CEM partner to enable them to respond dynamically to the ever-increasing demands of the OEMs customers.

Providing this is all managed correctly with robust control systems and processes in place at the CEM, the reduction in your stock and the various costs associated with it in terms of reduced working capital and WIP are just some of the key benefits to be gained when outsourcing to a CEM.


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Written by Neil Sharp

Neil has over 25 years’ experience in Electronics Manufacturing Services and Component Distribution. During his career, Neil has held a range of leadership positions in sales, marketing, and customer service. Neil is currently part of the ESCATEC Senior Management Team and is responsible for setting and delivering the overall Group Marketing strategy. Neil heads up the marketing department and is responsible for both the strategy and the implementation of innovative marketing campaigns designed to deliver high quality content to those seeking outsourcing solutions.