Effective Request-for-quote (RFQ) Process For Contract Electronics Manufacturing

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How do you differ from similar, low-cost providers serving identical markets?

How can I be certain our program tooling will be designed to specs?

What IP security do you have to protect my product?

How do you manage cost reductions? How do share ongoing savings?

What alternative to China manufacturing do you offer to enter Asian markets?

Can you reassure me key program personnel won't be pulled elsewhere?

Is all activity performed in-house or do you sub-contract some portions out?

Any significant impact on a manufacturer’s profitability can result in many outcomes, including missing quarterly forecasts, declining stock price, layoffs, and closure.

The manufacturing request-for-quote (RFQ) phase, sometimes called request-for-proposal (RFP), is important to any manufacturer. The RFQ process is an important cornerstone when working with suppliers and vendors. How you manage the RFQ process sets the tone in the supplier relationship.

Managing RFQ expectations early, with the right tools, processes and procedures, helps lay the groundwork for how your company is positioned, and perceived by electronics solutions providers, when negotiating pricing (your cost).

The ever-changing contract electronics services landscape

The hyper-competitive contract electronics manufacturing services (EMS) industry is undergoing changes and always facing new challenges. Whether the electronics solutions provider is EMS, CM, CEM, ODM or JDM or a design house, technology understanding in contract electronics solutions industry is typically 18 to 24 months behind technology understanding by their OEM prospects and customers.

And while sourcing electronics services saves OEMs costly investment in manufacturing plants, property and equipment costs (P,P&E) and can drive more, and faster ROI, vertically integrated solutions providers have higher fixed costs than providers not vertically integrated, and both are constantly facing rising costs for obtaining capital amid challenges servicing revolving lines of credit common in industry.

As providers take on more leverage, higher costs are passed on to customers.

To help combat eroding margins and the possibility of losing customers some providers focus on identifying serving faster growing end market with higher margins.

Non-traditional electronics industries typically offer EMS providers better profit margins. These include automotive electronics, industrial electronics and robotics, medical electronics, avionics and aerospace, and military and defense electronics, to name a few. Part of the reason for this is certifications and supply chain redundancy costs, combined with more value-add engineering and higher configuration effort needed. More on this is explained in this 30-page handbook for OEM decision makers launching new products and NPIs, which you can request here.

But no two solutions providers are the same. Each factory has its own cost basis (staffing, overhead…), its own circuit board assembly line and work cell distinctions we call workstations. You may have heard the term digital twin, whereas solutions providers state that both locations/factories have exactly the same assembly processes and lines in place. But this is deceiving.

Every workstation, which is a portion or stage of the entire production process, contains its own labor costs. Costing for both direct labor and costly indirect labor is covered, F,G&A, S,G&A, and even commissions are rolled in, in some cases, into a workstation.

Each workstation also has a set of further defined variables, like depreciation equipment value and a lot of other cost centers important to manufacturing finance and teams in office of program management and how EMS providers determine their internal costs will influence your quote pricing for your programs.

Every labor type is also important to understand for a particular location and geography such as how, and where, labor is added to the EMS manufacturing quotation process. And more importantly, where it should not be added.

From our experience, over assessment of thousands of price quotes issued by EMS providers, this is where lines become skewed: where there’s value-add and, non-value-add labor, that is often included and rolled into quoted pricing for EMS program.

Contract electronics production locations can also have currency exposure and related issues, based on geography and local currency. You’ll see bill-of-materials (eBOMs and mBOMs) quoted across different currencies; from euros to dollars to pesos to đồng… So, normalizing Forex variables within your program quote is also extremely important, not only for budget forecasting and comparing your program total landed cost with other quotes (apples-to-apples) but also EMS provider cost of capital and operating input costs. All of this should be reviewed in detail before contract negotiations begin. You can review the various types of contract electronics service level agreements here.

For years Venture Outsource has been helping OEM companies, as well as private equity, venture capital and limited partner firms, to better understand costing of contract electronics solutions and fees. Due diligence discovery vs disclosure. Based on our experience, it’s common to find gaps between service capabilities claimed by solutions providers, and reality.

We find even wider gaps between internal costs solutions providers claim are needed to service customer programs (quoted pricing) vs actual cost. And we regularly find annual spend savings of 5% to 15%+ run through both our Compendium, and Enterprise-level, cost modelers. The difference between both versions of our costing modelers can be found, here.

The above is only part of a much bigger picture. Long-standing RFQ procedures and practices were never a huge success. This is based on industry analysis of 5,000+ different programs and provider-prepared pricing quotes. Procedures, systems, and tactics previously utilized in the RFQ cycle management process are archaic as internal costs inside contract electronics solutions providers become more obfuscated.

In nearly every OEM company RFQ engagement leading to signing the contract service level agreement, the OEM customer ended up paying considerably more for total landed costs than they should have.

The takeaway is electronics OEM decision makers can no longer approach their contract manufacturing proposals and quote requests and run their RFQ cycle ‘as usual’.

So, what should these changes to the contract electronics RFQ phase look like?

We must discuss new procedures, new thinking, and new strategies in your RFQ cycle. Additionally, discuss common-sense ideas specific to your current RFQ practices that will assist you creating a more sound foundation in keeping contract electronics solutions providers on their heels, ensuring fees paid for contract electronics services are reasonable and your total landed cost for your program is what it should be.

Although it is impossible to review every important point of the RFQ cycle process in this article, we will touch on several. We offer this consulting service based on our experience and proprietary framework evaluating solutions providers and improving manufacturing RFQ processes.

Contract electronics RFQ best practices vs common industry practices

Venture Outsource begins its RFQ cycle and process analysis here. We conduct a complete manufacturing RFQ system assessment.

It is crucial that all of this information is accurate from the start. Knowing where holes are in the RFQ processes, errors are made, and how to root-cause and resolve these issues is a top priority. As a result, Venture Outsource offers a more thorough and beneficial assessment result than our competitors.

We begin with talking with you and learning more about your manufacturing program specs and sourcing and business objectives. We then evaluate your current functional group staffing and experience supporting your contract electronics programs, processes and flowcharts, forms and procedures.

Many OEMs typically decide which solutions providers to contact based on colleague recommendations or in-house research. The purpose of our service is to remove subjective influences. Whereas, our assessment results in a list of potentially suitable electronics solutions providers matching your program and business requirements using our proprietary framework.

We then advise how best to prepare your company for provider engagement, and we convey effective knowledge to you about suggested internal functional group staffing (and roles and responsibilities), and training to ensure OEM manufacturers absorb the information needed for smooth processes among functional groups (e.g., finance, purchasing, planning and scheduling, program management…) supporting your EMS manufacturing programs. Where possible, we recommend OEMs hire process engineers with deep industry experience working in contract electronics industry. (See Flowcharts and workflows)

Doing this effectively lays the groundwork for expectations about provider obligations. The above is completed before first contact with potential solutions providers.

If there are ineffective RFQ procedures and actions in the future, there should also be a system to flag these along with a protocol in place, enabling functional groups to work together and communicating more effectively to ensure gaps are closed.

A little time and effort spent upfront will produce greater efficiency and better outcomes down the road. At Venture Outsource, we also provide certified education and documentation services that further upgrades your contract electronics services RFQ system.

Creating a list of potential contract electronics providers

Venture Outsource has knowledge and experience from 1000s of detailed discussions with OEM sourcing decision makers working in various industries and product markets. Knowledge about challenges these companies face with their providers plus ways those challenges were overcome.

In most instances, we fount RFQ systems management was not aligned with OEM manufacturer finance and business analyst targets and desired outcomes.

RFQ cycle practices and administration are outdated. Yet, RFQ practices are still implemented without knowing how they will affect the OEM’s budget, planning and forecast, and program total landed cost. As Venture Outsource founder and lead consultant, Mark Zetter, has always said, “We help clients see the broader outcome – connecting the dots between their decisions and their consequences.”

Because of the revolving door nature of employment and hiring in contract electronics industry among solutions providers, we found common tactics and behaviors among sales, business development and marketing functions in industry. Additionally, their quote pricing response to OEM RFQs is also comprised of inaccurate calculations supported by outdated systems and methodologies – as many OEMs continue to share complaints and their experiences with Venture Outsource.

Let’s discuss what RFQ practices should look like. But before we do this, none of this matters if you are considering solutions providers not aligned with your business and program requirements.

Generally speaking, OEMs want solution providers, suppliers and vendors suitably located, with experience in the OEM’s industry, and experience with OEM technology. Venture Outsource has built a comprehensive directory of contract electronics solutions to help you get started.

Invite the right contract electronics providers for first meetings

Venture Outsource has a long history building trustworthy relationships with OEMs gathering information and formulating electronics solutions plans of action, thus creating a rich, constantly updating range of information impossible to obtain elsewhere from one, single resource. Access to this non-public information is exclusive to our OEM clients and this helps you find top quality providers that could not normally be discovered anywhere else.

What makes some providers more flexible than others when negotiating contractual terms? Which providers are known for meeting more shipping commitments than they miss? Which providers are losing customers? If so, why are customers leaving? Which providers have long histories meeting schedules and commitments and delivering on terms they agree on? How well does the provider do managing their own business? Several questions to help you dig deeper about internal provider business administration can be found here.

Contract electronics providers rinse, wash and repeat when formulating quote pricing for your program, using similar templates and similar calculations and similar quote platforms (created in-house or by third-party vendors) and designed for the benefit of the solutions provider. You can use this to your advantage.

It’s important to also clarify not all RFQ best practices and procedures align with every OEM manufacturer business model. We make suggestions then we help you consider options.

If your contract electronics manufacturing business understanding is new you may want to target more solutions providers (not too many) to help you and your company gain more understanding about contract electronics industry and differences between providers and services.

If your contract electronics manufacturing business understanding is seasoned, then 3 to 5 providers is usually sufficient, and be sure there is one outlier. Your number will be based on understanding and OEM functional group staffing experience.

Setting expectation for first meetings with contract electronics providers

Time is a commodity. Once time is spent you can never replace it. To save time, and money, OEMs want to drive the narrative and set the tone to achieve more detailed quote responses so decisions can be made.

Nurturing the provider relationship should begin from the moment of first contact and continue with each exchange afterward with you in control and keeping providers on their heels.

So that your discussions stay focused and you get the answers to important questions from solutions providers you are talking with we suggest sending each solutions provider a detailed, standing meeting agenda, with time allocated for each line item before you meet. At minimum, your agenda should aim to:

• discuss important program and business requirements • optimize discussion workflow, keeping discussions on path • extract the information you want • save you time

As the relationship progresses, we also recommend OEMs be prepared to ask every provider submitting a pricing quote to also include a flowchart, or workflow, for the program being quoted.

Workflows are detailed lists or visual layouts, charts or lists of activities, processes and staffing, inside the solutions provider, for your OEM program. Having detailed program workflow information, about your program (prepared by the provider) should break-out and define division of labor (specialization) by activity, processes, and procedures supporting your program quote pricing, such as identifying all workstations by name, process and activity within each, followed by then dividing each of these processes by phase (or task) and, including accurate measurement or timing (takt time) for each step to take place, plus, recording the unit of measure, number of staffing or headcount required for each activity, process, procedure… informing the discerning mind what is occurring, per division of labor, and at what costs to the solutions provider.

Most contract solutions providers will provide you a workflow for your program, upon request. The challenge, more often than not, is getting the proper amount of workflow detail from providers for your specific program.

If a provider is unwilling to provide this level of detailed information about your program when preparing their quote, ask, how are you able to determine quote pricing?

Armed with this knowledge helps OEMs persuade discussions when negotiating pricing of provider services and fees and, when discussing OEM program ROI, P&L… among internal OEM company board members, especially when/if considering transferring your OEM program(s) to a different geography or different provider, altogether.

OEM program workflows prepared properly, accompanied by robust ‘should costing’ techniques, help OEM decision makers more accurately predict program ROI and total landed cost while reducing annual program spend for contract electronics services.

Another positive is OEM leadership has a deeper degree of confidence in the EMS provider’s understanding of the OEM’s program and related challenges concerning internal providers costs and fees paid by OEM customers.

Flowcharts also help push customer program accountability into more layers of activity beneath the EMS manufacturing factory roof – because you know where your money is being spent while also revealing areas for potential cost reductions during quarterly business reviews and re-/negotiating service level agreements.

OEM team consistency and communication is important as you move to your final selection. Ideally, we recommend taking two to three solutions providers into the final found.

At this point, your entire team has conducted as much due diligence as possible.

You want to find yourself in a position to be able to negotiate the contract, master agreement, SOW before you award the business. You should also have a good understanding why many contract electronics solutions providers will cite thin industry margins as defense of their quoted pricing. Again, you can use this to your advantage.

For the person doing the negotiations for your company, its also important you are connected internally at different levels during the negotiations. Do not have the highest level do the negotiations with the solutions provider. Instead, let that person be the tie-breaker with their counter part.

Awarding the business while creating a sound OEM-EMS relationship foundation

How your relationship with your chosen providers evolves impact how your company’s time and money is spent. You want a sound supplier relationship with expectations clearly laid out and proper metrics and reporting in place so your company has more time to focus on your company performance instead of focusing unnecessary energy managing provider performance.

Having proper metrics, reports, and reporting frequency in place helps you effectively keep your thumb on the pulse of the relationship and manage provider performance more efficiently.

Venture Outsource recommends using weighted factor scoring on specific quantitative and qualitative RFQ criteria either based on the feedback received or findings (disclosure vs discovery) from your RFQ team.

Less objective are considerations to evaluate like; to what extent does the solutions provider cover weaknesses in your own organization, and to what extent would the solutions provider be willing to work with you where your program may not be ready for sourcing some aspects such as test equipment, developing test scripts, fulfillment, repair and reverse logistics, country-of-origin (COO) and UNSPS code management, HTS codes accuracy and other compliance issues where penalties, and customs delays, can be costly.

Next, select the final solutions providers based on the overall company, and the factory and team(s) who will be running and managing your business and ensure there is upfront clarity of the transition team at the solutions provider.

And always check references. The higher level the references, the better, because its more about validating core values than about capabilities, at this point. This assumes your due diligence was done properly.

Then, ensure all company stakeholders are consulted for the final decision. Every OEM functional group and team member should be in agreement on your company’s implementation project plan and time line and resources commitments before announcing the business award.

If your company is public and your decision has material impact, ensure that communication is done in a controlled manner.

When awarding the business, communicate the decision and rational to all stakeholders. Ensure everyone is enrolled in the decision. Update budgets accordingly and manage the expectations.

Then celebrate with your RFQ team!

If your company wants help creating an effective RFQ process for contract electronics sourcing, call Venture Outsource at (888) 860-1193.

Effective RFQ management for contract electronics programs

Venture Outsource can provide you and your company with a thorough review of your current RFQ process. We can help you evaluate your systems, policies and procedures to ensure your RFQ process is effective and tied to your business objectives and goals.

You must understand the RFQ process to evaluate it. Venture Outsource can give you the most comprehensive review of your RFQ process and help you discover where you are missing opportunities for better provider performance and savings. We can even be there to assist your company with cleanup following the review and help to implement or make changes suggested. We respond to all questions regarding your evaluation quickly.

This service guides you to invite only the right EMS providers for first-round discussions (while eliminating poor EMS providers from consideration) so your final-round EMS discussions are with a select number of ranked candidates, with a clear outlier.

Learn more about our research and consulting projects here or request more info here.

If your company needs help creating an effective RFQ management system aligned with your business call Venture Outsource at (888) 860-1193.

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