OEMs that employ strategic sourcing techniques often find contract manufacturers are reluctant to supply costed bills of material. Here are two good reasons and two bad reasons for this reluctance. Understand the differences then use these three secrets to get the costed BOMs.
Why CM’s won’t share: Bad Reason #1
If you employ strategic sourcing instead of should cost analysis (see the differences here) you probably ask your suppliers to present you “broken out” pricing, showing how much of the resale price is materials, materials overhead, labor, overhead, and profit. You probably also want to see a certain labor rate and a certain profit percentage. CMs very often manipulate this presentation to show you what you want. When they give you a costed BOM it is more difficult to manipulate.
Why CM’s won’t share: Bad Reason #2
Over the life of a contract CMs try to make money by reducing material costs and not passing it along to you. This is referred to as purchase price variance (PPV). It is much more difficult for the CM to use PPV to their benefit if you are fully and accurately aware of the costed BOM.
Why CM’s won’t share: Very Good Reason #1
By using strategic sourcing you are relying on the CMs to discover the best available price for each and every component. Materials typically account for 80% of a PCBA’s cost, so component costing is the key to winning these types of competitive bids. If you have created a situation where the CM’s best chance of success is beating their competition at component costing, why would you expect them to disclose their sources? That’s effectively asking them to give away their most importance strategic advantage.
Why CM’s won’t share: Very Good Reason #2
In any private commercial relationship between a buyer and seller there is a reasonable expectation of privacy, and in our industry almost always a formal non-disclosure. By asking a CM to disclose a costed BOM, you are asking them to violate confidentiality with their suppliers.
The Best Solution
The best way to avoid these problems is to use the should costing techniques employed by almost all top tier OEMs. With should costing the OEM negotiates the component prices directly with the component suppliers and simply informs the CM of the component costs. Should costing eliminates all the issues related to costed BOM sharing. Here are more reasons you should switch to should costing.
For companies still employing strategic sourcing, here are 3 secrets to overcoming the CM’s reluctance and getting costed BOMs.
Secret #1 – Build Trust
One of the most important ingredients in getting your CM to supply a costed BOM is trust between your companies, and personal trust between your employees. You need to eliminate two fears; 1) that you will disclose their pricing information to competitors, and 2) that you will use the information they supply to hurt them.
You can build trust on the disclosure issue by personally pledging confidentiality, and by creating a non-disclosure agreement explicity barring both parties from sharing cost information with 3rd parties.
You can build trust on the profit issue by requesting the costed BOM post-contract award and offering to share future component cost reductions, no matter who discovers them. When you build personal trust with your CM, you are much more likely to get the information you need.
Ultimately trust will come from saying what you’ll do and doing what you say. If you say you won’t use the costed BOM to drive the CMs margin down, and then you do, trust will be hard to maintain.
Secret #2 – Collaborate on Supply Chain
Sophisiticated OEM’s realize 80% of their cost is in materials. Rather than simply making counterproductive demands for annual/quarterly cost reductions, or constantly quoting alternative suppliers, they partner with the CM to develop the optimal supply chain for each component. When a CM senses they are a valued partner instead of an adversary on component pricing, they are much more likely to share costed BOM information.
Secret #3 – Share in both directions
If you want CMs to share their costed BOM’s, you should also be willing to share your costed BOMs (or other cost information). There is no clearer signal that you are adversaries and not partners than by refusing to share information with your CM. In short, if you expect your CM to trust you, start by trusting them.